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A Relationship between Firm Investment and Financial Status of Nepalese

Organizations
Kapil Deb Subedi
Head- Department of Management
Saptagandaki Multiple Campus

Statement of the Problem

The present study attempts to disclose the results and explain the outcome of analysis in
the role of financial factors in explaining the investment behaviour of nepales
organizations. One of the objectives of the study is to assess the firm investment practices
in Nepalese enterprises and to find its relationship with financial status variables.

Many studies in industrialized countries {for example Fazzari et al. (1988), Kaplan and
Zingales (1997), and Cleary (1999)} support the existence of a strong relationship
between financial factors and investment decisions. They suggest that firms (even large
well established ones) operate in imperfect markets, which leaves researchers and policy
maker to deal with the critical issues of how and why these imperfections affect firm
investment decisions.
The vast literature in investment empirics evidences that the investment decisions of
firms with weaker financial positions are much more sensitive to the availability of
internal funds than those that are more creditworthy. The evidence also demonstrates that
a major reason for the weak investment- cash flow sensitivity displayed by healthy firms
is that they are able to invest even with the increased debt level if there exists the market
opportunity but the same is not true for unhealthy firms. This is because they appear to be
too preoccupied with reducing debt levels to undertake much long-term investment. The
present study covers the empirical test of this notion that whether the firm financial status
(i.e. healthy or unhealthy firms) have significant impacts in investment cashflow
sensitivity among the Nepalese enterprises or not.

Methodology and Analysis


Portfolios sorted by financial status variables
Firms' characteristics based on financial status variables e.g. current ratio, assets turnover
ratio, sales growth, interest coverage, debt ratio, and net profit margins have been used to
classify firms that a priori can be considered to differ in their access to external funds or
in other words in their liquidity constraints. Similar studies in industrialized countries
focus on firm characteristics such as size, age, and firms' relationship with banks, the
dividend payout and the leverage that can be used as criteria for sub sampling. Some of
these features are irrelevant for developing countries. All firms in Nepal are relatively
young, so the age does not matter and there is no tradition with respect to dividend
policy. As regards to firms' relationship with financial sector, there is simply lacking the
firm level data on linkage between the financial sector and the firms in our sample. Given
these limitations, the present study selected the financial status variables to split the firms
in their access to external funds.
The study sorts out all the sampled enterprises into three portfolios. The financial status
variables selected to split the sample into three portfolios are the current ratio, assets
turnover ratio, sales growth, interest coverage, debt ratio, and net profit margins. The
enterprises with the lowest, medium, and highest values of financial status variables are
contained in portfolios 1, 2, and 3 respectively. The properties of these portfolios are
sown in the following sections.
Each portfolio shows the summary statistics of financial status variables in part A and
statistics of quantitative measures of the investment, growth, and cash flow variables in
part B. The investment variable for this study comprises the three separate investment
indicator of the firms. They are the investment in fixed assets (i.e, growth in fixed
assets=IFAt/Kt-1), investment in Current assets (i.e. growth in current assets =ICAt/Ct-1)
and investment in total assets (growth in total assets=ITAt/ Tt-1).

In Table1, portfolios sorted by current ratios are presented. The priori considered for this
classification assumes that the portfolios with the highest current ratios have a good
access to external funds and in other words, never constrained by liquidity. The
enterprises with the lowest current ratio have the lowest investment in fixed assets,
current assets and total assets. The average growth in fixed assets increased from10.36
percent for lowest CR portfolio to 20.81 percent for highest current ratio portfolio.
Similarly, The average growth in total assets increased from6.99 percent for lowest CR
portfolio to 8.46 percent for highest current ratio portfolio. But as regards to growth in
current assets, the result is opposite. The enterprises with highest current ratio have
lowest growth (6.61 percent) in current assets and the enterprises with the medium
current ratio have the highest investment (26.46 percent) in current assets. The statistics
also revealed that the enterprises with the medium current ratios (Portfolio 2) have the
highest investment in current assets, total assets, and fixed assets than the other two
portfolios. All the results are also supported by the median values.
Table-1
Summary Statistics of portfolios sorted by Current Ratio (CR)
The reported results in section A are the means of firm financial status variables e.g. Net Profit Margin,
Interest Coverage, Sales Growth, Debt Ratio, Assets Turnover and Current Ratio. The average yearly
growth in fixed Assets, Current assets, Total assets, and average yearly cash flow and Return on Assets are
reported in section B. Every portfolios are sorted by financial status variables (Current Ratio) of 26
enterprises over the sample period.

Portfolios 1(Lowest) 2(Medium) 3(Highest)

