Journal of Teaching and Education,

CD-ROM. ISSN: 2165-6266 :: 05(01):81–94 (2016)

FINANCIAL PERFORMANCE OF FIRMS: EVIDENCE FROM

PAKISTAN CEMENT INDUSTRY

Farah Naz

Kinnaird College for Women, Pakistan

Farrukh Ijaz and Faizan Naqvi

University of Management and Technology, Pakistan

Financial performance principally reflects business sector outcomes and results that shows overall
financial health of the sector over a specific period of time. It indicates that how well an entity is
utilizing its resources to maximize the shareholders wealth and profitability. Although a complete
evaluation of a firm’s financial performance take into account many other different kind of measures
but most common performance measurement used in the field of finance and statistical inference is
financial ratios. This paper provides a comprehensive study of the financial performance literature with
respect to the cement industry of Pakistan. The literature cover studies from the Iran, India and Pakistan
but some international evidences are also presented. The financial ratios used for the measurement of
financial performance of the cement sector are profitability ratios, asset utilization ratios, leverage
ratios, liquidity ratios and cash conversion cycle from the period 2006-2014. Return on Investment
(ROI) is taken as predicted variable and five ratio parameters are taken as predictor variables. The
research study found that all parameters have positive relationship with the dependent variable except
the leverage ratios which has insignificant relationship. This result is also supported by Selvam et al.
(2004), whereas Chandrasekaran (1989) and Dhanalakshmi (1994) identified that the external finances
is the key significant factor in determining investment in cement industry. To overcome the limitations
of the future study, the considered numbers of years need to be increased and other models like MVA,
CAPM, and EVA required being tested for the research to analysis other factors that may affect the
financial performance.

Keywords: Financial performance, Financial ratios, ROI, Profitability, Regression analysis.

Introduction

Many firms with in the sphere are re-structuring their business performance and operational methods in
an essential and fundamental way. These firms are exploring to integrate their search for cost-effective
development with the promise of environmental protection and social responsibility for present and future
generations with the sustainable business development concept. Based on this new phenomenon, many
firms are trying to do changes that are significantly important in their policies, business structure,
commitments, short and long term strategically framework.



81
82 Financial Performance of Firms: Evidence from ...

The “Performance” is a word originates from the old French word ‘Parfournir’; whose meaning is to
bring through, to carry out, to do or to bring forth. Performance is an act of performing, implementing,
achieving, and fulfilling of the given tasks that needs to be measured against defined sets of precision,
money, fullness and timing. In finance, it refers to the measurements of the company’s policies, activities
and operational results in financial terms. It is used to check a company’s success, compliance and
financial position. These results are reflected in the firm’s return on investment, assets, equity, capital
employed and profitability.
Financial performance is an extent to which a company financial health over a period of time is
measured. In other words, it is a financial action used in order to generate higher sales, profitability and
worth of a business entity for its shareholders through managing its current and non-current assets,
financing, equity, revenues and expenses. Its main purpose is to provide complete to the point information
to shareholders and stakeholders to encourage them in making decisions. It can be used to evaluate
similar companies from the same industry or to compare industries in aggregation.
Managing risk and increasing profitability of a firm within the corporate governance compliance is
an essence of making good decisions. In order to take timely decision, accurate information and proper
analysis of the sector is necessary. The non financial business region is a vital part of a country’s financial
system. For that purpose, a stable and sound work base is necessary for country economy well being. One
of the best ways of evaluating a sector financial performance is by the use of financial or ratio analysis. It
shows the relation between one quantity or performance indicators over another, expressed
mathematically and tries to summarize huge database for one eye view regarding the financial
performance of a firm. According to Max Weber, the relationship between two or more things expressed
mathematically is known as financial ratios.

