The behaviour of financial ratios for capital intensive and labour intensive enterprises during an upswing and decline phase of the economic cycle

Bloom, Jonathan,1976- (2001-04)

Dissertation (PhD)--University of Stellenbosch, 2001.

Thesis

ENGLISH ABSTRACT: Financial performance ratios are generally based on a set of financial statements without taking cognisance of other factors that could affect the measurement of performance. The behaviour of financial performance indicators during an upswing and decline phase of the economic cycle, together with the nature and scope of an enterprise's activities may have an effect on the manner in which financial performance indicators are used by an enterprise. The question may arise whether or not a ratio's behaviour for capital intensive (CI) and labour intensive (LI) enterprises could capture the essence of external factors such as an upswing or decline in the economic cycle as measured by the Gross Domestic Product (GOP). In this study an upswing phase (1987-1989) of three years and a decline phase (1990-1992) of three years have been selected after an analysis of the economic cycle over the period 1970 to 1996. The distinction between the capital and labour intensity of an enterprise is based on an analysis of the total assets, fixed assets and number of employees of industrial enterprises listed on the Johannesburg Stock Exchange (JSE). The initially selected 62 financial performance indicators categorised under profitability, growth, cash flow, value-added and inflation-adjusted ratios are calculated for each enterprise of the CI (33) and LI (36) groups and for each year of the research period. The primary objectives of the research are: • To distinguish between the CI and LI nature of enterprises listed in the industrial sector of the JSE by using measures of capital and labour intensity; • To obtain patterns and identify differences in the behaviour of the selected financial indicators between CI and LI enterprises during an upswing and decline phase of the economic cycle, as measured by the GOP; • To analyse and investigate patterns and differences to determine whether or not there is specific justification(s) for the behaviour exhibited by the CI and LI enterprises for a particular ratio during either or both the upswing and decline phases of the economic cycle; • To identify key financial indicators, which could possibly be used by CI and LI enterprises to forecast financial performance and to identify lead and lag patterns in the economic cycle. An elaborate statistical analysis is conducted of the ratios to satisfy the objectives stipulated above. The first part of the analysis is based on a single representative measure, which represents an average of the three-year upswing and three-year decline phases respectively. Mean and median values are calculated for the CI and LI enterprises for both the upswing and decline phases. A profile analysis based on Hotelling's T2 test is used for the analysis of ratios that exhibit approximate normal distributions. Non-parametric tests, Mann-Whitney Utest and Wilcoxon matched-pairs test, are used for the analysis of ratios that do not indicate approximately normal distributions. The second part of the study focuses on an analysis of the ratios based on the individual years of the research period. The statistical techniques used for the analysis of the ratios based on a single representative measure are also used in the analysis of the ratios based on the individual years. The limitations identified during the analysis based on a single representative measure are addressed to a large extent in this section of the statistical analysis. By analysing the mean and median values based on the individual years, it is possible to classify the ratios as one of five pattern groups exhibited by the CI and LI enterprises, i.e. normal expected, lag, lead, cyclical and mixed. The patterns of the various ratios within each of the pattern groups are also analysed from a financial management perspective. The findings of the study confirm the stated hypothesis that there are differences in the behaviour of financial indicators based on a single representative measure and over the individual years of the research period between CI and LI enterprises during either or both an upswing and decline phase of the economic cycle. Furthermore, the analysis highlights several ratios based on a single representative measure that could not be used universally by all enterprises to measure financial performance and only during either an upswing or decline phase of the economic cycle. Ratios which are part of this category include return on total net assets (before tax), return on total net operating assets, dividend per share, sales to total net assets and interest-bearing debt to total shareholders' interest. The results based on the individual years of the analysis indicate that a large number of ratios exhibit normal expected patterns. Among the traditional profitability indicators, 80% exhibit normal expected patterns for the CI and LI enterprises during the upswing and decline phases. Traditional profitability ratios such as return on total net assets, return on net operating assets, return on total shareholders' interest and the value-creation ratio, economic value added form part of the normal expected group of patterns. All the inflation-adjusted ratios indicate normal expected patterns. These ratios indicate relative stability over the economic cycle and may be appropriate for the purposes of medium- and long-term financial forecasting as they follow the trade cycle. Approximately 39% of the ratios indicate mixed patterns, i.e. different patterns for the CI and LI enterprises. The growth in attributable earnings, cash flow to interest payments, market value of equity to book value of equity and market value added ratios indicate behaviour patterns for the CI and LI enterprises which may lead the economic cycle. These ratios may indicate the possibility of anticipating upswing and decline phases in the economic cycle. The relevance of the results for a CI enterprise alludes to the use of more debt financing during the decline phase to cover costs and working capital requirements when demand for products and services decreases as a result of a slow-down in the economy. The pattern exhibited by EPS may allude to an anticipated upswing phase in the economic cycle. An increase in the cash flow to interest payments ratio during the decline phase may indicate an imminent change in the cycle of the economy. The relevance of the results for LI enterprises indicates that an upswing in the economic cycle may be anticipated by an increase in the working capital to operating cash flow ratio. More debt financing is used during the upswing period, which may be attributed to greater demand and consequently results in a higher gearing position for LI enterprises. An increase in the cash flow to interest payments ratio during the decline phase may indicate an imminent upswing in the economic cycle. Several limitations of the study include the use of a single upswing and decline phase to represent the movements of the economic cycle; the approach used to distinguish between the CI and LI enterprises requires further analysis, and the large number of ratios could in future research be limited to several indicators. The more important recommendations of the study include the use of multiple upswing and decline phases of the economic cycle; more research into the lags and leads exhibited by the CI and LI enterprises for specific ratios should be conducted; the possibility of adopting a different approach to distinguish between CI and LI enterprises could also be considered; and further research is required to ascertain the reliability of indicators that highlight lead patterns for forecasting an upswing or decline phase in the economic cycle.

