Professional Documents
Culture Documents
Organizations
Kapil Deb Subedi
Head- Department of Management
Saptagandaki Multiple Campus
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.
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.
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
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
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.
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.
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.
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.
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
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.
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.