Cement Industry in Pakistan

The cement industry progress in Pakistan is an indicator of economic development. When Pakistan came
into existence, she had inherited 4 cement plants having 5 lakh tons of capacity. The major expansion in
the cement sector took place in the period of 1956-66 but still it couldn’t keep pace with the economic
development. In 1990, the cement industry was privatized which help in the setting up of new plants. The
industry shows tremendous growth and expansion in the last decade due to higher GDP growth and
earthquake rehabilitation era of the year 2005. In Pakistan, the cement production not only meets the local
demand of the consumers but it is also exported to foreign countries, such as India, South Africa, Sri
Lanka, and UAE. Pakistan ranks 5th in the worlds cement export (Source: Daily Times). Over the last six
years, the industry contributes around Rs 30 billion to the national income and about $1.5 billion in
capacity expansion.
Pakistan cement industry is classified into the two regions (North and South), comprised of 29
companies having a 44.09 million tons of installed production capacity. The north region covers the 80%
of cement production, comprises of 19 companies having capacity of 35.18 million tons whereas the
south region covers the remaining 20%. The south region has a capacity of 8.89 million tons with total of
10 companies (Business Recorder, 2009). The domestic market is of more than 19 million tons in the year
2010-11, which is increasing at the rate of 7% per annum. The sector also providing employment to about
approximately 7% of the employed labor forces (Economic Survey of Pakistan, 2013).
Cement industry is the most heavily taxed division in the Pakistan financial economy. Excise duty,
sales taxes levied by the state governments, duties on power tariffs, restriction on level of capacity
utilization are the major factors that are important in the increment in price of the cement. The federal
government has risen GST by 1% and FED by Rs 150 per tonne on cement in the FY 2008 budget. The
FED on cement has surged from Rs 750 per ton to Rs 900 per ton and GST from 15% to 16% in the
budget (Aaj News, 2008). The cement sector acts a central role in the development of infrastructural
system of Pakistan as well as of other countries if exported. Higher population growth rates in the world,
more housing projects, government development expenditures, construction of dams, urbanization,
increase in per capita income and lifestyle are the various factors that ascertain the growth of the industry.
 Farah Naz et al. 83

Research Problem

This research paper gives an idea about the most frequently used financial performance measures and
indicators by the owners, lenders, creditors, controlled risk takers and investors to evaluate the financial
strength of the sector and make their decisions accordingly. The main objective of this paper is to study
the financial performance of Pakistan cement sector. In order to find out the financial position of the
cement sector and to make a judgment about its efficiency, operations and how well the sector has been
able to utilize its assets, we used financial ratio analysis to analytically measure working capital, asset
utilization position (overall efficiency and performance), leverage position (debt equity analysis),
liquidity position (current assets coverage with respect to current liabilities) and profitability position (in
terms of sales and net profit margins) of the cement company of Pakistan. The study also tries to present
past performance measurement indicators and to establish the futuristic trend to its current financial
position. This study represents an effort to investigate how cement industry can progress to meet the
needs and challenges of the international environment while increasing the stakeholder’s value from time
to time.

Literature Review

Cement industry represents as one of the critical segment which plays huge role in the social and
economic development of the country. The most vital ingredient in any kind of building and construction
work is the cement. Pakistan cement market has a long history when there was production capacity of
nearly less than 0.5 million tons yearly, which are now extended to almost 44.3 million tons (Cement
Sustainability Initiative, 2007). Since Pakistan independence, several structural and construction activities
were commerce by the government of the Pakistan in the development of schools, colleges, hospitals,
housing programs and roads; private and public sector organizations; central governments and in the last
but not the least the very first and primary requirement of every individual is that of provision of housing.
According to WBCSD 2002, cement is the second most consumed material in the universe after water.
The yearly sales for the last couple of years in the cement industry are average at 22 million tons per year.
Over the most recent three decades, many researches had been conducted by the researchers in order
to evaluate the financial position by the help of several financial ratios or by applying the statistical
analysis techniques. The methods used to evaluate a company potential and limitations with the help of
relationship between the heads of the income statement and balance sheet is called financial performance
analysis (Panday, 1992). Hingorani and Ramanathan (1973) defined financial analysis as an in-depth
study of causal relationship between financial position and profitability. Financial analysis involves three
steps: selection, relation and evaluation of financial statements. Proper and appropriate evaluation of
industry or more specifically of any company performance is not only important for lenders, investors and
shareholders but also for the competing companies working in the same sector. Prasad et al. (2011)
financial health of a company is a matter of concern for every investor and stakeholder of the business.
The main purpose of financial analysis is to find out the financial performance and position of the
company’s management, as reflected in the financial data and reports (Hampton, 1986). Besides financial
analysis, the location selection also plays as a major factor in the effective asset utilization and cost
reduction money matters of cement manufacturing entity (Schumacher and Sathaye, 1999). Previous
researchers use different techniques to measure the financial performance of cement industry in the
different countries. This includes in terms of profitability, working capital, asset utilization, liquidity and
growth analysis, but not any research completely focus on all the determinants of financial performance
measurement in the Pakistan.
Hall and Weiss (1967), Shepherd (1972), Dalton and Penn (1976), Bothwell et al. (1984), Amato and
Wilder (1990) studied the financial performance with respect to profitability and discussed the
components of return on assets and relates them with the firm size. Gangadhar (1982) studied the possible
reasons of fluctuations in the profitability of large scale public limited cement firms of India. The findings
84 Financial Performance of Firms: Evidence from ...

