Analyzing Factors Effecting Profitability of Non-Financial U.S. Firms

Abstract

This paper empirically aims to analyze the factors (leverage, liquidity, inventory, growth, size and firm’s age) effecting financial performance. Return on assets (ROA) as the ratio of earnings before depreciation, interest and tax (EBIT) to total assets was used as a proxy for financial performance. A sample of 100 top non-financial American firms listed on Fortune 500 for a period of five years from 2009 – 2013 was considered. Secondary data were collected from financial statements which were taken from Mergent online, and were analyzed by a number of basic statistical techniques such as descriptive and inferential statistics. Results from this study showed that multicollinearity did not exist among all independent variables (VIF < 5), and multiple regression indicated that 16% was predicted by the independent variables (R² = 0.1623). Findings also presented that leverage, inventory, growth and age have a negative significant impact on ROA, while liquidity and size in terms of sales have positive significant effect on profitability of the American firms. However, an insignificant negative relationship was found between size in terms of total assets and return on assets. A generalization of the results is limited because of the five-year time period. For future research, the author suggests analyzing the effect of external factors, such as economic, political, cultural, legal, macroeconomic factors, and the existence of rivals in the industry.

Keywords: Financial performance, Leverage, Liquidity, Return on assets, Firm size, Age, Profitability