23008 Leverage Report

8/16/2019 23008 Leverage Report

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3.6 Hypothesis

: There is no statistically significant impact of financial leverage on profitability (Return onCommon Equity), for the companies of the textile industry.

: There is no statistically significant impact of operating leverage on profitability (Return on

Common Equity), for the companies of the textile industry.

3.7 Empirical Analysis

Correlation Matrix of Variables

Financial leverage and operating leverage variables will be examined with profitability together.This examination will reveal statistical association by Pearson correlation method. This matrix will

be used to show all possible simple correlation coefficients among the variables. It will show howstrongly each independent variable is correlated with the dependent variable.

Regression Analysis of Operating and Financial Leverage on Profitability

= + ∗ + ∗

The analysis will cover sample 100 firm-year observations which will be analyzed through multipleregression using the least square method . In this multiple regression, there will be employed morethan one variables which are considered to have the effect on the dependent variable.

Global F-test will be used to investigate whether any of the independent variables have significantcoefficients.

Some of the independent variables in the equation may have no or significant effect on thedependent variable. The significance of the individual variables in this study will be tested using T-test . This test will tell us that whether individual independent variable is able to influence thedependent variable or not.

3.8 Use of Software

Microsoft excel is used to reformulate balance sheets & income statements and analyze the profitabilityof companies.

SPSS is used to determine correlation coefficients of variable and to do regression analysis.


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CHAPTER 4: ANALYSIS AND FINDINGS

4.1 Sample Companies

Spinning

1. Apex Spinning & Knitting Mills Ltd.

2. CMC-Kamal Textile Mills Ltd.

3. Prime Textile Spinning Mills Ltd.

4. Safko Spinning Mills Ltd.

5. Sonargaon Textiles Ltd.

6. Tallu Spinning Mills Ltd.

Knitting & Dyeing

7. Alltex Industries Ltd.

8. HR Textile Mills Limited

9. Mithun Knitting and Dyeing Ltd.

Ready-made Garments 10. Stylecraft Limited

4.2 Company Level Analysis

4.2.1 Alltex Industries Ltd

Alltex Industries Ltd

Year ROCE RNOAROCE-RNOA

FLEVFinancial

SpreadNBC ROOA

RNOA-ROOA

OLEV

Operating

Spread2005 2.28% 6.38% -4.10% 0.53 -7.70% 14.08% 5.60% 0.78% 0.58 1.35%2006 2.14% 6.68% -4.54% 0.65 -7.01% 13.69% 5.78% 0.90% 0.59 1.53%2007 1.63% 5.62% -3.99% 1.35 -2.94% 8.56% 5.24% 0.38% 0.39 0.99%2008 0.92% 5.31% -4.39% 2.20 -1.99% 7.30% 5.18% 0.13% 0.14 0.93%2009 -9.35% 2.28% -11.63% 1.77 -6.58% 8.87% 2.86% -0.58% 0.42 -1.39%2010 -15.44% 2.01% -17.45% 1.79 -9.73% 11.74% 2.84% -0.83% 0.59 -1.41%2011 0.96% 8.03% -7.07% 2.34 -3.03% 11.06% 6.77% 1.26% 0.50 2.52%

2012 -1.10% 6.96% -8.06% 2.77 -2.91% 9.87% 6.17% 0.80% 0.42 1.92%2013 -13.64% 6.41% -20.05% 3.95 -5.08% 11.49% 6.04% 0.38% 0.21 1.79%2014 25.79% 6.80% 18.99% 3.91 4.86% 1.95% 6.37% 0.43% 0.20 2.12%


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Interpretation of Operating Leverage

From above it can be noticed that operating leverage has been continuously fluctuating over years.Impact of OLEV is favorable when operating spread is positive. During 2009 & 2010 operating spreadwere negative and the impact of operating leverage were unfavorable.