Basis of portfolio (CR) <= .83 .84 - 1.74 1.75+


A. Financial status
Net Profit margin (Times) -.2421 .0317 .0659
Interest Coverage (Times) 4.4562 12.656 16.5613
Sales Growth (Times) .1337 .1435 .1372
Debt Ratio (Times) .4193 .1481 .1680
Assets Turnover (Times) .7547 1.5620 2.2660
Current Ratio (Times) .5433 1.2746 2.9332
Number of observations 54 52 54
B.Investment, Cash flow,
Growth
Investment in Fixed Assets t /Kt-1 (Times)
.1036 .2136 .2081
Investment in Current Assets t (Times)
.0905 .2644 .0661
/Ct-1
Investment in Total Assets t /Tt-1 (Times)
.0699 .2506 .0846
Cash flowt/Kt-1 (Times) -.3367 .7001 1.6078
ROA (Times) -.0200 .1040 .1213
Number of observations 54 50 54
As regards to relationship between current ratio and cash flow, the mean and median
values of different portfolios support the priori assumption. The enterprises with the
lowest current ratio have the lowest cash flow to capital ratio
(-33.67 percent), medium enterprises have the medium cash flow to capital ratio(70.01
percent) and the enterprise with the highest current ratio have the highest cashflow to
capital ratio (160.78 percent). Return on Assets (ROA) is another variable considered for
corporate growth and taken as a proxy for market opportunity. The classification scheme
successfully captures the characteristics of portfolio to this variable also. The average
return on Assets for highest CR enterprise is 12.13 percent, where as it decreases to –2
percent for lowest CR enterprise.
The study also attempted to measure the relationship among the financial status variables
in different portfolios. The summary statistics for different portfolios in part B of Table 1
shows that the current ratio is positively related with the net income margin, assets
turnover, sales growth and interest coverage ratios, however it is negatively related with
the debt ratio. The net income margin increased from –24.21 percent for the enterprises
with the lowest CR portfolio to 6.59 percent for enterprises with highest CR portfolio.
Similarly the assets turnover ratio increased from 0.75 times for the enterprises with the
lowest CR portfolio to 2.26 times for enterprises with highest CR portfolio. Likewise,
The interest coverage ratio increased from 4.45 times for the enterprises with the lowest
CR portfolio to 16.56 times for enterprises with highest CR portfolio. As regards to sales
growth, the relationship with CR is not negative but also not increasing monotonically.
However, the debt ratio is negatively related with the current ratio. The debt ratio for
lowest CR enterprise is 41.93 percent and it declines to 16.80 percent for the portfolio of
highest CR enterprises.
From the above analysis, the following conclusions can be derived. First, the firms with
lower current ratios have first of all a lower investment to capital ratio than the firms with
larger current ratio. Secondly smaller CR firms have higher long-term debt. Third, small
CR firms have smaller cash flow to capital ratio than the larger CR firms.
In Table 2, portfolios sorted by sales growth are presented. The priori considered for this
classification assumes that the portfolios with the highest sales growth have a good
access to external funds and in other words, little constrained by liquidity. The enterprises
with the lowest sales growth have the lowest investment in fixed assets, current assets
and total assets.
The average investment in fixed assets increased from13 percent for lowest sales growth
portfolio to 21.77 percent for highest sales growth portfolio. Similarly, The average
growth in total assets increased from 5.73 percent for lowest sales growth portfolio to
23.17 percent for highest sales growth portfolio. As regards to growth in current assets,
the relationship is even strong. The enterprises with highest sales growth have highest
average investment (30.71 percent) in current assets and the enterprises with the lowest
sales growth have only the 3.51 percent investment in current assets. All the results are
also supported by the median values.
As regards to relationship between sales growth and cash flow, the mean and median
values of different portfolios support the priori assumption. The enterprises with the
lowest sales growth have the lowest cash flow to capital ratio (36.25percent), medium
enterprises have the medium cash flow to capital ratio (55.27 percent) and the enterprise
with the highest sales growth have the highest cash flow to capital ratio (100 percent).
Table-2
Summary Statistics of portfolios sorted by sales growth
The reported results in section A are the means of firm financial status variables e.g. Net Profit Margin,
Interest Coverage, Sales Growth, Debt Ratio, Assets Turnover and Current Ratio. The average yearly
growth in fixed Assets, Current assets, Total assets, and average yearly cash flow and Return on Assets are
reported in section B. Every portfolios are sorted by financial status variables (sales growth) of 26
enterprises over the sample period.
Portfolios 1(Lowest
2(Medium) 3(Highest)
)
Basis of portfolio (Sales
.01 - .19 .20+
growth) <= .00
A. Financial status Variables
Net Profit margin (Times) -.0788 .0075 -.0742
Interest Coverage (Times) 6.9424 17.3472 9.5583
Sales Growth (Times) -.2209 .0856 .5476
Debt Ratio (Times) .2618 .2491 .2282
Assets Turnover (Times) 1.4273 1.3216 1.8249
Current Ratio (Times) 1.5496 1.7201 1.4978
Number of observations 54 52 54
B.Investment, Cash flow,
Growth
Investment in Fixed Assets t (Times)
.1300 .1762 .2177
/Kt-1
Investment in Current Assets t (Times)
.0351 .0851 .3071
/Ct-1
Investment in Total Assets t (Times)
.0573 .1069 .2317
/Tt-1
Cash flowt/Kt-1 (Times) .3625 .5527 1.0079
ROA (Times) .0560 .0715 .0744
Number of observations 53 52 53
As regards to relationship between sales growth and cash flow, the mean and median
values of different portfolios support the priori assumption. The enterprises with the
lowest sales growth have the lowest cash flow to capital ratio (36.25percent), medium
enterprises have the medium cash flow to capital ratio (55.27 percent) and the enterprise
with the highest sales growth have the highest cash flow to capital ratio (100 percent).
Return on Assets (ROA) is another variable considered for corporate growth and taken as
a proxy for market opportunity. The classification scheme successfully captures the
characteristics of portfolio to this variable also. The average return on Assets for highest
sales growth enterprise is 7.44 percent, where as it decreases to 5.60 percent for lowest
sales growth enterprise. The median value of ROA for highest sales growth enterprises is
8.76 percent and it declined to 6.19 percent to small sales growth enterprises. It suggests
that there is no negative relationship between sales growth and Return on Assets.
Part A of Table.2 reports the mean and median values of financial status variables across
the three different portfolios formed on the basis of lowest, medium, and highest sales
growth ratios. The firm-years in the lowest sales growth portfolio have the smaller net
profit margin, assets turnover, and interest coverage ratio as compared to the firm-years
in highest portfolio. On the other side, the sales growth ratio is negatively related with the
current ratio and the debt ratio when compared to lowest sales growth portfolio with the
highest one.
The median value of net income margin increased from 0.04 percent for the enterprises
with the lowest sales growth portfolio to 1.52 percent for enterprises with highest sales
growth portfolio. Similarly the average assets turnover ratio increased from 1.42 times for
the enterprises with the lowest sales growth portfolio to 1.82 times for enterprises with
highest sales growth portfolio. Likewise, The interest coverage ratio increased from 6.94
times for the enterprises with the lowest sales growth portfolio to 9.55 times for
enterprises with highest sales growth portfolio. However, the debt ratio is negatively
related with the sales growth. The mean debt ratio for lowest sales growth enterprise is
26.18 percent and it declines to 22.82 percent for the portfolio of highest sales growth
enterprises. But the median debt ratio for these portfolios is 3.96 percent and 6.54 percent
respectively. The large differences in mean and median values in the portfolios suggest
that the distributions are highly skewed.
Table 4.3 presents the summary statistics of portfolios formed on the basis of net profit
margin. The firm-years with negative net profit margin are included in portfolio 1. The
firm-years with the NP margin between zeros to 4.99 percent are categorized in portfolio
2 and the firm-years with the NP margin greater than 5 percent are formed in portfolio 3.
In part B of Table 4.3, the median investment in net fixed assets, current assets, total
assets, net cash flow and ROA increase monotonically across the three categories. For
example, the median level of net cash flow for portfolio 1 is -22.97 percent of beginning
of period net fixed assets while the median level of net cash flow for portfolio 3 is 57.05
percent. This suggests that the firms in portfolio 3 could have increased their investment
without tapping the external source of capital. At the same time, median level of
investment in fixed asset in portfolio 3 is 7.33 percent of its beginning of period net fixed
assets while it decreases to 2.07 percent for portfolio 1. The median level of
investment in current assets increased from 3.31 percent in portfolio 1 to 11 percent in
portfolio 3.