were that during the low rate period, the profitability fluctuations were high. The asset turnover shows an
upward positive trend, while profit margins declines.
Chandrasekaran (1994) have also made a study on the performance of cement companies in India
measuring the profitability, efficiency and growth aspects. The cement companies were found to be
financially sound. Further, they identified that the cash flow and external finances are the key determining
factors of investment in cement industry. McEvoy et al. (1999) also studied the scenarios for better
power efficiency in the UK residential sector. Goel and Nair (1978) have studied the productivity aspect
of Indian Cement industry. This study emphasized that cement being a construction material occupied a
strategic place in the Indian economy. Gokarn and Vaidya (1993) evaluate the cement sector performance
after decontrol and found that the performance of cement industry was characterized in terms of profit and
price performance.
The firm’s had installed new plants and machinery, operating well in the industry and generating
higher productivity and profits. Bhanu (1995) has assess the performance of the cement industry in India
empirically during assorted phases of control and decontrol. Samuels and Smyth (1968), Nagarajan and
Burthwal (1990), Amit et al. (1998), Vijayakumar (2002) used return on sales as a measures of
profitability in the cement sector. In the cement industry, various things are accountable for rapid changes
and these are the causes for mergers, acquisitions and fallout of low capacity plants (Ajay Acharaya,
1999). Mansur (1996) studied textile industry with special emphasis of z-score model for evaluating the
financial health with the support of five weighted financial ratios which further followed by Selvam et al.
(2004) had revealed about Cement industry’s financial health with the reference to India Cements
Limited. Kimiagari and Amini (2007) examine the profitability of a wide range of stock selection
strategies in Tehran Stock Exchange over the period of 1991-2004. Capital Budgeting is another measure
of calculating the sector financial environment (Maxwell and Gitman, 1987).
Another measure of financial performance is liquidity (Eljelly, 2004), which ensures the ability of a
company management to meet its short term financing obligations. Raheman and Nasr (2007) and
Zariyawati et al. (2009) states that the maximize profit is the main idea of doing business, but liquidity
protection is an important objective too. According to Lamberson (1995), this is because of high volatility
and changing nature of the current assets, current liabilities and short term markets. The more the cash or
current assets or the lower company liabilities the companies have, the higher the working capital
associated with it to expand business. On the other hand, an entity may lose profit maximization
opportunities if working capital is too low (Chiou et al., 2006). Moss and Stine (1993) figured out that
Cash Conversion Cycle is a broad measure of working capital as it shows the duration of the collection of
cash from the sales from the purchasing of raw material from the suppliers. China Rao N. and Rao. K.V.
(1995), in their study, revealed that the working capital problems faced by executives were huge in the
areas of collection of debts, accumulation of finished goods, availability of working funds and uncertain
cash flows. Cash Conversion Cycle requires good management of inventory, receivables and payables
period (Thachappilly, 2009). It is a good indicator of the overall health of a company.

