The financial performance of an organization is influenced by several factors like capital structure, cost, revenue and the consequential profit margin. The best indicators of the financial performance are return on assets, sales, equity and other financial variables. In this study, the researcher has analyzed the performance of selected companies in Jordan on the parameters such as profitability, utilization of assets, growth of performance, financial strength and capital structure. The researcher has also attempted to identify the nature of relationship between the various aspects of financial performance.
The term performance refers to the act of performing, execution, accomplishment, fulfillment of a given task measured against preset standards of accuracy, completeness, cost, and speed [
Working Capital Management (WCM) plays an important role in creating value for the shareholders. The way working capital was managed had a significant impact on both profitability and liquidity. It was found that there is negative relationship between lengths of the firm’s net trading cycle and its profitability [
The following are the broad objectives of the study:
1) To provide an introductory background of the selected companies in Jordan.
2) To study the profitability position of the selected companies in Jordan.
3) To analyze the impact of financial ratios on the profitability of the selected companies in Jordan.
Ho1: There is no significant impact of financial ratios on the financial performance of Arab East Real Estate Investments Company.
Ha1: There is a significant impact of financial ratios on the financial performance of Arab East Real Estate Investments Company.
Ho2: There is no significant impact of financial ratios on the financial performance of Specialized Jordanian Investment.
Ha2: There is a significant impact of financial ratios on the financial performance of Specialized Jordanian Investment.
Ho3: There is no significant impact of financial ratios on the financial performance of Al-Bilad Medical Services.
Ha3: There is a significant impact of financial ratios on the financial performance of Al-Bilad Medical Services.
Ho4: There is no significant impact of financial ratios on the financial performance of Jordan Electric Power.
Ha4: There is a significant impact of financial ratios on the financial performance of Jordan Electric Power.
Ho5: There is no significant impact of financial ratios on the financial performance of Jordan National Shipping Lines.
Ha5: There is a significant impact of financial ratios on the financial performance of Jordan National Shipping Lines.
The study is based on the secondary sources of data collected from the published annual reports of the selected companies of the past thirteen years i.e. 2001-02 to 2013-14. Besides, the data has been collected from the articles published in various business newspapers, journals, and internet. Multiple Regression has been used to analyze the impact of financial ratios on the financial performance of the selected companies.
The present study highlights the financial performance of selected companies in Jordan through facts of published financial data. The financial performance of all these companies has been evaluated on the parameters like profitability, utilization of assets, growth of performance, financial strength and financial health.
The reliability of the study depends on the accuracy of data collected. The present study is based on the published secondary data and hence the limitations of the published financial statement limitations may be applicable to this study.
Following companies have been selected for analysis in this study:
1. Arab East For Real Estate Investments Company
2. Specialized Jordanian Investment
3. Al-Bilad Medical Services
4. Jordan National Shipping Lines
5. Jordan Electric Power
To study the impact of financial ratios on the financial performance of the selected companies in Jordan, the multiple regression model has been used. The fitted model is shown here;
Y = β 0 + β 1 X 1 + β 2 X 2 + β 3 X 3 + β 4 X 4 + β 5 X 5 + β 6 X 6 + β 7 X 7 + β 8 X 8 + U (1)
where;
Y―Net Profit/Return on Equity
X1 = Current Ratio
X2 = Quick Ratio
X3 = Current Assets to Total Assets Ratio
X4 = Inventory Turnover Ratio
X5 = Debtors Turnover Ratio
X6 = Working Capital Ratio
X7 = Total Assets Turnover Ratio
X8 = Fixed Assets Turnover Ratio
b1, b2, ….b8―Regression coefficients of predictor variables.
U = disturbance term and
A―Intercept
Hypotheses Testing
Hypothesis 1
Ho1: There is no significant impact of financial ratios on the financial performance of Arab East Real Estate Investments Company.
Ha1: There is a significant impact of financial ratios on the financial performance of Arab East Real Estate Investments Company.
Multiple linear regression used to find out the impact of financial ratios on the financial performance of Arab East Real Estate Investments Company. The null hypothesis states that the there is no significant impact of financial ratios on the financial performance of Arab East Real Estate Investments Company and the alternate states that there is a significant impact of financial ratios on the financial performance of Arab East Real Estate Investments Company.