Interpretation of Financial LeverageFrom above it can be noticed that financial leverage has been increasing over years except the year2009. But impact of financial leverage was unfavorable because financial spread was negative. Ithappened because net borrowing cost was high over the years. But only exception was in year 2014when impact of financial leverage levered up profitability because net borrowing cost reduced to only1.95%.

4.2.2 Apex Spinning & Knitting Mills Ltd.

Apex Spinning & Knitting Mills Ltd.


FLEVFinancial

SpreadNBC ROOA

RNOA-ROOA

OLEVOperating

Spread

2005 17.36% 17.94% -0.58% 0.16 -3.69% 21.63% 11.64% 6.31% 0.85 7.39%2006 15.58% 15.85% -0.27% 0.13 -2.14% 17.99% 10.12% 5.73% 0.98 5.87%2007 14.36% 15.37% -1.02% 0.30 -3.44% 18.82% 10.32% 5.06% 0.83 6.07%2008 17.42% 15.83% 1.58% 0.39 4.06% 11.77% 10.77% 5.06% 0.78 6.52%2009 3.24% 5.99% -2.75% 0.27 -10.01% 15.99% 5.19% 0.80% 0.84 0.94%2010 3.43% 5.98% -2.55% 0.18 -14.29% 20.27% 5.19% 0.79% 0.84 0.94%2011 3.35% 5.56% -2.21% 0.09 -25.83% 31.39% 4.85% 0.71% 1.17 0.60%2012 4.99% 5.76% -0.77% 0.06 -11.89% 17.65% 4.87% 0.88% 1.41 0.62%2013 4.04% 5.20% -1.16% 0.08 -14.22% 19.42% 4.64% 0.56% 1.42 0.39%2014 6.70% 4.63% 2.08% 0.08 26.98% -22.35% 4.40% 0.22% 1.46 0.15%


From above it can be noticed that operating leverage has been increasing over years. Impact of OLEVis favorable when operating spread is positive. But operating spread were decreasing over the years.That’s why impact of operating leverage were little.

Interpretation of Financial Leverage

From above it can be noticed that financial leverage has been fluctuating over years. But impact offinancial leverage was unfavorable because financial spread was negative. It happened because net

borrowing cost was high over the years. But only exception was in year 2014 when impact of financialleverage levered up profitability because net borrowing cost was negative.


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4.2.3 CMC-Kamal Textile Mills Ltd.

CMC-Kamal Textile Mills Ltd.


FLEVFinancial

SpreadNBC ROOA

RNOA-ROOA

OLEVOperating Spread

2005 1.47% 5.93% -4.46% 1.69 -2.65% 8.58% 5.81% 0.12% 0.05 2.31%2006 -3.26% 4.75% -8.01% 1.49 -5.39% 10.14% 4.70% 0.04% 0.09 0.45%2007 -5.82% 2.82% -8.63% 1.31 -6.61% 9.43% 3.01% -0.20% 0.16 -1.24%2008 -21.78% -3.85% -17.93% 1.41 -12.72% 8.86% -2.45% -1.40% 0.21 -6.70%2009 10.34% 5.31% 5.02% 0.99 5.05% 0.26% 5.03% 0.28% 0.36 0.78%2010 8.48% 8.67% -0.19% 0.32 -0.59% 9.25% 7.80% 0.86% 0.24 3.55%2011 5.99% 3.69% 2.30% 0.14 15.93% -12.25% 3.74% -0.05% 0.10 -0.51%2012 7.36% 4.73% 2.63% 0.01 395.68% -390.95% 4.70% 0.02% 0.06 0.45%2013 6.52% 6.82% -0.31% 0.00 295.97% -289.15% 6.74% 0.08% 0.03 2.49%2014 7.10% 7.57% -0.47% 0.06 -7.79% 15.36% 7.44% 0.13% 0.04 3.19%


From above it can be noticed that operating leverage has been fluctuating over years. Impact of OLEVis favorable when operating spread is positive. Most of the year operating spread were positive except2007, 2008 & 2011. But the company took small amount of operating leverage compared to othercompanies that’s why impact of operating leverage on profitability is low.