Research Objectives

x To study major indicators of financial performance of cement industry of Pakistan.

x To analyze the financial statements of the company by using financial tools.
x To assess the financial ratios (profitability, asset utilization, leverage, and liquidity) and cash
conversion cycle of the Pakistan cement industry.
x To create a model for financial performance of the companies by applying multiple regression
analysis.

Research Hypotheses

Following are the five hypothesis formulated to study the financial performance of cement sector of
Pakistan.
 Farah Naz et al. 85

Table 1. Research Hypothesis

Sr. #
1 Ho: When return on investment increases, Profitability ratio doesn’t increases (or remains same).
2 Ho: When return on investment increases, Asset utilization ratio doesn’t increases (or remains same).
3 Ho: When return on investment decreases, Cash Conversion Cycle doesn’t increases (or remains same).
4 Ho: When return on investment increases, Leverage ratio doesn’t increases (or remains same).
5 Ho: When return on investment increases, Liquidity ratio doesn’t increases (or remains same).

Research Methodology

In this study, secondary quantitative data was employed. The quantitative data in the shape of financial
figures was taken from the annual reports of the cement companies as well as from the report “Financial
Statement Analysis for the years 2005-14” published on the official website of State Bank of Pakistan
(SBP). Apart from this, wherever required, Karachi Stock Exchange (KSE) published information was
also used. The financial data duration is expanded over the 9 years period from 2006 to 2014 for the
population size of 18 cement companies listed at Karachi Stock Exchange. In order to analyze financial
performance in terms of liquidity, leverage, profitability and asset utilization financial ratios were used.
The data analysis was done with the Microsoft Excel (MS Excel 2007) and Statistical Package for Social
Sciences (SPSS v16). Descriptive statistics, autocorrelation, normality, heteroskedasticity, one sample t-
test analysis and regression analysis were carried out to get the desired results of research objectives.

Data and Variables

The variables used in this study are comprised of two groups, dependent (predicted) and independent
(predictor) variables. Return on Investment taken as a predicted variable, while independent variables are
shown in the Table 2. Most of the present study variables are planned according to the variables that had
used in an earlier research work done by Sheela and Karthikeyan (2012) on the “Financial Performance of
Pharmaceutical Industry in India”.

Table 2. Independent Variables

Sr. # Ratio Type Ratio Abbreviation
1 Current Ratio CuR
2 Liquidity Ratio Quick Ratio QR
3 Cash Ratio CR
4 Total Debt to Equity Ratio TDTE
5 Leverage Ratio Total Debt to Assets Ratio TDTA
6 Interest Coverage Ratio ICR
7 Total Asset Turnover TATR
8 Asset Utilization Fixed Assets Turnover FATR
9 Working Capital Turnover WCTR
10 Gross Profit Ratio GPR
11 Profitability Ratio Net Profit Ratio NPR
12 Operating Profit Ratio OPR
13 Cash Conversion Cycle Cash Collection Period CCC
86 Financial Performance of Firms: Evidence from ...

Variables Description

x Return on Investment: Shows the amount produced on a company's total wealth and is expressed
as percentage to measure financial efficiency and performance of an entity.
x Current Ratio: Shows either a firm has the resources to pay its debt within 1 year. It is basically
the ability of a business entity to meet its short term liabilities.
x Quick Ratio: Shows how quickly an entity meets its short term obligations with its most liquid
assets.
x Cash Ratio: Shows the extent to which on hand money can pay off current liabilities. It is total
value of cash and marketable securities to current liabilities.
x Total Debt to Equity Ratio: Shows the investment structure of an entity. It is a measure of
leverage, obtained by dividing total debt by shareholders/owners equity.
x Total Debt to Assets Ratio: Shows the fraction of an entity asset which are financed with
advances and loans over 1 year of time period.
x Interest Coverage Ratio: Shows the ability of an entity that how easily it can pay interest amount
on its outstanding debt.
x Total Assets Turnover Ratio: Shows how efficiently an entity management using its resources
(assets) to promote sales and revenues.
x Fixed Assets Turnover Ratio: Shows how efficiently an entity generates sales from its fixed
assets. It measures the productivity of the business.
x Working Capital Turnover: Shows results after deducting current assets from current liabilities in
terms of percentage.
x Gross Profit Ratio: Shows the fraction of net sales minus cost of goods sold over the financial
year.
x Net Profit Margin: Shows net profit divided by net sales, expressed as a percentage. It is a most
common measure of profitability.
x Operating Profit Margin: Shows the amount left after deducting operational costs and is
calculated by dividing operating profit to net sales.
x Cash Conversion Cycle: Shows that how long it takes an entity to convert its cash from the raw
material product.

