Factors determining Profitability: A Study of Selected Manufacturing Companies listed on Colombo Stock Exchange in Sri Lanka

Abstract

This paper aims to investigate whether factors such as capital structure, working capital, firm size, non-debt tax shield and growth rate, determining profitability have any impact on profitability of selected manufacturing companies listed on Colombo stock exchange, Sri Lanka over a period of five years from 2008 to 2012. This study employs multiple regression analysis to measure relationship among variables, individual and overall impact on profitability and to test the operational hypotheses. The results revealed that whereas all independent variables explain 76.6% and 84.7% of the variance on ROA and ROE respectively where significant is at 5% levels, the overall model has a significant impact on profitability at the rate of 80.5 % (Adjusted R² = 80.5%, P<.0.05). Further, while capital structure (+) and non-debt tax shield (+) have statistically significant impact on profitability (P < 0.05), the remaining working capital (+), growth rate (-) and firm size (+) have no significant effect on the profitability (P > 0.05).

Keywords: Profitability, Determinants of Profitability, Colombo Stock Exchange