From above it can be noticed that financial leverage has been decreasing over years because net borrowing cost was high except the year 2011, 2012 & 2013. In these three years interest income wasmuch higher than interest expense. As their net borrowing cost is higher than RNOA (return on netoperating asset), company like to keep their financial leverage to minimum.

4.2.4 HR Textile Mills Limited

HR Textile Mills Limited


FLEVFinancial

SpreadNBC ROOA

RNOA-ROOA

OLEVOperating

Spread

2005 5.64% 7.16% -1.52% 0.43 -3.52% 10.68% 5.96% 1.20% 0.49 2.46%2006 6.19% 6.44% -0.24% 0.77 -0.31% 6.75% 5.76% 0.68% 0.45 1.51%2007 7.37% 9.12% -1.75% 1.03 -1.70% 10.82% 7.44% 1.68% 0.53 3.19%2008 8.57% 9.62% -1.04% 0.97 -1.07% 10.69% 7.37% 2.25% 0.72 3.12%

2009 9.33% 12.22% -2.90% 0.94 -3.08% 15.30% 8.46% 3.77% 0.89 4.21%2010 11.26% 14.05% -2.79% 0.94 -2.98% 17.03% 9.14% 4.91% 1.01 4.89%

2011 18.95% 20.35% -1.40% 0.72 -1.93% 22.28% 11.71% 8.64% 1.16 7.46%

2012 14.97% 19.45% -4.48% 0.43 -10.54% 29.99% 10.73% 8.72% 1.35 6.48%2013 15.04% 17.97% -2.92% 0.39 -7.58% 25.55% 10.33% 7.63% 1.26 6.08%2014 12.38% 13.44% -1.07% 0.48 -2.24% 15.69% 8.64% 4.81% 1.10 4.39%


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From above it can be noticed that operating leverage and operating spread have been increasing overyears except the last two year. As operating spread were positive, impact of operating leverage werefavorable for the company’s profitability.

Interpretation of Financial LeverageFrom above it can be noticed that financial leverage has been decreasing over years because net

borrowing cost was higher than RNOA. As financial leverage is not favorable for the company’s profitability, their financial leverage has a decreasing trend.

4.2.5 Mithun Knitting and Dyeing Ltd.

Mithun Knitting and Dyeing Ltd.


FLEVFinancialSpread

NBC ROOARNOA-ROOA

OLEVOperating

Spread

2005 4.10% 9.06% -4.96% 1.49 -3.32% 12.39% 6.90% 2.16% 0.64 3.40%

2006 8.72% 10.76% -2.04% 1.87 -1.09% 11.85% 8.33% 2.43% 0.60 4.08%2007 9.15% 12.74% -3.59% 1.69 -2.13% 14.87% 9.26% 3.48% 0.70 5.01%2008 8.77% 14.80% -6.03% 1.40 -4.30% 19.10% 10.05% 4.74% 0.82 5.80%2009 10.16% 13.08% -2.93% 1.28 -2.29% 15.37% 8.81% 4.27% 0.94 4.56%2010 24.74% 20.83% 3.91% 0.98 3.99% 16.84% 12.22% 8.61% 1.08 7.97%2011 23.33% 22.35% 0.98% 0.70 1.40% 20.95% 12.24% 10.11% 1.27 7.99%2012 21.29% 27.54% -6.24% 0.36 4.86% 22.67% 17.33% 10.21% 0.78 13.08%2013 15.01% 16.95% -1.94% 0.19 -10.01% 26.97% 12.39% 4.56% 0.56 8.14%

2014 13.68% 15.19% -1.51% 0.17 -8.84% 24.03% 11.75% 3.44% 0.46 7.50%


From above it can be noticed that operating leverage has been increasing over years except the last threeyear when company have seen a decreasing trend of operating leverage. As operating spread were

positive, impact of operating leverage were favorable for the company’s profitability.


