Determinants of profitability in Chinese companies

Abstract

Purpose This study is conducted to determine the factors that affect profitability in Chinese listed companies (by using financial ratios). Four independent variables liquidity, intangible assets, working capital and company leverage were empirically tested for their relationships with profitability besides two control variables which are firm size and company efficiency.Design/methodology/approach This study used secondary data extracted manually from the annual reports of non-financial Chinese listed companies on the Shanghai stock exchange (http://www.szse.cn/); the data set covers 100 companies during the period of 2017–2019, and a random selection method was used in order to achieve credibility and fairness as much as possible.Findings The findings show firm size, working capital and intangible assets have positive and significant relationships with profitability [return on assets (ROA) and earnings per share (EPS)]. Positive working capital is important to lower the cost of capital and improve companies' profitability. Intangible assets are also an essential source to improve profitability due to their low costs. In addition, the findings display a negative and strong relationship between liquidity and profitability, meaning that companies suffer low profit due to inefficient use of liquid items. Interestingly, leverage, which is measured by debt ratio and leverage ratio, shows mixed results; debt ratio shows a positive and strong association with ROA but not with EPS; while leverage ratio displays a strong but negative association with ROA but not with EPS. These results confirm the inverted U-shape relationship between leverage and profitability, which depends on the balance between benefit and cost of debt.Social implications Profitability is also important for employees and society where business organization provides sustainability and stability for both of them. Employees can then significantly contribute to achieve higher firm's profitability by efficiently using firm's resources.Originality/value This study differs than previous studies in number of aspects: First, this study focuses on financial ratios to explain profitability in Chinese companies. This study provides empirical results about the factors connected to profitability and help stakeholders to make their right decisions. Second, it examines the impact of four independent factors and two control variables that some of them are new in Chinese context such as intangible assets. Third previous studies focus on financial industry such as banks; however, this study focuses on non-financial industry.

Working Capital Management and Leverage to Profitability: Case of Manufacturing Firms in Indonesia

“…Although longer payable period to suppliers (DPO) is favorable in general, extending DPO might severe firms' reputation. A longer CCC signifies a more extended period between the cash disbursement and cash inflows and is negatively associated with profitability, as demonstrated by previous studies (Le 2019;Ren et al, 2019;Fernández-López et al, 2020;Alarussi & Gao, 2021). Longer CCC days mean firms require higher working capital, which causes high financing costs leading to financial distress.…”

“…CCC is a crucial element that affects firms' profitability, and their relationships have been studied in many countries. For example, Portugal (Neves et al, 2021), China (Dalci, 2018;Ren et al, 2019;Alarussi & Gao, 2021), Malaysia (Wasiuzzaman, 2015), Thailand (Singhania & Mehta, 2017), Vietnam (Tran et al, 2017, Le, 2019, Jordan (Soda et al, 2022), and Ghana (Amponsah-Kwatiah & Asiamah, 2020). Some study multiple countries, such as Boțoc and Anton (2017) Tran et al (2017) explained that stable cash flow is significant to maintain a business; sufficient working capital will maximize profitability, while poor working capital management is one of the main reasons for business failure.…”

“…According to Amponsah-Kwatiah and Asiamah (2020), the goal of each organization is the maximization of profits; hence profitability measures are commonly used in comparation with other performance ratios. Profitability is a firm's ability to obtain profit and to survive in a market, thus leading to sustainability and stability (Alarussi & Gao, 2021).…”

Profitability Determinants of Technology Companies: A Study From ACE Market of Bursa Malaysia

“…Ghasemi and Razak (2017) who analysed 60 companies listed on ACE market for the year 2013 until 2017 assert that bigger companies are more profitable as compared to their smaller counterparts. Alarussi and Alhaderi (2018); Alarussi and Gao (2021); Alvarez et al (2021); Babalola (2013); Iqbal and Zhaquan (2015); Dahmash (2015) also find that size has a positive significant effect on profitability. However, Lee et al (2016) report contradictory results.…”

“…Other studies have reported conflicting results. For example, Alarussi and Gao (2021) find that debt ratio is positive and statistically significant with ROA of Chinese listed companies. Furthermore, there are previous studies which report there is no relationship between leverage ratio and profitability (Berhe & Kaur, 2015;Pratheepan, 2014) This study will examine whether this correlation exists in the Malaysian stock market.…”