Table- 3
Summary Statistics of portfolios sorted by Net Profit Ratio
The reported results in section A are the means of firm financial status variables e.g. Net Profit Margin,
Interest Coverage, Sales Growth, Debt Ratio, Assets Turnover and Current Ratio. The average yearly
growth in fixed Assets, Current assets, Total assets, and average yearly cash flow and Return on Assets are
reported in section B. Every portfolios are sorted by financial status variables (Net Profit Ratio) of 26
enterprises over the sample period.
Portfolios
1(Lowest) 2(Medium) 3(Highest)
Basis of portfolio (Net Profit
<= -.01 .00 - .04 .05+
margin)
A. Financial status
Net Profit margin (Times) -.3282 .0127 .1668
Interest Coverage (Times) 1.082 3.4191 29.26
Sales Growth (Times) .0573 .2237 .1316
Debt Ratio (Times) .4759 .2234 .0401
Assets Turnover (Times) .8019 2.5488 1.211
Current Ratio (Times) .9343 1.9453 1.876
Number of observations 54 53 53
B.Investment, Cash flow, Growth
Investment in Fixed Assets t /Kt-1 (Times) .1354 .2372 .1501
Investment in Current Assets t /Ct-1 (Times) .1476 .1392 .1351
Investment in Total Assets t /Tt-1 (Times) .0858 .1622 .1489
Cash flowt/Kt-1 (Times) -.5284 1.3060 1.1303
ROA (Times) -.0757 .0956 .1810
Number of observations 53 52 53

This result suggests us that the firms with the higher NP margin have higher investment
ratio, higher cash flow to capital ratio and higher Return on assets.
Part A of Table 4.3 reports the mean and median values of financial status variables
across the three different portfolios formed on the basis of lowest, medium, and highest
NP margin. The firm-years in the negative NP margin portfolio have the smaller sales
growth, smaller assets turnover, and current ratio and smaller interest coverage ratio as
compared to other two portfolios. On the other hand, the debt ratio is negatively related
with the NP margin. The median value of net sales growth increased from 5.73 percent
for the enterprises with the negative NP margin portfolio to 13.16 percent for enterprises
with highest NP margin portfolio. Similarly the average assets turnover ratio increased
from 0.80 times for the enterprises with the negative NP margin portfolio to 1.21 times
for enterprises with highest NP margin portfolio. Likewise, The interest coverage ratio
increased from 1.082 times for the enterprises in the negative NP margin portfolio to
29.26 times for enterprises with highest NP margin portfolio. However, the debt ratio is
negatively related with the NP margin. The mean debt ratio for negative NP margin
enterprises is 47.59 percent and it declines to 4.01 percent for the portfolio of highest NP
margin enterprises. But the median debt ratio for these portfolios is 53.50 percent and
zero percent respectively.

Table 4.4 reports the portfolio sorted by Debt Ratio. The firm-years observations are
grouped in portfolio 3 if the debt ratio is higher than 30 percent. The firm-years
observations between 1 to 30 percent debt ratios are classified in portfolio 2 and the
observations with no debt at all are sorted in portfolio 1. For investment studies of
western economies, the intuition behind such a sample split is mostly that the companies
with a relatively large amount of debt are more likely (ex ante) to face liquidity
constraints.

Table-4:4
Summary Statistics of portfolios sorted by Debt Ratio
The reported results in section A are the means of firm financial status variables e.g. Net Profit Margin,
Interest Coverage, Sales Growth, Debt Ratio, Assets Turnover and Current Ratio. The average yearly
growth in fixed Assets, Current assets, Total assets, and average yearly cash flow and Return on Assets are
reported in section B. Every portfolios are sorted by financial status variables (Debt Ratio) of 26
enterprises over the sample period.

Portfolios
1(Lowest) 2(Medium) 3(Highest)
Basis of portfolio (Debt
<= .00 .01 - .29 .30+
Ratio)
A. Financial status
Net Profit margin (Times) .0681 -.0227 -.2138
Interest Coverage (Times) 18.9520 12.6441 .5590
Sales Growth (Times) .1861 .0648 .1314
Debt Ratio (Times) .0000 .1340 .6331
Assets Turnover (Times) 2.4280 1.0449 .7578
Current Ratio (Times) 2.0310 1.2493 1.2816
Number of observations 67 39 54
B.Investment, Cash flow,
Growth
Investment in Fixed Assets t (Times)
.1815 .1521 .1824
/Kt-1
Investment in Current Assets t (Times)
.1855 .0885 .1275
/Ct-1
Investment in Total Assets t (Times)
.1750 .0912 .1088
/Tt-1
Cash flowt/Kt-1 (Times) 1.5973 .1686 -.1587
ROA (Times) .1619 .0660 -.0455
Number of observations 66 39 53

From table 4.4 it could be discerned that there are a notable differences in among the
firms in the sample with respect to stock of long term debt. As can be seen from the table
the firms with the negative cash flow, and firms with negative ROA predominantly hold
long-term debt. For Nepalese firms it is the case that firms with the positive long-term
debt are on average relatively larger in size, do not make a profit and display a lower
sales growth. As can be seen from the table the ROA of unleveled firms is 16.19 percent
where as it declines to -4.55 percent for the heavily indebted firms (portfolio3)
The summary statistics of financial status variable in part A of Table 4.4 reports the debt
ratio has negative relation with CR, NP Margin, Assets turnover, Interest Coverage and
Sales growth. The median value of net sales growth increased from 13.14 percent for the
enterprises with the higher debt ratio to 18.64 percent for enterprises with no debt ratio.
Similarly the average assets turnover ratio increased from .75 times for the enterprises
with higher debt ratio to 2.42 times for enterprises with no debt ratio. Likewise, The
interest coverage ratio increased from 0.55 times for the enterprises with higher debt ratio
to 18.95 times for enterprises with no debt ratio. Similarly, the current ratio increased
from1.28 times for enterprises with the highest net cash flow ratio to 2.03 times for the
enterprise with no debt ratio. Very importantly the net profit margin for heavily indebted
firms are negative (-21.38 percent) but at the same time the firms with no debt at all have
positive net profit margin. All these results suggest that for the Nepalese firms higher the
debt ratio is the sign of financial weakness and they are liquidity constrained.