From above it can be noticed that financial leverage has been decreasing over years because net borrowing cost was higher than RNOA. As financial leverage is not favorable for the company’s profitability, their financial leverage has a decreasing trend and company keeps it to minimum in recentyears.


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4.2.6 Prime Textile Spinning Mills Ltd.

Prime Textile Spinning Mills Ltd.


FLEVFinancial

SpreadNBC ROOA

RNOA-ROOA

OLEVOperating

Spread

2005 1.88% 2.64% -0.76% 0.87 -0.87% 3.52% 2.70% -0.06% 0.20 -0.30%

2006 3.62% 4.05% -0.43% 0.82 -0.52% 4.56% 4.08% -0.03% 0.21 -0.17%2007 4.66% 4.86% -0.20% 0.73 -0.28% 5.14% 4.74% 0.12% 0.23 0.49%

2008 6.04% 5.81% 0.24% 0.66 0.36% 5.45% 5.47% 0.34% 0.28 1.22%2009 2.22% 3.94% -1.72% 0.48 -3.61% 7.55% 3.99% -0.05% 0.17 -0.26%

2010 2.15% 3.75% -1.60% 0.35 -4.53% 8.28% 3.81% -0.06% 0.14 -0.44%2011 2.93% 5.19% -2.26% 0.32 -6.97% 12.16% 5.06% 0.13% 0.16 0.81%

2012 1.67% 4.44% -2.77% 0.34 -8.17% 12.62% 4.41% 0.03% 0.17 0.16%

2013 2.06% 5.63% -3.57% 0.31 -11.41% 17.04% 5.37% 0.27% 0.24 1.12%

2014 2.03% 5.80% -3.76% 0.40 -9.47% 15.27% 5.57% 0.23% 0.18 1.32%


From above it can be noticed that operating leverage has been fluctuating over years. Impact of OLEVis favorable when operating spread is positive. Most of the year operating spread were positive except2005, 2006, 2009 & 2010. But the company took small amount of operating leverage compared to othercompanies that’s why impact of operating leverage on profitability is low.


From above it can be noticed that financial leverage has been decreasing over years because net borrowing cost was higher than RNOA. As financial leverage is not favorable for the company’s profitability and net borrowing cost is increasing in recent years, their financial leverage has a

decreasing trend to make the negative impact of financial leverage to minimum.

4.2.7 Safko Spinning Mills Ltd.

Safko Spinning Mills Ltd.


FLEVFinancial

SpreadNBC ROOA

RNOA-ROOA

OLEVOperating

Spread2005 2.67% 4.79% -2.12% 0.71 -2.99% 7.78% 4.72% 0.08% 0.06 1.22%2006 2.90% 5.22% -2.32% 0.88 -2.64% 7.86% 5.21% 0.01% 0.01 0.96%2007 3.48% 6.48% -3.00% 0.96 -3.13% 9.60% 6.45% 0.02% 0.01 2.20%2008

-29.48% -5.87% -23.61% 1.36 -17.41% 11.53% -5.80% -0.08% 0.01 -10.05%2009 -41.40% -4.79% -36.60% 2.28 -16.08% 11.29% -4.66% -0.13% 0.01 -8.91%2010 -11.15% 6.57% -17.72% 3.26 -5.44% 12.00% 6.52% 0.04% 0.02 2.27%

2011 21.69% 12.99% 8.71% 2.85 3.05% 9.93% 12.66% 0.33% 0.04 8.41%2012 7.25% 8.45% -1.21% 0.80 -1.50% 9.96% 8.23% 0.22% 0.06 3.98%2013 5.09% 5.77% -0.67% 0.47 -1.44% 7.20% 5.67% 0.10% 0.07 1.42%2014 5.42% 6.39% -0.97% 0.45 -2.16% 8.55% 6.26% 0.13% 0.07 2.01%


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From above it can be noticed that operating leverage has been fluctuating over years. Impact of OLEVis favorable when operating spread is positive. Most of the year operating spread were positive except2008 & 2009. But the company took small amount of operating leverage compared to other companiesthat’s why impact of operating leverage on profitability is low.