Model-1 | Dependent Variables | |||||
---|---|---|---|---|---|---|
Independent Variables | Return on Sales | Return on Equity | ||||
Regression Coefficients | t Value | P Value | Regression Coefficients | t Value | P Value | |
(Constant) | 44.451 | 37.561 | 0.474 | 21.261 | 11.443 | 0.078 |
Current Ratio | 2.412 | 19.471 | 0.000 | 1.478 | 4.571 | 0.001 |
Quick Ratio | 1.784 | −23.451 | 0.001 | 1.577 | 2.469 | 0.000 |
Operating Ratio | 1.990 | −4.745 | 0.000 | 2.014 | 10.412 | 0.000 |
Inventory Turnover Ratio | 2.413 | 31.033 | 0.000 | 2.337 | 16.574 | 0.000 |
Debtors Turnover Ratio | 1.986 | 14.704 | 0.007 | 1.674 | 5.577 | 0.001 |
Debt Equity Ratio | 1.775 | 13.241 | 0.002 | 1.493 | 21.303 | 0.004 |
Adjusted R2 | 0.897 | 0.799 |
89.7% variation in return on sales (ROS) is explained by independent variables while rest of the variation is an unexplained variation that is due to other variables that has not been considered in this model. So far as return on equity (ROE) is concerned, the value of adjusted R square is 0.799 which means that 79.9% variation in return on equity (ROE) is explained by independent variables while rest of the variation is an unexplained variation. The significant value for each variable is less than 0.005. Therefore, null hypothesis stands rejected and it can be said that there is a significant impact of financial ratios on the financial performance of Arab East Real Estate Investments Company.
Hypothesis 2
Ho2: There is no significant impact of financial ratios on the financial performance of Specialized Jordanian Investment.
Ha2: There is a significant impact of financial ratios on the financial performance of Specialized Jordanian Investment.
Multiple linear regression used to find out the impact of financial ratios on the financial performance of Specialized Jordanian Investment. The null hypothesis states that the there is no significant impact of financial ratios on the financial performance of Specialized Jordanian Investment and the alternate states that there is a significant impact of financial ratios on the financial performance of Specialized Jordanian Investment.
Model-2 | Dependent Variables | |||||
---|---|---|---|---|---|---|
Independent Variables | Return on Sales | Return on Equity | ||||
Regression Coefficients | t Value | P Value | Regression Coefficients | t Value | P Value | |
(Constant) | 33.048 | 37.561 | 0.879 | 19.887 | 11.443 | 0.338 |
Current Ratio | 2.007 | 4.874 | 0.000 | 1.668 | 31.033 | 0.001 |
Quick Ratio | 1.593 | 3.340 | 0.000 | 1.087 | 14.704 | 0.009 |
Operating Ratio | 2.014 | 17.761 | 0.000 | 2.334 | 10.412 | 0.008 |
Inventory Turnover Ratio | 2.339 | 21.223 | 0.000 | 1.996 | 16.574 | 0.000 |
Debtors Turnover Ratio | 2.247 | 1.078 | 0.000 | 1.831 | 5.577 | 0.000 |
Debt Equity Ratio | 1.863 | 16.241 | 0.000 | 1.776 | 4.229 | 0.000 |
Adjusted R2 | 0.665 | 0.587 |
uity (ROE) is explained by independent variables while rest of the variation is an unexplained variation. The significant value for each variable is less than 0.005. Therefore, null hypothesis stands rejected and it can be said that there is a significant impact of financial ratios on the financial performance of Specialized Jordanian Investment.
Hypothesis 3
Ho3: There is no significant impact of financial ratios on the financial performance of Al-Bilad Medical Services.
Ha3: There is a significant impact of financial ratios on the financial performance of Al-Bilad Medical Services.
Multiple linear regression used to find out the impact of financial ratios on the financial performance of Al-Bilad Medical Services. The null hypothesis states that the there is no significant impact of financial ratios on the financial performance of Al-Bilad Medical Services and the alternate states that there is a significant impact of financial ratios on the financial performance of Al-Bilad Medical Services.
Hypothesis 4
Ho4: There is no significant impact of financial ratios on the financial performance of Jordan Electric Power.
Model-3 | Dependent Variables | |||||
---|---|---|---|---|---|---|
Independent Variables | Return on Sales | Return on Equity | ||||
Regression Coefficients | t Value | P Value | Regression Coefficients | t Value | P Value | |
(Constant) | 61.542 | 37.561 | 0.909 | 19.887 | 55.443 | 0.557 |
Current Ratio | 2.447 | 14.874 | 0.001 | 2.287 | 11.033 | 0.000 |
Quick Ratio | 1.243 | 13.240 | 0.000 | 2.134 | 4.764 | 0.001 |
Operating Ratio | 2.664 | 7.461 | 0.0061 | 1.997 | 2.412 | 0.000 |
Inventory Turnover Ratio | 2.109 | 2.443 | 0.000 | 2.007 | 16.574 | 0.000 |
Debtors Turnover Ratio | 2.771 | 11.878 | 0.0044 | 2.365 | 15.477 | 0.0023 |
Debt Equity Ratio | 1.443 | 41.201 | 0.000 | 1.446 | 14.019 | 0.001 |
Adjusted R2 | 0.693 | 0.707 |
Ha4: There is a significant impact of financial ratios on the financial performance of Jordan Electric Power.