Table 4.5 reports portfolios sorted by Assets Turnover Ratio. Every year, the firms with
the lowest Assets Turnover Ratio (the bottom one-third) are categorized as Portfolio 1,
the next one third are categorized as portfolio 2, and the top one-third are categorized as
portfolio 3. Assets turnover ratio is the sign of operational health of the firm. The firms
with higher assets turnover ratio have higher cash flow, higher ROA and greater
investment in fixed, current and total assets as compared to the firms with smaller ATR.
Table-4: 5
Summary Statistics of portfolios sorted by Assets Turnover
The reported results in section A are the means of firm financial status variables e.g. Net Profit Margin,
Interest Coverage, Sales Growth, Debt Ratio, Assets Turnover and Current Ratio. The average yearly
growth in fixed Assets, Current assets, Total assets, and average yearly cash flow and Return on Assets are
reported in section B. Every portfolios are sorted by financial status variables (Assets Turnover) of 26
enterprises over the sample period

Portfolios 1(Lowest) 2(Medium 3(Highest)


)
Basis of portfolio (Assets <= .65 1.31+
turnover) .66 – 1.30

A. Financial status
Net Profit margin (Times) -.1536 -.0189 .0243
Interest Coverage (Times) 15.4776 10.4865 7.6699
Sales Growth (Times) .1110 .0736 .2308
Debt Ratio (Times) .3609 .2627 .1152
Assets Turnover (Times) .4010 .9003 3.2920
Current Ratio (Times) 1.1917 1.4027 2.1717
Number of observations 54 52 54
B.Investment, Cash flow,
Growth
Investment in Fixed Assets t /Kt- (Times)
.1224 .1895 .2116
1
Investment in Current Assets t (Times)
.1207 .0734 .2276
/Ct-1
Investment in Total Assets t /Tt-1 (Times) .0888 .1116 .1969
Cash flowt/Kt-1 (Times) -.1429 .2298 1.8246
ROA (Times) .0075 .0440 .1487
Number of observations 52 51 52

The cash flow ratio to fixed assets increased to 1.82 times for the portfolio 3 firms from
the -.14 times for the lowest assets turnover portfolio. Mean ROA for the portfolio 3 is
highest than other two portfolios. This suggests that the higher assets turnover ratio is the
sign of sound financial health for Nepalese enterprises.
Part A of Table 4.5 reports the mean values of financial status variables across the three
different portfolios formed on the basis of lowest, medium, and highest assets turnover
ratio. The firm-years in the portfolio 1 have the smaller sales growth, NP margin and
smaller current ratio as compared to other two portfolios. On the other hand, the debt
ratio is negatively related with the assets turnover ratio. The median value of net sales
growth increased from 11.10 percent for the enterprises with the smaller assets turnover
ratio to 23.08 percent for enterprises with larger assets turnover ratio. Similarly, the
current ratio declined from 2.17 times for enterprises with the highest assets turnover
ratio to 1.19 times for the enterprise with lowest assets turnover ratio. Likewise, The NP
margin increased from –15.36 percent for the enterprises with smaller assets turnover
ratio to 2.43 percent for enterprises with highest assets turnover ratio. However, the debt
ratio is negatively related with the assets turnover ratio. The mean debt ratio for smaller
assets turnover firms is 36.09 percent and it declines to 11.52 percent for the highest
assets turnover enterprises in portfolio 3. Similarly the Interest coverage ratio decreases
monotonically as the assets turnover ratio increases across the portfolio.

In Table 4.6 portfolios sorted by interest coverage ratio are presented. The firms with
higher interest coverage ratio also have higher investment ratio in fixed assets, current
assets, and total assets. The average growth in fixed assets increased from 13.37 percent
for the lowest interest coverage portfolio to 17 percent for the highest.
Table-4: 6
Summary Statistics of portfolios sorted by interest coverage
The reported results in section A are the means of firm financial status variables e.g. Net Profit Margin,
Interest Coverage, Sales Growth, Debt Ratio, Assets Turnover and Current Ratio. The average yearly
growth in fixed Assets, Current assets, Total assets, and average yearly cash flow and Return on Assets are
reported in section B. Every portfolios are sorted by financial status variables (interest coverage) of 26
enterprises over the sample period

Portfolios 1(Lowest) 2(Medium) 3(Highest)