Research Framework

Returnon
Investment

Financial
Performance

Asset Profitability Leverage Liquidity Cash

Utilization Ratio Ratio Ratio Conversion
Ratio Cycle
 Farah Naz et al. 87

Data Analysis & Discussion

In order to measure the financial performance of the cement sector of Pakistan for the time duration of FY
2006-2014, first it is important to study the descriptive statistics of the financial ratios which are used as
an explanatory variables to measure the major impact on the ROI (exploratory variable) taken in the
study.

Table 3. Descriptive Statistics

Standard Standard
Ratios Mean Error Median Deviation Kurtosis Skewness
ROI 5.05 1.83 1.81 5.19 (1.72) 0.73
GPR 21.99 3.10 23.51 8.77 (1.81) (0.25)
NPR 9.68 3.08 4.83 8.71 (2.08) 0.55
OPR 31.49 3.42 33.68 9.68 (0.73) (0.88)
TAR 0.46 0.03 0.44 0.10 0.14 1.10
FATR 0.71 0.07 0.65 0.20 0.72 1.24
WCTR 43.46 39.44 5.35 111.55 7.90 2.80
CCC 34.66 3.39 33.94 9.59 0.38 0.01
TDER 1.16 0.10 1.24 0.29 (0.07) (1.09)
TDTA 0.53 0.03 0.55 0.07 0.59 (1.34)
ICR 3.20 1.82 0.64 5.14 0.19 1.04
CuR 1.00 0.12 1.04 0.34 (0.54) 0.41
QR 0.45 0.08 0.49 0.22 (1.94) (0.17)
CR 0.09 0.03 0.08 0.07 1.10 1.10

Gross profit margin (GPR), Net profit margin (NPR) and Operating profit ratio (NPR) are the
measure of profitability of the company and is come under the profitability ratios. These ratios focuses on
how well a company is performing in terms of its ability to generate profits. From the above table, we can
see that GPR has a mean value of 21.99 with a standard deviation of 8.71. Also, OPR has a mean value of
31.49 with deviation of 9.68. Both these values have lower kurtosis and skewness when compared with
NPR, which is on high side with a value of -2.08 and 0.55 respectively. This means that NPR is a weak
indicator of performance with respect to other two as their may be issue of skeness in the data. Asset
utilization ratios comprised of Total assets turnover (TATR), Fixed assets turnover (FATR) and Working
capital turnover ratio (WCTR). They are used to find out how well and efficiently a company is utilizing
its assets. From the above three ratios, FATR mean value is 0.71 followed by 0.46 for TATR and 43.46
for WCTR. The higher value of WCTR standard deviation, kurtosis and skewness indicates that this
measure of financial ratio not well measuring the financial performance due to non normality in the data.
Cash conversion cycle (CCC) is basically a final ingredient of three components: Days sales
outstanding (DSO), Days payables outstanding (DPO) and Days invesntory outstanding (DIO)
respectively. Cash conversion cycle shows the effectiveness of the management and it means the time
taken by entity to convert its resources into the monetary terms. The average value of CCC is 34.66
indicating the sector is managing to sell its raw input with in 35 days. Solvency ratios are measured with
the help of Total debt to equity ratio (TDER), Total debt to assets ratio (TDAR) and Interest coverage
ratio (ICR). The solvency ratio indicates that how well a company is operating in meeting its long term
obligations. All these ratios shows low kurtosis and skewness value with a mean of 1.16, 0.53 and 3.20
each. Liquidity ratio explains the ability to meet obligations of the company within the span of 1 year. It
88 Financial Performance of Firms: Evidence from ...

is comprise of Current ratio (CuR), Acid ratio (QR) and Cash ratio (CR) with the mean value of 1.00,
0.45 and 0.09 respectively. The standard deviation and skewness of liquidity ratios is low which indicates
it’s a good overall performance measure with the normal data formulation..
From the overall discriptive statistics, we conclude that only two ratios (Net profit margin and
Working capital turnover ratio) are showing the sign of large deviation, skewness and kurtosis. Our
further analysis by normality test and hypothesis testing would indicate either the observations shows a
real effect or they are combined with a component of chance variation.

