ABSTRACT
This
study empirically examined the determinants of manufacturing firms’ financial
performance in Nigeria using a panel data for 12 years across 10 manufacturing
firms listed on the Nigerian Stock Exchange for the period 2004 to 2015. The
effect of revenue reserves, interest paid on borrowings and tax paid were
examined on net worth, profit after tax and return on asset.
The
data was analyzed using descriptive and inferential analysis. The study was
based on the microeconomic theory of production. The hausman test was used to
determine the appropriateness of the fixed effect and random effect estimators
that were employed. A robust check was carried out on the effect of borrowings.
The
results revealed that the mean profit after tax, net worth and return on asset
was N11,800,000,000, N67,200,000,000 and 10.441% respectively. From the panel
regression estimates, revenue reserve had insignificant effect on net worth,
profit after tax and return on asset. Tax paid had a negative significant
effect on the net worth and profit after tax of manufacturing firms. However it
had no significant effect on return on asset. The amount of borrowings had a
positive significant effect on profit after tax and net worth of manufacturing
firms. However, its effect on return on asset was insignificant. Interest paid
on borrowings was not a significant determinant.
The
study concluded that the high tax paid by the manufacturing firms significantly
explain declines intheir financial performance. The amount of borrowings
available to manufacturing firms determines improvements in their financial
performance. Tax reductions and subsidies as well as greater access to
borrowings are important for improving the financial performance of
manufacturing firms.
CHAPTER
ONE
INTRODUCTION
1.1 Background to the Study
The manufacturing sector plays a
catalytic role in a modern economy and has many dynamic benefits that are
crucial for economic transformation. In a typical advanced country, the
manufacturing sector is a leading sector in many respects. It is an avenue for
increasing productivity related to import replacement and export expansion,
creating foreign exchange earning capacity; and raising employment and per
capita income which causes consumption patterns to increase (Ogar & Charles
2014). Furthermore, it creates investment capital at a faster rate than any
other sector of the economy while promoting wider and more effective linkages
among different sectors. In terms of contribution to the Gross Domestic Product
(GDP), the manufacturing sector is dominant and it has been overtaken by the
services sector in a number of organizations for Economic Co-operation and Development
(OECD) countries (Anyanwu, 2003).
Before independence, agricultural
products dominated Nigeria’s economy and accounted for the major share of its
foreign exchange earnings. Initially, inadequate capital investment permitted
only modest expansion of manufacturing activities (Ariyo, 2005). Early efforts
in manufacturing sector were oriented towards the adoption of an import
substitution strategy in which Light Industry and assembly related
manufacturing ventures were embarked upon by the formal trading companies up to
about 1970, the prime mover in manufacturing activities was the private sector
which established some agro-based Light manufacturing units such as vegetable
oil extraction plants, turneries tobacco processing, textiles, beverages and petroleum
products (Ariyo, 2005). The strategy of light and assemblage manufacturing
shifted somewhat to heavy industries from the period of the Third National
Development Plan (1975-1980) when government intervened to establish Core
Industrial Plants to provide basic imports for the downstream industries. The
import dependent industrialization strategy virtually came to a halt in the
late 1970s and early 1980s when the Liberal Import Policy expanded the imports
of finished goods to the detriment of domestic production (Ariyo, 2005).
Using data from the CBN Statistical
Bulletin 2015, an analysis of the contribution of manufacturing sector to the
growth of the economy is thus presented.The contribution of manufacturing
sector to total output (GDP) was 13% in 1982. A slight decline of 12% was
recorded in 1984 and further declined by 3% in 1986. An increase to 15% was recorded in 1988 and
huge increase of 33% was obtained in 1990.
From 1991, it decreased by 3% in 1992 and by 1994 a further decrease of
2% was recorded. A huge increase of 46% was obtained in 1996. However, it
declined by 12% in 1998. From 2000, the contributions of this manufacturing
sector only increased by 3% and further increased to 8% in 2002. Further
fluctuations have therefore been recorded as seen from an increase to 11% in
2004 and also increased by 9% in 2006. By 2010 an increase of 7% was recorded
and further increased to 14% in 2015.
1.2 Statement of the Problem
Manufacturing sector is a leading sector
in many respects. It is an avenue for increasing productivity related to import
replacement and expansion, creating foreign exchange earning capacity and raising
employment. In spite of continuous policy strategies to attract credits to the
manufacturing sector, most Nigerian manufacturing enterprises have remained
unattractive because of the various charges imposed by financial institutions
and government causing reduction in the net worth of the firms. Despite the
important role of the manufacturing sector in development, Nigeria is still
backward as shown by the several declines of the manufacturing sector to the
GDP. Also from the financial statement of some manufacturing firms, as seen in
Nascon Allied Idustries Plc which
recorded 37% of its return on asset in 2007 but declined to 13% in 2015.