Basis of portfolio (Int.Cov) <= .94 .95 - 4.38 4.39+


A. Financial status
Net Profit margin (Times) -.3205 .0206 .1510
Interest Coverage (Times) .1303 2.0884 31.5738
Sales Growth (Times) .0729 .1961 .1440
Debt Ratio (Times) .4905 .2305 .0183
Assets Turnover (Times) .8403 2.2248 1.5032
Current Ratio (Times) .9263 1.9044 1.9259
Number of observations 53 54 51
B.Investment, Cash flow, Growth
Investment in Fixed Assets t /Kt-1 (Times) .1337 .2193 .1700
Investment in Current Assets t /Ct-1 (Times) .1527 .0857 .1883
Investment in Total Assets t /Tt-1 (Times) .0905 .1191 .1865
Cash flowt/Kt-1 (Times) -.5845 1.2824 1.2462
ROA (Times) -.0737 .1021 .1771
Number of observations 53 54 51
The enterprises with higher interest coverage also have higher average investment (18.83
percent) in current assets and the enterprises with the smaller interest coverage have only
the 15.27 percent investment in current assets. As regards to cash flow, the enterprises
with smaller interest coverage ratio have negative cash flow to capital ratio where as the
enterprises with higher interest coverage ratio have average cash flow of 1.24 times of
their fixed capital. It indicates that the enterprises with greater interest coverage ratio
reveal the sound financial health of Nepalese enterprises.
Among the financial status variables, a negative relation of interest coverage ratio with
debt ratio are noticed where as it has positive relation with all other financial status
variables. The median value of net sales growth increased from 7.29 percent for the
enterprises with the smaller interest coverage ratio to 14.40 percent for enterprises with
larger interest coverage. Similarly, the current ratio declined from 1.92 times for
enterprises with the highest interest coverage ratio to .92 times for the enterprise with
lowest interest coverage ratio. Likewise, The NP margin increased from –32.05 percent
for the enterprises with smaller interest coverage ratio to 15.10 percent for enterprises
with highest interest coverage ratio. Similarly the average assets turnover ratio increased
from .84 times for the enterprises with lower interest coverage ratio to 1.5 times for
enterprises with higher interest coverage ratio However, the debt ratio is negatively
related with the interest coverage ratio. The mean debt ratio for smaller interest coverage
firms is 49.05 percent and it declines to 1.83 percent for the highest interest coverage
enterprises in portfolio 3.
The overall results of the above analysis suggests that the financial status variables have a
relationship with firm investment, cash flow, and Return on Assets of Nepalese
enterprises. There is also noticed the existence of relationship among the financial status
variables themselves. The overall results indicate the two major trends in Nepalese
enterprises. First, the debt ratio is negatively related with other variables in all cases,
among others. For Nepalese firms it is the case that all firms with the positive long-term
debt are on average relatively larger in size, do not make a profit and display a lower
sales growth. All these results suggest that for the Nepalese firms higher the debt ratio is
the sign of financial weakness and they are liquidity constrained. Second, except the debt
ratio all other study variables are more or less positively related with each other and the
financial status variable have considerable impact on firm investment, cash flow and
growth.
4.3 Regression estimate of the financial status variables on firm investment
In this section, first, it has been examined the relationship between the firm financial
status and investment in capital expenditure by following the KZ-97 methodology and
estimating the separate regression equation for each independent variable. The regression
results are presented in table 4.7. The first six models include one of the six independent
variables at a time. Model 7 and 8 includes different combinations of independent
variables and model 9 includes all the six independent variables simultaneously. The
results of these alternative specifications support the summary statistics for portfolios
sorted by financial status variables.
The values reported in table 4.7 are all as per prior expectation and encouraging. The all
estimated coefficient of current ratio, assets turnover ratio and sales growth are positive
in different models. The intercept and slope coefficient for current ratio and assets
turnover ratio are significant on model 1 and model 5 respectively. It suggests that these
financial status variables have strong relationship with the investment in capital
expenditure of Nepalese enterprises.
Table: 4.7
Estimation of relationship between firm investment and financial status.
Values reported are OLS regression estimates over the whole sample period (1995-2004). See Table 1 for
details on the construction of the data set and the variables. Capital expenditure (normalized by net fixed
assets) is the dependent variable. The independent variables are the proxies for firm financial status i.e.,
the current ratio, debt ratio, sales growth, net profit margin, and assets turnover and interest coverage
ratio. Model one to six presents the intercept and slope coefficient of regression equation of each
independent variable at a time, model seven and eight include the different combination of independent
variables and model 9 presents the values of the multiple regression of all independent variables
simultaneously.
Model Intercept Regression coefficient of Adj.R2 F-
statistic
CR Debt ratio Sales NP Assets Int.Cov.
Growth Margin Turnover
1 .099 .046 0.011 2.83
{1.798}* {1.684}*
2 .223 -.189 0.013 3.10
{5.229}*** {-1.76}*
3 .157 .128 0.008 2.24
{4.503}*** {1.497}
4 .175 .001 0.006 0.99
{5.201}*** {012}
5 .111 .041 0.026 5.38
{2.617}*** {2.306}**
6 .191 -.001 .000 .619
{4.927}*** {-.787}
7 .268 -.265 .008 -.003 .022 2.16
{3.456}*** {-1.98}** {375} {-1.59}
8 0.077 0.048 .127 -.014 0.014 1.73
{1.31} [1.70}* {1.457} {-.215}
9 .189 .047 -.265 .104 -.028 0.01 -.004 .029 1.80
{2.186}** {1.564} {-1.938}* {1.191} {-.398} {-.027} {-1.61}

Notes: t-statistics in the brackets. ***, ** and *:significance levels at the 1, 5, and 10
percent levels respectively
Net profit margin and interest coverage ratio are the proxies for profitability and are
considered as financial status variable to the present study. The estimated relationship
between firm investment and the interest coverage ratio is negative and insignificant in
all models as stated above. This result suggests that the interest coverage ratio has not
much explanatory power in capital expenditure of firms. The result of Net profit margin
is also similar to interest coverage ratio.
As regards to debt ratio, the debt coefficient is not only clearly significant but the size of
debt coefficient is relatively large in all equations and they are all negative in various
models. The size of coefficient is in line with the results found by others (see Fazzari et.
al, 1988, and Hubbard, 1998). This result indicates that the investment in capital
expenditure declines with the increase in debt ratio.
4.4 Regression estimate of the financial status variables on current assets growth
The regression results of various models of growth in current assets on financial status
variables are presented in table 4.8 First, it has been examined the relationship between
the firm financial status and investment in current assets estimating the separate
regression equation for each independent variable. The first six models include one of the
six independent variables at a time. Model 7 and 8 includes different combinations of
independent variables and model 9 includes all the six independent variables
simultaneously. The results of these alternative specifications support the summary
statistics for portfolios sorted by financial status variables.
The results reported in table 4.8 are mixed. The signs of coefficients for current ratio,
sales growth, assets turnover ratio and debt ratio are as per prior expectation.
Table: 4.8
Estimation of relationship between growth in current assets and firm financial
status.
Values reported are OLS regression estimates over the whole sample period (1995-2004). See Table 1 for
details on the construction of the data set and the variables. Increase in current assets (normalized by
beginning of period current assets) is the dependent variable. The independent variables are the proxies
for firm financial status i.e., the current ratio, debt ratio, sales growth, net profit margin, and assets
turnover and interest coverage ratio. Model one to six presents the intercept and slope coefficient of
regression equation of each independent variable at a time, model seven and eight include the different
combination of independent variables and model 9 presents the values of the multiple regression of all
independent variables simultaneously.

Model Intercept Regression coefficient of Adj.R2 F-


statistic
CR Debt Sales NP Assets Int.Cov.
ratio Growth Ratio Turno.
1 -.007 .096 .061 10.949
{-.128} {3.309}***
2 .147 -.022 .006 .043
{3.339}** {-.21}
3 .101 .308 .069 12.23
{2.967}** {3.49}***
4 .140 -.005 .000 .006
{4.123}*** {-.07
}
5 .058 .055 .042 7.7
1.309 {2.7}*
6 .154 -.001 .000 .460
{3.996}*** {-.678}
7 .107 -.032 .308 -.032 0.057 4.058
{2.409}** {-.27} {3.47}*** {-.25
}
8 -.012 .077 .032 -.002 .068 4.69
{-.197] {2.419}** {1.46} [-.814}