AFRIKAANSE OPSOMMING: Finansiele verhoudingsgetalle word algemeen op 'n stel finansiele state gebaseer sonder dat ander faktore wat die meting van prestasie kan beinvloed, in ag geneem word. Die gedrag van finansiele verhoudingsgetalle tydens 'n opswaai en afswaai-fase van die ekonomiese siklus, tesame met die aard en omvang van 'n ondememing se aktiwiteite, mag die manier waarop 'n ondememing finansiele verhoudingsgetalle gebruik, beinvloed, Die vraag mag ontstaan of 'n verhoudingsgetal se gedrag vir kapitaalintensiewe (KI) en arbeidsintensiewe (AI) ondememings die essensie van eksteme faktore soos 'n opswaai en afswaai in die ekonomiese siklus soos gemeet deur die Bruto Binnelandse Produk (BBP), sal kan omvat. In hierdie studie is 'n opswaai-fase van driejaar (1987-1989) en 'n afswaai-fase van driejaar (1990-1992) geselekteer na 'n analise van die ekonomiese siklus vir die peri ode 1970-1996. Die onderskeid tussen die kapitaal- en arbeidsintensiteit van 'n ondememing is op 'n analise van totale bates, vaste bates en die aantal werknemers van nywerheidsondememings wat op die Johannesburg Aandelebeurs (JAB) genoteer is, gebaseer. Die 62 gekose finansiele verhoudingsgetalle wat as winsgewindheid-, groei-, kontantvloei-, toegevoegdewaarde- en inflasie-aangepaste verhoudingsgetalle gegroepeer is, is vir elkeen van die 33 KI ondememings en die 36 AI ondememings, sowel as vir elke jaar van die ondersoekperiode, bereken. Die primere doelstellings van die navorsing is: • Om tussen die KI en AI aard van ondememings wat in die industriele sektor van die JAB genoteer is, te onderskei deur maatstawe van kapitaal- en arbeidsintensiwiteit te gebruik. • Om patrone te verkry en verskille in die gedrag van die gekose verhoudingsgetalle gedurende opswaai- en afswaai-fases van die ekonomiese siklus soos gemeet deur die BBP, tussen KI en AI ondememings te identifiseer. • Om patrone en verskille te ontleed en ondersoek ten einde te bepaal of daar spesifieke regverdiging is vir die gedrag wat deur KI en AI ondememings vir 'n bepaalde verhoudingsgetal gedurende een of albei van die opswaai- en afswaai-fases van die ekonomiese siklus getoon word. • Om bepaalde finansiele verhoudingsgetalle vir KI en AI ondememings te identifiseer wat moontlik gebruik kan word om finansiele prestasie te voorspel en om lei- en sloerpatrone in die ekonomiese siklus te identifiseer. 'n Omvattende statistiese analise van die verhoudingsgetalle is uitgevoer om bogenoemde doelwitte te bevredig. Die eerste deel van die analise is op 'n enkel verteenwoordigende maatstaf gebaseer wat 'n gemiddelde van die drie-jaar opswaai en drie-jaar afswaai-fases onderskeidelik verteenwoordig. Gemiddelde en mediaanwaardes is vir die KI en AI ondememings vir die opswaai- en afswaai-fases bereken. 'n Profiel-analise gebaseer op Hotelling se T2 toets is gebruik om die verhoudingsgetalle wat benaderd normaal verdeel is, te ontleed. Die nie-parametriese toetse "Mann-Whitney U-test" en "Wilcoxon matched-pairs test" is gebruik om die verhoudings wat nie benaderd normaal verdeel is nie, te ontleed. Die tweede dee I van die studie fokus op 'n analise van die verhoudingsgetalle wat op die individuele jare van die navorsingsperiode gebaseer is. Die statistiese tegnieke wat in die analise van die verhoudingsgetalle gebaseer op 'n enkel verteenwoordigende maatstaf gebruik is, is ook vir die analise van die verhoudingsgetalle gebaseer op die individuele jare gebruik. Die beperkings wat deur die analise gebaseer op 'n enkel verteenwoordigende maatstaf geidentifiseer is, word tot 'n groot mate in hierdie afdeling van die statistiese analise aangespreek. Deur die gemiddelde en mediaanwaardes gebaseer op die individuele jare te ontleed, is dit moontlik om die verhoudingsgetalle as een van 'n aantal patroongroepe, naamlik normaal verwagte, sloer-, lei-, sikliese en gemengde patrone, vir die Kl en AI ondememings te klassifiseer. Die patrone van 'n verskeidenheid van verhoudingsgetalle binne elk van die patroongroepe word ook uit 'n finansiele bestuursperspektief ontleed. Die bevindings van die studie bevestig die gestelde hipotese dat daar verskille in die gedrag van finansiele verhoudingsgetalle, gebaseer