An Empirical Analysis of Inflationary Impacts on Profitability and Value of Selected Manufacturing Firms in Nigeria

Abstract

The study investigated the nature of the relationship between inflation and the value of firms in the manufacturing sector of a developing economy like Nigeria. It also tried to discern the nature of the relationships between inflation and profitability (proxied by return on assets) and economic value added and return on assets. The study employed secondary data collated from the audited financial statements of the sampled firms. These were analyzed using multiple regressions and analysis of variance. Results indicate a strong negative relationship between inflation and firm value and an insignificant negative relationship between inflation and return on assets (proxy for profitability). Further, the relationship between return on assets and economic value added is insignificant. Inflation, even at low level, seriously understates the true value of the firm. The implication of the findings is deducible from the fact that accurate estimation of the real value of the firm necessitates incorporating inflation element to arrive at the value of investments in fixed assets and other long term investments. It also highlights the fact that most business failures are caused by unwise investments in fixed assets that could easily have been detected if inflation rate is incorporated to get at the real cost of investible funds.

Keywords: Inflation, Return on Assets, Firm Valuation, Manufacturing Firms