Nigerian Flourmill Plc recorded return on asset of 13% in 2007 and further
declined to 1% in 2015. Cutix Plc recorded 19% of its return on asset in 2007
and further decreased to 8% in 2015.
Financial performance as assessed using
ROA and PAT has shown that there is a great need for improvement and also to
identify those specific factors that affects financial performance and the
magnitude of their effect on manufacturing sector. By so doing there is a need
to narrow down the financial performance of these manufacturing firms in order
to get a clearer picture of financial activities of these firms. This is
because this study is looking at the strength of these firms which can help to
make a decision on its overall financial performance and sustainability.
There has been a large agreement that
the poor financial performance of manufacturing firms usually threatens their
long term existence and affects their operations in the short run (Lawal,
Edwin,Monica & Adisa 2014). However, there has been less agreement as to
which of the key financial performance indicators or variables are important to
the continue survival of manufacturing firms (Olorunfemi, Tomola, Felix &
Ogunleye 2013). This study will therefore examine those factors that affect the
financial performance of manufacturing firms in Nigeria.
1.3 Objective of the
Study
The main objective of this study is to
examine the determinants of manufacturing firms’ financial performance in
Nigeria. The specific objectives are to:
1. estimate
the effect of revenue reserve on manufacturing firms’ financial performance;
2. analyze the effect of tax paid on manufacturing
firms’ financial performance and
3. estimate the effect of interest paid on
borrowings on manufacturing firms’ financial performance.
1.4 Research Questions
2. What
is the effect of revenue reserve on the financial performance of manufacturing
firms?
3. Does
the tax paid have an effect on the financial performance of manufacturing
firms?
4. What effect does interest paid on borrowings
has on financial performance of manufacturing firms?
1.5 Hypotheses
The hypothesis was tested at 5% significance level.
H01
Revenue reserve has no significant effect on the financial performance of
manufacturing firms.
H02The
amount of tax paid has no significant effect on the financial performance of
manufacturing firms.
H03The
amount of interest paid on borrowings has no significant effect on the
financial performance of manufacturing firms.
1.6 Scope of the Study
The study examined the
determinants of manufacturing firms’ financial performance in Nigeria. The
period for the study is from 2004 to 2015 and 10 manufacturing firms in the
country was used including only firms in the consumer goods and industrial
goods sector.
1.7 Significance of the
Study
The significance of this study would
help government to find appropriate measure of manufacturing firms’ financial
performance and interest charged on the overall performance of the firms being
minimized in order to meet the needs of the consumers. This would help to
improve the role that manufacturing sector plays towards contributing to and
enhancing the economic development of Nigeria. These roles include: provision
of the essential finished goods required by Nigerians; earning of foreign
reserves for Nigerian economy; creation of employment opportunities for
Nigerian citizens and reducing the importation of the finished goods they
produce.
1.8 Justification for
the Study
Several studies on the manufacturing sector exist, however
only a few has focused on financial performance of manufacturing firms. For
example, Ogar and Charles (2014) examined the effect of commercial bank credit
on the manufacturing sector output in Nigeria from 1992 to 2011 using
manufacturing output to capture manufacturing sector performance. Olorunfemi et
al. (2013) examined factors influencing manufacturing performance in Nigeria
for the period 1980 to 2008 using economic growth to measure manufacturing
performance which is a function of investment, capacity utilization, exchange
rate, export and import.
Lawal et al.
(2014) carried out an empirical study on the effect of capital structure on
manufacturing firms’ performance in Nigeria for the period 2002 to 2012 using
return on asset, return on investment as firms performance variable and
performance as a function of debt-equity ratio, long term debt to capital
employed ratio, total debt ratio and age.Lawrence & Sanusi (2014) explored
the extent of target costing system adoption and implementation by manufacturing
industry in South-Western Nigeria using firm performance in terms of
profitability as a function of return on investment and reduction in the cost
of production. However this study intends to focus only on financial
performance of manufacturing firms in Nigeria for the period of 12 years
(2004-2015).
1.9 Operational
Definition of Terms
Manufacturing Firms: This
is a commercial business that converts raw materials or components into
finished products with the aid of machinery for the purpose of meeting
customers demand.
Return on Asset:
This is a percentage of profit after tax over total asset of the firm. This
gives an idea as to how efficient management is at using its asset to generate
earnings. It is an indicator of how profitable a company is relative to its
total asset.
Net Worth: This
is the difference between the assets and liabilities of the firm. It is a key
measure of how much an entity worth showing asset owned minus any debt owed.
Bank Credit:
This is the aggregate amount of credit available to a person or business from a
banking institution. It is the total amount of funds financial institutions
provide to an individual or business.
Financial Performance: This
is a subjective measure of how well a firm can use assets from its primary mode
of business and generate revenues. It shows the level of performance of a
business over a specified period of time expressed in terms of overall profits
and losses during that time.
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Item Type: Postgraduate Material | Attribute: 72 pages | Chapters: 1-5
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