op 'n enkel-verteenwoordigende maatstaf en vir individuele jare van die navorsingsperiode, tussen Kl en AI ondememings gedurende een of albei van die opswaai- en afswaai-fases van die ekonomiese siklus is. Die analise beklemtoon verder dat 'n aantal verhoudingsgetalle wat op 'n enkel verteenwoordigende maatstaf gebaseer is, nie universeel vir alle ondememings en slegs gedurende 6f 'n opswaai- 6f 'n afswaai-fase van die ekonomiese siklus gebruik kan word nie. Verhoudingsgetalle wat deel van hierdie kategorie vorm, sluit ondememingsrentabiliteit (voor belasting), rentabiliteit van totale netto vaste- en bedryfsbates, dividend per aandeel, verkope tot totale netto bates, en rentedraende skuld tot totale aandeelhouersbelang in. Die resultate gebaseer op die individuele jare van die analise toon dat die oorgrote meerderheid van die verhoudingsgetalle normaal verwagte patrone volg. Van die tradisionele winsgewindheidsverhoudingsgetalle vertoon 80% normaal verwagte patrone vir die KI en AI ondememings gedurende die opswaai- en afswaai-fase. Tradisionele winsgewindheidsverhoudingsgetalle soos ondememingsrentabiliteit, rentabiliteit van netto vaste- en bedryfsbates, rentabiliteit van eie kapitaal en die waardeskeppingsverhoudingsgetal EVA, vorm deel van die normaal verwagte groep van patrone. Al die inflasie-aangepaste verhoudingsgetalle toon ook normaal verwagte patrone. Hierdie groep van verhoudingsgetalle toon relatiewe stabiliteit gedurende die ekonomiese siklus en is vir medium- en langtermyn finansiele vooruitskatting geskik omdat hulle die besigheidsiklus volg. Ongeveer 39% van die verhoudingsgetalle toon gemengde patrone, m.a.w. verskillende patrone vir die KI en AI ondememings. Die groei in verdeelbare inkomste, kontantvloei tot rentebetalings, markwaarde van aandeelhouersbelang tot boekwaarde van aandeelhouersbelang en mark-toegevoegde waarde verhoudingsgetalle toon gedragspatrone vir die KI en AI ondememings wat moontlik die ekonomiese siklus kan lei. Hierdie verhoudingsgetalle mag 'n aanduider van verwagte opswaai- en afswaai-fases in die ekonomiese siklus wees. Die relevansie van die resultate vir KI ondememings dui op die groter gebruik van vreemde kapitaal gedurende die afswaai-fase om kostes en bedryfskapitaal behoeftes te dek wanneer die vraag na produkte en dienste afneem as gevolg van 'n daling in die ekonomie. Die patroon wat deur verdienste per aandeel aangedui word, gee 'n moontlike aanduiding van 'n verwagte opswaai-fase in die ekonomiese siklus. 'n Toename III die kontantvloei-totrentebetalingsverhoudingsgetal gedurende die afswaai-fase mag 'n aanduider van 'n naderende opswaai in die ekonomiese siklus wees. Die relevansie van die resultate vir AI ondememings toon dat 'n opswaai in die ekonomiese siklus deur 'n toename in die bedryfskapitaal tot kontant uit ondememingsaktiwiteite verhoudingsgetal verwag kan word. Meer vreemde kapitaal word gedurende die opswaai-fase gebruik wat aan 'n toename in die vraag toegeskryf kan word en gevolglik tot 'n hoer hefboomsituasie vir AI ondememings lei. 'n Toename in die kontantvloei tot die rente betaal verhoudingsgetal gedurende die afswaai-fase mag 'n aanduider van 'n naderende opswaai in die ekonomiese siklus wees. 'n Aantal beperkings van die studie sluit in: die gebruik van 'n enkele opswaai- en afswaaifase wat die ekonomiese bewegings verteenwoordig; die benadering wat gevolg is om tussen die KI en AI ondememings te onderskei benodig verdere ondersoek; en die groot aantal verhoudingsgetalle kan in toekomstige studies tot 'n sekere aantal indikatore beperk word. Die belangrikste aanbevelings van die studie sluit in: die gebruik van veelvoudige opswaai- en afswaai-fases van die ekonomiese siklus; meer navorsing op die sloer- en leipatrone wat deur die KI en AI ondememings vir spesifieke verhoudingsgetalle getoon word; die moontlikheid om 'n ander benadering te volg om tussen KI en AI ondememings te onderskei, kan oorweeg word; en verdere navorsing word benodig om die betroubaarheid te bepaal van die indikatore wat dui op lei patrone wat 'n opswaai- of afswaai-fase in die ekonomiese siklus kan voorspel.

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