The Role of Economic Factors in Profitability of Accepted Companies in Stock Exchange of Tehran
Interdisciplinary Journal of Contemporary Research in Business, Vol. 5, No. 1, May 2013
9 Pages Posted: 13 Jul 2014
Date Written: July 12, 2014
For every business enterprise, net profit or specific equity after tax deduction for a specific time period is the final result of investment activities, and financial and operational provision. These activities can result from managerial decisions and a group of extrinsic or intrinsic environmental factors. This study examines how firms’ profitability is impressed by selected economic and financial indices or what is the relationship between profitability and mentioned indices. In other words, this study probes if there is any relationship between profitability and selected indices according to general accepted theory. Moreover, the results from data analysis may lead to some useful strategies for a better profit management. In this study, the data of 42 companies were analyzed in Stock Exchange of Tehran, using an econometric framework from 2008-2011. Return on equity (ROE) and return on assets (ROA) were regarded as main profitability indices (dependent variables); while current ratio, financial leverages (long-term debt to total capital and long term debt ratio). Annual income growth and GDP were considered as independent variables. The correlations between dependent and independent variables were tested, using combined regressions. At 95% confidence level, however stockholder equity or asset return is regarded as the dependent variable; the results show direct and significant correlation between liquidity (current ratio) and profitability of the firms. Maybe the most important reason for that is growing inflation rate in Iran which causes high rise of basic products’ prices such as manufacturing raw materials and machinery in recent years. When asset return is regarded as profitability criterion, it is concluded that there is a negative and significant correlation between financial leverage and profitability at 90% confidence level.
JEL Classification: G10, M00
Suggested Citation: Suggested Citation