Sales Growth And Firm's Profitability Case Study

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2.2.5 Sales Growth and Firm’s Profitability
Most of the research listed sales growth as one of the control variables on firm’s profitability. From the majority research results, it can be observed that sales growth is positively correlated with firm’s profitability. Previous study done by Makori and Jagongo (2013) indicated that sales growth can affect firm’s profitability significantly. The result suggested that there is a positive association between sales growth and profitability of the firms in Kenya for the period 2003 to 2012. They explained that sales growth is influenced by Average Payment Period (APP). Higher APP means the firms have more cash in hand because they have longer period to pay off their debt. Thus, the firms are able
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Previous researches showed the correlation coefficients of firm leverage and ROA is significant. The measurement of firm leverage is total debt divided by total asset. Makori and Jagongo (2013) suggested that the level of leverage is negatively impacted on corporate profitability. It can be explained by if firms earn more money that increase their profitability, the firms will use the retail earning to pay off their debt leverage. Therefore, the higher the profitability, the lower the debt leverage. Studies conducted by Sharma and Kurma (2011) and Pais and Gama (2015) also proved that leverage would influence firm’s profitability negatively. From their study, the firms could maximize their profitability by achieving the lowest level of leverage. Previous researches completed by Gill, Biger and Mathur (2010) and Lazaridis and Tryfonidis (2006) used financial debt ratio as a proxy of leverage. Both of their results indicated negative relationship between firm leverage and the dependent variable. This means that the leverage is inversely with the profitability of firms. The reason given by Lazaridis and Tryfonidis on the result is firms would get a cheaper price if firms trade with suppliers by cash. The cash trade would decrease the leverage then increase the gross operating profit since firms purchase their inventories with lower …show more content…
They suggested that current ratio is a conventional measurement that used to measure the liquidity and how efficient a firm to pay their current liabilities. At the same time, they found out that current ratio is negatively correlated to the profitability of firms, hence, this means liquidity is adversely impact on profitability. In other words, if the liquidity position of firms is better, then the profitability of firms would drop. Furthermore, they explained that current ratio is the most important measurement of liquidity that affects profitability in Pakistan. Thus, Pakistani firms must face a trade-off in between liquidity or

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