9 -.136 .060 .144 .347 -.017 .062 .001 0.144 5.27


{-1.651} {1.924}* {1.12} {3.93}*** {-.25 {2.5}** {.285}
}

Notes: t-statistics in the brackets. ***, ** and *:significance levels at the 1, 5, and 10
percent levels respectively
But the estimated coefficients of interest coverage and net profit margin are not as per our
prior assumptions. The models (model 4 and 6) for these two variables are also
insignificant as the F-statistics are very small. The adjusted R2 for these two models are
negative suggesting that these variables are unable to explain the changes in current
assets growth.
The estimated coefficients of current ratio, sales growth, and assets turnover ratio are all
positive for various models. The results, among others, show the positive relationship of
investment in current assets with current ratio, sales growth, and assets turnover ratio.
Basically, these all coefficients are not only positive but also statistically significant in all
the time whether they all exist alone or put together with other independent variables in
the regression models. (see Models 1,3,5,7,8, and 9). By this result it is noticed that the
explanatory power of current ratio, and sales growth are important to explain the
variation in investment in current assets.
As regards to debt ratio, the debt coefficient is negative for model 1 and model 7. But the
estimated debt coefficient is positive (see model 9) when all the independent variables
are considered simultaneously. However, in all the cases the debt coefficients are not
statistically significant.
It is noteworthy to suggest that the inclusion of current ratio, assets turnover ratio and
sales growth in regression models makes it more capable in explaining the total variation
in current assets investment: as indicated by the coefficient of multiple determination
(adjusted R2). F-statistics for Models 1,3, 5, 7, 8, and 9 are also statistically significant
indicating that these regression models have a proper goodness of fit.
4.5 Regression estimate of the financial status variables on total assets growth
The regression results of various models of growth in total assets on financial status
variables are presented in table 4.9 First, it has been examined the relationship between
the firm financial status and investment in total assets estimating the separate regression
equation for each independent variable. The growths in total assets are obtained as taking
the first difference of total assets divided by the beginning of period total assets. The
independent variables for the regression equation are Current ratio, assets turnover ratio,
debt ratio, sales growth, interest coverage ratio and net profit margin all considered as
proxies for firm financial status
The first six models include one of the six independent variables at a time. Model 7 and 8
includes different combinations of independent variables and model 9 includes all the six
independent variables simultaneously. The results of these alternative specifications
support the summary statistics for portfolios sorted by financial status variables.
The results reported in table 4.9 are mixed. The signs of coefficients for current ratio,
sales growth, assets turnover ratio and debt ratio are as per prior expectation. But the
estimated coefficients of interest coverage and net profit margin are not as per our prior
assumptions. The models (model 4 and 6) for these two variables are also insignificant as
the F-statistics are very small. The adjusted R2 for these two models are negative
suggesting that these variables are unable to explain the changes in total assets growth.
Table: 4.9
Estimation of relationship between total assets growth and firm financial status.
Values reported are OLS regression estimates over the whole sample period (1995-2004). See Table 1 for
details on the construction of the data set and the variables. Increase in total assets (normalized by
beginning of period total assets=∆TA/TAt0) is the dependent variable. The independent variables are the
proxies for firm financial status i.e., the current ratio, debt ratio, sales growth, net profit margin, and
assets turnover and interest coverage ratio. Model one to six presents the intercept and slope coefficient of
regression equation of each independent variable at a time, model seven and eight include the different
combination of independent variables and model 9 presents the values of the multiple regression of all
independent variables simultaneously.

Model Intercept Regression coefficient of Adj.R2 F-


statistic
CR Debt Sales NP Assets Int.Cov.
ratio Growth Margin Turnover
1 -.013 .091 .089 16.33
(-.295) {4.042}***
2 .148 -.061 .000 .459
{4.108}*** {-.677}
3 .102 .224 .054 10.27
{3.614}*** {3.16}**
4 .131 -.007 .000 .017
{4.690}*** {-.130}
5 .068 .044 .036 6.92
{1.886}* {2.631}*
6 .140 -.001 .000 .236
{4.339}*** {-.486}
7 .087 -.031 .041 -.001 .025 2.32
{1.390} {-.296} {2.224}** {-.344}
8 -.057 .097 .223 -.040 .146 9.92
{-1.228} {4.30}*** {3.28}** -.765
9 -.087 .083 .028 .244 -.035 .034 -.001 .153 5.744
{-1.264} {3.339}** {.259} {3.49}** {-.636} {1.746}* {-.316}
Notes: t-statistics in the brackets. ***, ** and *:significance levels at the 1, 5, and 10
percent levels respectively

The estimated coefficients of current ratio, sales growth, and assets turnover ratio are all
positive for various models. The results, among others, show the positive relationship of
investment in total assets with current ratio, sales growth, and assets turnover ratio.
Basically, these all coefficients are not only positive but also statistically significant in all
the time whether they all exist alone or put together with other independent variables in
the regression models. (See Models 1,3,5,7,8, and 9). By this result it is noticed that the
explanatory power of current ratio, assets turnover ratio and sales growth are important to
explain the variation in investment in total assets.
As regards to debt ratio, the debt coefficient is negative for model 1 and model 7. But the
estimated debt coefficient is positive (see model 9) when all the independent variables
are considered simultaneously. However, in all the cases the debt coefficients are not
statistically significant.
It is noteworthy to suggest that the inclusion of current ratio, assets turnover ratio and
sales growth in regression models makes it more capable in explaining the total variation
in total assets investment: as indicated by the coefficient of multiple determination
(adjusted R2). F-statistics for Models 1,3, 5, 7, 8, and 9 are also statistically significant
indicating that these regression models have a proper goodness of fit.
4.6 Properties of portfolios formed on Growth in fixed assets.
The properties of portfolio on growth in fixed assets and its relationship with various
measures of Liquidity, Efficiency, Leverage, Profitability, Growth,and Market
opportunity are presented in table-4.5 The smallest, intermediate and largest groups are
formed by sorting all firm-years according to their percentage of growth in fixed assets.
Every year, the firms with the lowest percentage of growth in fixed assets (the bottom
one-third i.e., < 2%) are categorized as smallest; the next one third are categorized as
intermediate (3-12 %); and the top one-third (>13%) are categorized the largest.
Table- 4.10
Properties of portfolios formed on Growth in fixed assets
The followings are the reports of financial variable statistics for the sample of firms-year observations of
Nepalese non-financial sectors of enterprises. A full-description of the variables is included in the
Appendix. The smallest, intermediate and largest groups are formed by sorting all firm-years according to
their percentage of growth in fixed assets. Every year, the firms with the lowest percentage of growth in
fixed assets (the bottom one-third i.e., < 2%) are categorized as smallest; the next one third are
categorized as intermediate (3-12 %); and the top one-third (>13%) are categorized the largest.

