Abstract
This research aims to propose a model adding to the competitiveness of companies by identifying factors that determine the profitability of the selected companies (both publicly traded and unquoted private companies of all sizes). Another aim is to prove a dichotomy between the motivation of equity holders and senior lenders as far as acceptable financial leverage is concerned. The paper is innovative based on its combination of several different factors influencing corporate profitability (i.e. firm-specific effects: current ratio, labor cost ratio, working capital financing ratio, long-term financing ratio, return on sales, age of the firm; industry-specific effects and other macroeconomic effects) and by assessing determinants concerning the interests of shareholders and other stakeholders using a panel regression analysis with fixed effects. The authors prove that the determinants of the operating performance of Czech trading companies differ substantially when the performance is measured by ROA or by ROE. This clearly shows discrepancies between the equity holder interest to maximize their returns on investment and the other stakeholder interests. Specifically, the authors have found that the leverage, both in terms of working capital and long-term financing, negatively impacts returns on assets. On the other hand, it positively impacts returns for equity holders both in the Wholesale and Retail sub-samples. Interestingly, other determinants of operating performance, such as capital intensity, labor cost ratio, historical profitability, and macroeconomic variables, are of comparable significance, impacting both the ROA and ROE analyses.
Highlights
IntroductionFinancial position and business performance must be constantly assessed
In a market economy, financial position and business performance must be constantly assessed
The entire sample shows that there is a significantly negative effect of both variables related to financing, i.e., the weight of working capital financing and long-term financing on the company’s balance sheet
Summary
Financial position and business performance must be constantly assessed. Various performance benchmarks serve as feedback to companies evaluating the steps they have taken and enabling them to adjust the direction they have taken, all to maintain competitiveness. Performance in terms of profitability is the main criterion for the allocation of capital, which explains why this concept is given such considerable attention both in the field of rationalism and in the area of empiricism. Many studies have been conducted for different reasons, with various factors examined to determine ways to increase business performance. The authors intention was to analyze existing studies focused on corporate profitability, to define an area not yet examined, and to provide evidence of profitability determinants based on panel data of Czech companies, including publicly traded companies and unquoted private companies of all sizes (including SMEs)
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