From above it can be noticed that financial leverage has been decreasing in recent years because net borrowing cost was higher than RNOA except the year 2011. In 2011, return on net operating asset washigher than net borrowing cost. That’s why financial leverage levered up the profitability in 2011. Asfinancial leverage is not favorable for the company’s profitability, their financial leverage has adecreasing trend to make the negative impact of financial leverage to minimum.

4.2.8 Sonargaon Textiles Ltd.

Sonargaon Textiles Ltd.

Year ROCE RNOAROCE-

RNOAFLEV

Financial

SpreadNBC ROOA

RNOA-

ROOAOLEV

Operating

Spread2005 6.93% 7.65% -0.72% 4.06 -0.18% 7.83% 7.42% 0.24% 0.06 3.92%2006 6.92% 8.44% -1.52% 3.83 -0.40% 8.84% 7.94% 0.51% 0.14 3.69%

2007 4.82% 1.08% 3.74% 3.34 1.12% -0.04% 1.76% -0.68% 0.27 -2.49%

2008 -4.61% -1.05% -3.56% 3.48 -1.02% -0.03% 0.43% -1.47% 0.39 -3.82%2009 6.72% 7.89% -1.18% 4.14 -0.28% 8.18% 7.01% 0.89% 0.32 2.76%2010 3.29% 6.52% -3.23% 1.34 -2.40% 8.92% 6.13% 0.40% 0.21 1.88%2011 1.96% 5.71% -3.75% 0.65 -5.77% 11.49% 5.42% 0.29% 0.25 1.17%

2012 0.78% 4.68% -3.90% 0.61 -6.41% 11.09% 4.59% 0.09% 0.26 0.34%2013 -2.38% 4.01% -6.38% 0.68 -9.34% 13.34% 4.05% -0.04% 0.21 -0.20%2014 -6.65% 0.78% -7.43% 0.76 -9.74% 10.52% 1.31% -0.53% 0.18 -2.94%


From above it can be noticed that operating leverage has been fluctuating over years. Impact of OLEVis favorable when operating spread is positive. Most of the year operating spread were positive except2007, 2008, 2013 & 2014. But the company took small amount of operating leverage compared to othercompanies that’s why impact of operating leverage on profitability is low.


From above it can be noticed that financial leverage has been decreasing because net borrowing cost

was higher than RNOA except the year 2007. As financial leverage is not favorable for the company’s profitability, their financial leverage has a decreasing trend to make the negative impact of financialleverage to minimum.


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4.2.9 Stylecraft Limited

Stylecraft Limited


FLEVFinancial

SpreadNBC ROOA

RNOA-ROOA

OLEVOperating

Spread

2005 3.82% 4.97% -1.15% 0.51 -2.28% 7.25% 4.71% 0.26% 0.57 0.46%

2006 5.23% 8.38% -3.16% 0.62 -5.05% 13.44% 6.81% 1.57% 0.61 2.56%2007 3.58% 6.84% -3.26% 0.74 -4.42% 11.26% 5.89% 0.95% 0.58 1.64%2008 3.99% 7.81% -3.81% 0.86 -4.41% 12.21% 6.63% 1.18% 0.50 2.38%2009 5.01% 8.98% -3.97% 1.09 -3.63% 12.61% 7.46% 1.52% 0.47 3.21%

2010 6.01% 8.41% -2.40% 1.10 -2.18% 10.59% 6.88% 1.53% 0.58 2.63%2011 11.33% 10.11% 1.22% 1.06 1.15% 8.96% 7.07% 3.04% 1.08 2.82%2012 12.94% 11.85% 1.08% 1.04 1.04% 10.81% 7.38% 4.48% 1.43 3.13%2013 6.94% 10.90% -3.96% 1.23 -3.21% 14.11% 7.29% 3.61% 1.19 3.04%

2014 8.61% 12.22% -3.61% 1.80 -2.01% 14.23% 8.52% 3.70% 0.87 4.27%


From above it can be noticed that operating leverage and operating spread have been increasing overyears except the last year. As operating spread were positive, impact of operating leverage werefavorable for the company’s profitability.