Financial N Mean Std. Deviation


variables Portfolios
Liquidity Smallest 54 1.4499 1.37958
(Current ratio) Intermediate 52 1.5092 1.14154
Largest 54 1.8006 1.10598

Efficiency Smallest 54 1.3106 1.74912


(Assets Intermediate 52 1.2891 1.22892
Turnover) Largest 54 1.9729 2.23992

Leverage Smallest 54 .3162 .39326


(Debt Ratio) Intermediate 52 .2858 .27810
Largest 54 .1385 .22012

Profitability Smallest 54 -.1003 .37921


(Net Profit Intermediate 52 -.0522 .29047
Margin) Largest 54 .0048 .18835
Coverage Smallest 54 11.1004 19.51105
(Interest Intermediate 52 10.5744 17.97251
Coverage) Largest 54 11.9222 18.03922

Growth Smallest 54 .1302 .38571


(Sales Growth) Intermediate 52 .0950 .30818
Largest 54 .1873 .44281

Internal Smallest 53 .3202 1.51196


Liquidity Intermediate 51 .4477 1.15720
(Cash flow) Largest 54 1.1486 2.07885

Market Smallest 53 .0481 .30484


opportunity Intermediate 51 .0559 .18499
(ROA) Largest 54 .0970 .12511

The characteristics of traditional financial ratios presented in the table-4.10, among others
reveal the followings;
 The firms with the larger growth in fixed assets have higher liquidity. The average
current ratio increased from 1.44 times for the smallest portfolio to 1.80 for the
largest portfolio. Similarly, the cash flow to net fixed assets ratio also increased
from 0.32 times for smallest portfolio to 1.15 times for the largest portfolio. Thus
with the increase in liquidity position, the investment in fixed assets tends to
increase. Current ratio for smallest portfolio is more variable than for the largest
portfolio but the cash flow ratio is less variable for smallest portfolio.
 The operational efficiency of the firm is measured by the assets turnover ratio.
The firms with the larger growth in fixed assets have higher assets turnover ratio.
The average assets turnover ratio increased from 1.31 times for the smallest
portfolio to 1.97 times for the largest portfolio. Thus a positive relationship is
noticed between the growth in fixed assets and assets turnover ratio. However, the
variability in assets turnover ratio is increased monotonically from the smallest to
largest portfolio.
 The negative relationship is noticed between the leverage and growth in fixed
assets. The ratio of long term debt to total assets declined from 31.6 percent for
smallest portfolio to 13.85 percent to the largest portfolio. Similarly, the
variability in leverage ratio is decreased monotonically from the smallest to
largest portfolio.
 A positive relationship is noticed between the investment in fixed assets and sales
growth. The firms with the larger growth in fixed assets have higher sales growth.
The sales growth increased from 13.02 percent for the smallest portfolio to 18.73
percent for the largest portfolio. This result suggests that with the increase in the
growth in sales, the investment in fixed assets tends to increase. However, the
variability in sales growth also increases from 38.57 percent to 44.28 percent from
smallest to largest portfolio.
 A positive relationship is noticed between the Interest coverage ratio and growth
in fixed assets. Similarly the net profit margin, and the return on assets also have
the positive relationship with the growth in fixed assets. These results suggest that
with the increase in net profit margin, ROA, and interest coverage ratio,
investment in fixed assets tends to increase.

4.7 Properties of portfolios formed on Growth in Current Assets:


The properties of portfolio on growth in current assets and its relationship with various
measures of Liquidity, Efficiency, Leverage, Profitability, Growth, and Market
opportunities are presented in Table-4.6. The smallest, intermediate and largest groups
are formed by sorting all firm-years observations according to their percentage of growth
in fixed assets. Every year, the firms with the lowest percentage of growth in current
assets (the bottom one-third i.e., < -2%) are categorized as smallest; the next one third are
categorized as intermediate (-1 to20 %); and the top one-third (>21%) are categorized the
largest

Table- 4.11
Properties of portfolios formed on Growth in Current Assets
The followings are the reports of financial variable statistics for the sample of firms-year observations of
Nepalese non-financial sectors of enterprises. A full-description of the variables is included in the
Appendix. The smallest, intermediate and largest groups are formed by sorting all firm-years according to
their percentage of growth in current assets. Every year, the firms with the lowest percentage of growth in
current assets (the bottom one-third i.e., <- 2%) are categorized as smallest; the next one third are
categorized as intermediate (-1-20 %); and the top one-third (>21%) are categorized the largest

Financial Portfolios N Mean Std. Deviation


variables
Liquidity Smallest 50 1.4772 1.20458
Intermediate 52 1.5268 1.19327
(Current ratio) Largest 51 1.5750 1.09463

Efficiency Smallest 50 1.7638 2.25984


Intermediate 52 1.0416 1.05032
(Assets
Largest 51 1.8656 1.84915
Turnover)

Leverage Smallest 50 .2409 .34516


Intermediate 52 .3132 .29230
(Debt Ratio)
Largest 51 .2085 .30895

Profitability Smallest 50 -.0626 .28458


Intermediate 52 -.0910 .32012
(Net Profit
Largest 51 -.0346 .25059
Margin)
Coverage Smallest 50 7.1488 14.45916
Intermediate 52 9.9394 17.68230
(Interest
Largest 51 13.0133 19.49479
Coverage)

Growth Smallest 50 .0028 .37592


Intermediate 52 .1095 .23324
(Sales Growth)
Largest 51 .2740 .41536

Internal Smallest 50 .5130 1.69828


Intermediate 52 .3865 1.23146
Liquidity
Largest 51 1.0192 1.99783
(Cash flow)

Market Smallest 50 .0448 .25630


Intermediate 52 .0914 .13649
opportunity
Largest 51 .0625 .25347
(ROA)