Multiple linear regression used to find out the impact of financial ratios on the financial performance of Jordan Electric Power. The null hypothesis states that the there is no significant impact of financial ratios on the financial performance of Jordan Electric Power and the alternate states that there is a significant impact of financial ratios on the financial performance of Jordan Electric Power.
Hypothesis 5
Ho5: There is no significant impact of financial ratios on the financial performance of Jordan National Shipping Lines.
Ha5: There is a significant impact of financial ratios on the financial performance of Jordan National Shipping Lines.
Multiple linear regression used to find out the impact of financial ratios on the financial performance of Jordan National Shipping Lines. The null hypothesis states that the there is no significant impact of financial ratios on the financial performance of Jordan National Shipping Lines and the alternate states that there is a significant impact of financial ratios on the financial performance of Jordan National Shipping Lines.
Model-4 | Dependent Variables | |||||
---|---|---|---|---|---|---|
Independent Variables | Return on Sales | Return on Equity | ||||
Regression Coefficients | t Value | P Value | Regression Coefficients | t Value | P Value | |
(Constant) | 65.442 | 17.461 | 0.837 | 19.887 | 55.443 | 0.445 |
Current Ratio | 2.447 | 15.477 | 0.000 | 2.287 | 2.446 | 0.000 |
Quick Ratio | 1.243 | 14.019 | 0.000 | 2.664 | 14.874 | 0.000 |
Operating Ratio | 2.365 | 11.556 | 0.000 | 2.109 | 13.240 | 0.000 |
Inventory Turnover Ratio | 1.446 | 12.443 | 0.000 | 2.771 | 7.461 | 0.000 |
Debtors Turnover Ratio | 2.227 | 11.878 | 0.000 | 2.009 | 5.449 | 0.000 |
Debt Equity Ratio | 1.443 | 41.201 | 0.000 | 2.374 | 17.229 | 0.000 |
Adjusted R2 | 0.655 | 0.724 |
Model-5 | Dependent Variables | |||||
---|---|---|---|---|---|---|
Independent Variables | Return on Sales | Return on Equity | ||||
Regression Coefficients | t Value | P Value | Regression Coefficients | t Value | P Value | |
(Constant) | 92.742 | 17.461 | 0.758 | 19.887 | 43.228 | 0.669 |
Current Ratio | 2.447 | 22.477 | 0.000 | 2.287 | 14.019 | 0.000 |
Quick Ratio | 1.009 | 7.461 | 0.002 | 1.664 | 11.556 | 0.000 |
Operating Ratio | 2.465 | 5.449 | 0.000 | 2.269 | 12.443 | 0.000 |
Inventory Turnover Ratio | 1.446 | 17.229 | 0.000 | 2.771 | 9.907 | 0.001 |
Debtors Turnover Ratio | 2.118 | 16.661 | 0.0066 | 2.449 | 12.228 | 0.000 |
Debt Equity Ratio | 1.229 | 13.338 | 0.000 | 1.374 | 34.449 | 0.0033 |
Adjusted R2 | 0.539 | 0.595 |
Financial performance is the evaluation and interpretation of a firm’s financial positions and operations and involves a comparison and interpretation of accounting data. Financial performance analysis is the analysis of financial statements, like balance sheet and profit and loss account aimed at diagnosing the profitability and financial condition of a business concern. It is a scientific tool which played an important role in terms of appraising the real worth of an enterprise. It helps in drawing out the complications of what is contained in the financial statements. In the present research, financial performance is measured with the help of financial ratios. Current ratio, quick ratio, operating ratio, inventory turnover ratios, debtors’ turnover ratios, debt equity ratios, return on sales (ROS), and return on equity (ROE) have been calculated, and thereafter multiple linear regression has been applied to find out the impact of these financial ratios on the financial performance of selected companies in Jordan. The analysis of the data shows that there is a significant impact of financial ratios on the financial performance of Arab East for Real Estate Investments Company, Al-Bilad Medical Services, Jordan Electric Power, and Jordan National Shipping Lines.
Al Dalayeen, B. (2017) Financial Performance Appraisal of Selected Companies in Jordan. Open Journal of Business and Management, 5, 131- 140. http://dx.doi.org/10.4236/ojbm.2017.51012