From above it can be noticed that financial leverage has been increasing despite financial spread isnegative. As net borrowing cost is much higher than return on net operating asset, financial leveragelevered down the profitability. In 2011 & 2012, RNOA was greater than NBC. That’s why in thoseyears financial leverage was favorable for the company.


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4.2.10 Tallu Spinning Mills Ltd.

Tallu Spinning Mills Ltd.


FLEVFinancialSpread

NBC ROOARNOA-ROOA

OLEVOperating

Spread

2005 5.46% 5.78% -0.32% 3.17 -0.10% 5.88% 5.62% 0.16% 0.12 1.37%

2006 5.62% 10.87% -5.25% 2.80 -1.87% 12.75% 10.19% 0.68% 0.11 5.94%2007 -9.36% 7.78% -17.14% 2.87 -5.96% 13.74% 7.30% 0.48% 0.16 3.05%

2008 -7.12% 8.88% -16.00% 2.91 -5.50% 14.38% 8.01% 0.87% 0.23 3.76%

2009 -8.82% 9.54% -18.37% 3.22 -5.70% 15.24% 8.22% 1.32% 0.33 3.97%

2010 2.93% 10.00% -7.07% 3.71 -1.91% 11.91% 8.35% 1.65% 0.40 4.10%

2011 8.44% 12.88% -4.44% 3.78 -1.18% 14.05% 10.18% 2.70% 0.46 5.93%

2012 23.77% 17.85% 5.92% 3.53 1.67% 16.18% 13.74% 4.11% 0.43 9.49%

2013 17.48% 16.54% 0.95% 1.16 0.82% 15.72% 13.93% 2.61% 0.27 9.68%

2014 9.81% 12.27% -2.46% 0.67 -3.69% 15.96% 11.08% 1.19% 0.17 6.83%


From above it can be noticed that operating leverage and operating spread have been increasing overyears except the last two years. As operating spread has been positive and increasing, impact ofoperating leverage were favorable for the company’s profitability.


From above it can be noticed that financial leverage has been increasing but in last two years it isreduced significantly. As net borrowing cost is much higher than return on net operating asset, financialleverage levered down the profitability. In 2012 & 2013, RNOA was greater than NBC. That’s why inthose years financial leverage was favorable for the company.


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4.3 Industry Level Analysis

Table 10-1: Distributions of RNOA and its operating leverage components.

RNOA ROOA RNOA-ROOA OLEV OSPREAD

NValid 100 100 100 100 100

Missing 0 0 0 0 0Mean .083483 .066796 .016690 .479248 .024796Median .068300 .064100 .006800 .386700 .022900Std. Deviation .0561122 .0352011 .0250576 .4008711 .0350615

Percentiles

5 .007950 .013325 -.005775 .020010 -.029175

10 .029070 .030830 -.000600 .055110 -.005030

20 .047580 .047000 .000400 .137600 .004500

30 .056230 .051900 .001300 .184860 .009460

40 .061460 .057060 .003060 .240240 .014560

50 .068300 .064100 .006800 .386700 .022900

60 .083980 .072020 .008960 .492100 .030460

70 .098860 .079890 .016260 .594740 .038720

80 .128520 .092360 .035840 .843260 .049860

90 .164710 .115840 .050450 1.150840 .073340

95 .193760 .123825 .085610 1.341390 .081325

Table 10-2: Pearson Correlations between RNOA and components of the operating leverage

RNOA ROOA RNOA-ROOA OLEV OSPREADRNOA 1 .952 ** .902 * .523 ** .949 **

ROOA .952 ** 1 .727 * .352 ** .998 **

RNOA-ROOA .902 ** .727 ** 1 .676 ** .723 **

OLEV .523 ** .352 ** .676 * 1 .345 **OSPREAD .949 ** .998 ** .723 * .345 ** 1**. Correlation is significant at the 0.01 level (2-tailed).