The characteristic of traditional financial ratios presented in the Table 4.11, among others
reveals the followings;
 The firms with the larger growth in current assets have higher liquidity. The
average current ratio increased from 1.47 times for the smallest portfolio to 1.57
for the largest portfolio. Similarly, the cash flow to net current assets ratio also
increased from 0.51 times for smallest portfolio to 1.02 times for the largest
portfolio. Thus with the increase in liquidity position, the investment in current
assets tends to increase. Current ratio for smallest portfolio is more variable than
for the largest portfolio but the cash flow ratio is less variable for smallest
portfolio.
 The operational efficiency of the firm is measured by the assets turnover ratio.
The firms with higher assets turnover ratio have the larger growth in current
assets. The average assets turnover ratio increased from 1.76 times for the
smallest portfolio to 1.86 for the largest portfolio. Thus a positive relationship is
noticed between the growth in current assets and assets turnover ratio. However,
the mean assets turnover ratio and its variability is the smallest for the
intermediate portfolio.
 The negative relationship is noticed between the leverage and growth in current
assets. The ratio of long term debt to total assets declined from 24.09 percent for
smallest portfolio to 20.85 percent to the largest portfolio. Similarly, the
variability in leverage ratio is decreased monotonically from the smallest to
largest portfolio. However, the mean debt ratio is the smallest for the intermediate
portfolio.
 A positive relationship is noticed between the investment in current assets and
sales growth. The firms with the larger growth in current assets have higher sales
growth. The sales growth increased from 0.2 percent for the smallest portfolio to
27.40 percent for the largest portfolio. This result suggests that with the increase
in the growth in sales, the investment in current assets tends to increase. However,
the variability in sales growth also increases from 37.59 percent to 41.53 percent
from smallest to largest portfolio.
 A positive relationship is noticed between the Interest coverage ratio and growth
in current assets. Similarly the net profit margin, and the return on assets also
have the positive relationship with the growth in current assets. These results
suggest that with the increase in net profit margin, ROA, and interest coverage
ratio, investment in current assets tends to increase.
4.8 Portfolios formed on Growth in Total Assets
The properties of portfolio on growth in total assets and its relationship with various measures of
liquidity, Efficiency, leverage, Profitability, Growth, Market opportunities are presented in Table-
4.7. The smallest, intermediate and largest groups are formed by sorting all firm-years
observations according to their percentage of growth in total assets. Every year, the firms with the
lowest percentage of growth in total assets (the bottom one-third i.e., < 2%) are categorized as
smallest; the next one third are categorized as intermediate (3 to14 %); and the top one-third (>15
%) are categorized the largest

Table 4.12
Properties of portfolios formed on Growth in Total Assets
The followings are the reports of financial variable statistics for the sample of firms-year observations of
Nepalese non-financial sectors of enterprises. A full-description of the variables is included in the
Appendix. The smallest, intermediate and largest groups are formed by sorting all firm-years according to
their percentage of growth in fixed assets. Every year, the firms with the lowest percentage of growth in
total assets (the bottom one-third i.e., <2%) are categorized as smallest; the next one third are categorized
as intermediate (3-14 %); and the top one-third (>15%) are categorized the largest.

Financial N Mean Std. Deviation


variables Portfolios
Liquidity Smallest 53 1.5337 1.29288
(Current ratio) Intermediate 53 1.4950 1.28104
Largest 52 1.7478 1.09827

Efficiency Smallest 53 1.8077 2.20998


(Assets Intermediate 53 .9766 1.06308
Turnover) Largest 52 1.8617 1.82500

Leverage Smallest 53 .2541 .34793


(Debt Ratio) Intermediate 53 .2916 .29660
Largest 52 .1915 .29377

Profitability Smallest 53 -.0719 .32984


(Net Profit Intermediate 53 -.0527 .31446
Margin) Largest 52 -.0245 .25201
Coverage Smallest 53 7.8743 16.244
(Interest Intermediate 53 11.2916 18.357
Coverage) Largest 52 14.8471 20.422

Growth Smallest 53 .0300 .39956


(Sales Growth) Intermediate 53 .1283 .27305
Largest 52 .2442 .42475

Internal Smallest 53 .4655 1.65934


Liquidity Intermediate 52 .3462 1.23445
(Cash flow) Largest 51 1.0999 1.96019

Market Smallest 53 .0526 .26293


opportunity Intermediate 52 .0680 .18232
(ROA) Largest 51 .0834 .20631

The characteristic of traditional ratios presented in the table 4.12, among others reveals
the followings;
 The firms with the larger growth in total assets have higher liquidity. The average
current ratio increased from 1.53 times for the smallest portfolio to 1.74 for the
largest portfolio. Similarly, the cash flow to net total assets ratio also increased
from 0.46 times for smallest portfolio to 1.09 times for the largest portfolio. Thus
with the increase in liquidity position, the investment in total assets tends to
increase. Current ratio for smallest portfolio is more total assets tends to increase.
Current ratio for smallest portfolio is more variable than for the largest portfolio
but the cash flow ratio is less variable for smallest portfolio.
 The operational efficiency of the firm is measured by the assets turnover ratio.
The firms with the larger growth in total assets have higher assets turnover ratio.
The average assets turnover ratio increased from 1.80 times for the smallest
portfolio to 1.86 for the largest portfolio. Thus a positive relationship is noticed
between the growth in total assets and assets turnover ratio. However, the mean
assets turnover ratio and its variability is the smallest for the intermediate
portfolio.
 The negative relationship is noticed between the leverage and growth in total
assets. The ratio of long term debt to total assets declined from 25.41 percent for
smallest portfolio to 19.15 percent to the largest portfolio. Similarly, the
variability in leverage ratio is decreased monotonically from the smallest to
largest portfolio.
 A positive relationship is noticed between the investment in total assets and sales
growth. The firms with the larger growth in total assets have higher sales growth.
The sales growth increased from 3 percent for the smallest portfolio to 24.42
percent for the largest portfolio. This result suggests that with the increase in the
growth in sales, the investment in total assets tends to increase. Similarly, the
variability in sales growth also increases from 39.97 percent to 42.47 percent from
smallest to largest portfolio.
 A positive relationship is noticed between the Interest coverage ratio and growth
in total assets. Similarly the net profit margin, and the return on assets also have
the positive relationship with the growth in total assets. These results suggest that
with the increase in net profit margin, ROA, and interest coverage ratio,
investment in total assets tends to increase.

4.9 Conclusion
In this chapter, it was attempted to test the empirics that whether the firm financial status
matters in the investment decisions of Nepalese enterprises. The overall results suggest
that there is the existence of strong relationship between the firm investment and
financial status variables. This section indicates the two major trends in Nepalese
enterprises. First, the debt ratio is negatively related with other variables in all cases. For
Nepalese firms it is the case that all firms with the positive long-term debt are on average
relatively larger in size, do not make a profit and display a lower sales growth. All these
results suggest that for the Nepalese firms, higher the debt ratio is the sign of financial
weakness and they are liquidity constrained.
Second, except the debt ratio all other study variables are more or less positively related
with each other and the financial status variables have considerable impact on firm
investment, cash flow and growth.

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