Table 10-1and Table 10-2 give the analysis of the effects of operating leverage. ROOA has a mean of6.7% and median of 6.4% compared with a mean 8.3% and median of 6.8% for operating levered

profitability (RNOA). Accordingly, the operating leverage effect is 1.6% on average, 0.68% at themedian, and is positive for more than 95 percent of the observations.

The two components of the operating leverage effect, OLEV and the operating spread are both positiveat mean and median. The mean of the product of the two components (i.e., the operating leverage effect,

RNOA-ROOA) is positive. Because the Pearson correlation between OLEV and OSPREAD in Table10-4 is positive (0.345).


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Table 10-3: Distributions of ROCE and its f inancial leverage components.

ROCE RNOA ROCE-RNOA FLEV FSPREAD NBC

NValid 100 100 100 100 100 100

Missing 0 0 0 0 0 0Mean .047889 .083483 -.035592 1.276979 .034557 .048925

Median .051600 .068300 -.024300 .872950 -.029600 .115100Std. Deviation .1017557 .0561122 .0674903 1.1478118 .5004393 .5055957

Percentiles

5 -.135155 .007950 -.179195 .077220 -.141450 -.000395

10 -.070730 .029070 -.113300 .158450 -.100100 .046180

20 .015020 .047580 -.051920 .352860 -.074660 .078360

25 .020375 .052050 -.044275 .427025 -.062975 .085650

30 .023970 .056230 -.039420 .485500 -.054250 .089320

40 .035960 .061460 -.032020 .705840 -.036220 .106260

50 .051600 .068300 -.024300 .872950 -.029600 .115100

60 .066280 .083980 -.015520 1.080100 -.021480 .126160

70 .084680 .098860 -.010260 1.407480 -.012580 .143350

80 .110760 .128520 -.003120 2.260860 -.002800 .15984090 .171820 .164710 .015440 3.335110 .029120 .201850

95 .216700 .193760 .039015 3.827145 .050405 .239620

Table 10-4: Pearson Correlations between ROCE and components of the financial leverage

ROCE RNOA ROCE-RNOA FLEV FSPREAD NBCROCE 1 .784 * .856 ** -.197 * .088 .000RNOA .784 ** 1 .350 ** -.094 -.036 .147ROCE-RNOA .856 ** .350 * 1 -.219 * .163 -.123FLEV -.197 * -.094 -.219 * 1 -.139 .127

FSPREAD .088 -.036 .163 -.139 1 -.994 **

NBC .000 .147 -.123 .127 -.994 ** 1**. Correlation is significant at the 0.01 level (2-tailed).*. Correlation is significant at the 0.05 level (2-tailed).

For financial leverage in Table 10-3, profitability (ROCE) has a mean of 4.8% and a median of 5.2%.The difference between the mean and the median reflects the negative skewness of ROCE, which iscaused primarily by observations with negative earnings. RNOA, has a mean of 8.3% and a median of6.8%. The mean ROCE is less than RNOA, so the mean financial leverage effect (ROCE-RNOA) isnegative (3.5%). The median financial leverage effect is also negative (2.4%), and the financial leverage

effect is negative for about 80% of the observations.

The two components of the financial leverage effect, mean FLEV and the financial spread are both positive. And median FLEV is positive but median financial spread is negative. Yet the mean of the product of the two components (i.e., the financial leverage effect, ROCE-RNOA) is negative. Becausethe Pearson correlation between FLEV and FSPREAD in Table 10-4 is negative (-0.139). This negativecorrelation is partially due to the positive correlation between FLEV and the net borrowing rate (NBR)of 0.127: the higher the financial leverage, the higher the risk and therefore the interest rate that lenderscharge.


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At the mean, OLEV is substantially smaller than FLEV, and OSPREAD is closer to FSPREAD. Yet both the mean and the median effects of operating leverage on profitability are larger than thecorresponding mean and median of the financial leverage effect. In summary, even though operatingleverage is on average smaller than financial leverage, the mean and median of the leverage effect on

profitability is higher for operating leverage. Operating leverage is typically used to enhance profitability more than financial leverage.

4.4 Results of Hypothesis Test through Regression

To identify the relationship between financial and operating leverage and the level of profitability byregressing ROCE on financial leverage (FLEV) and operating leverage (OLEV). Following regressiontables presents summary statistics of 100 regressions from 2005 through 2014.

Variables Entered/Removed a

Model Variables Entered Variables

Removed

Method

1 OLEV, FLEV b . Enter

a. Dependent Variable: ROCE

b. All requested variables entered.

Model Summary

Model R R Square Adjusted R

Square

Std. Error of the

Estimate

1 .426 a .181 .164 .0930189

a. Predictors: (Constant), OLEV, FLEV

ANOVA a

Model Sum of Squares df Mean Square F Sig.

1

Regression .186 2 .093 10.735 .000 b

Residual .839 97 .009

Total 1.025 99


b. Predictors: (Constant), OLEV, FLEV

Coefficients a

Model Unstandardized Coefficients StandardizedCoefficients

t Sig.

B Std. Error Beta

1

(Constant) .008 .021 .392 .696

FLEV -.007 .009 -.075 -.772 .442

OLEV .101 .025 .397 4.109 .000



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4.4.1 Global Test Result of Regression

The abovementioned results indicate that the F-statistic value (corresponding to 10.735) is in therejection zone with a confidence level of 5%. This means that the null hypothesis is refused accordingto the adopted decision support; subsequently, there’s a statistically significant impact for theindependent variables (FLEV and OLEV) on the dependent variable (ROCE). In other words, the

alternative hypothesis is accepted.4.4.2 Evaluating Hypothesis

: There is no statistically significant impact of financial leverage on profitability (Return onCommon Equity), for the companies of the textile industry.

Above results reveals the result of the examination of this hypothesis. The abovementioned resultsindicate that the t-statistic value, corresponding to -0.772 is in the acceptable zone with a confidencelevel of 5%. This means that the null hypothesis is supported. In other words, there’s no statisticallysignificant relationship between this independent variable (Financial Leverage) and the dependentvariable (ROCE).

: There is no statistically significant impact of operating leverage on profitability (Return onCommon Equity), for the companies of the textile industry.

Above results reveals the result of the examination of this hypothesis. The abovementioned resultsindicate that the t-statistic value, corresponding to 4.109 is in the rejection zone with a confidence levelof 5%. This means that the null hypothesis is rejected. In other words, there is statistically significantrelationship between this independent variable (Operating Leverage) and the dependent variable(ROCE).


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CHAPTER 5: SUMMARY & CONCLUSION

The main purpose of the assignment was to analyze the two textile firms’ profitability through theanalysis of financial statements. With the basis from the reformulation of the financial statements,

profitability analysis has been prepared. The analysis of the key figures, told us that H.R. Textile hasincreased ROCE, RNOA and ATO better than Prime Textile through the period of the analysis, 2009-2013.

CHAPTER 6: REFRENCES

Penman, Stephen, H, Financial Statement Analysis and Security Valuation, 3rd

edition, McGraw-Hill, New York Website: www.investopedia.com/


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CHAPTER 7: APPENDICES

Documents

23008 Leverage Report