Hypothesis Testing

In statistical inference, the main part is to build up and test of a hypothesis. Its main purpose is to select
between the two hypothesis (null or alternative) about the value of a population parameter. It is used to
determine the possibility of that is the given hypothesis or assumption is either true or false. Hypothesis
testing technique is widely used in the marketing, operations, financial business and industry for making
strategic decisions. Mostly the hypothesis are tested using a level of significance of 5% (or 0.05) and a
confidence level of 95%. A one sample t-test is a kind of hypothesis test about the mean for answering
questions where the data figures are a random sample of predictor observations from an underlying
normal distribution. For one sample test, normality assumption need to be follwed. To check the
normality (bell shaped) assumption, we use the tests of normality by using the SPSS.

Table 4. Tests of Normality

Financial Kolmogorov-Smirnov Shapiro-Wilk

Indicators Statistic df Sig. Statistic df Sig.
ROI .241 7 .200 .916 7 .469
GPR .273 7 .121 .889 7 .112
NPR .258 7 .200 .895 7 .342
OPR .211 7 .200 .878 7 .253
TAR .136 7 .200 .963 7 .822

FATR .478 7 .000 .551 7 .003

WCTR .300 7 .073 .833 7 .021
CCC .198 7 .200 .906 7 .417
TDER .211 7 .200 .918 7 .504

TDTA .277 7 .134 .782 7 .058

ICR .236 7 .200 .839 7 .131
CuR .299 7 .104 .810 7 .072
QR .211 7 .200 .920 7 .508

The normality test results in the following table shows that the finincial indicators that have
significance value of Shapiro-Wilk test of normality greater than 0.05 (level of significance) are assumed
to be follow the normal (bell shaped) pattren. Only net profit ratio and working capital turnover ratio are
not bell shaped from the above analysis. In order to make them normal, we take the natural log of both the
financial indicators, and than run the one sample test and regression analysis.
 Farah Naz et al. 89

Autocorrelation, Heteroskedasticity and Collinearity Test

These tests used to check the issue of correlation, heteroskedasticity and multi collinearity from the data
set. As a rule of thumb, if the significance value of auto correlation and heteroskedasticity tests is below
0.05, than there is issue among the data set and vice versa. Durbin Watson value indicates the collinearity
of the data. The close the value to 2, the less the data has multi collinearity.

Table 5. Autocorrelation, Heteroskedasticity and Collinearity Test

Regression Models Autocorrelation Heteroskedasticity Durbin Watson Value

(P-value) (P-value)
Model – A 0.586 0.324 1.76
(Profitability)
Model – B 0.055 0.211 1.87
(Asset Utilization)
Model – C 1.000 0.032 2.31
(Cash Conversion Cycle)
Model – D 0.595 0.142 1.73
(Leverage)
Model – E 0.152 0.401 1.95
(Liquidity)

As p-value of all five models is greater than 0.05, there is no issue of both autocorrelation and
heteroskedasticity. Also the value of Durbin Watson test near 2 indicates no issue of multi collinearity.

One Sample t-Test

The t-value column in the one sample test at the level of confidence 95% (or z-value = 2.32) indicates that
except working capital turnover and interest coverage ratio value all the indicators have value greater than
2.32, which means that we have to reject null hypothesis (Ho) in the favour of the alternative hypothesis
(H1). Also, the p-value, which is the possibility that the test statistic is significant as the one observed
would be obtained assuming the null hypothesis were true. The smaller the p values than the significance
value, the stronger the indication favoring the alternative hypothesis. As the p values are less than the
alpha value (Į = 0.05) for all the financial indicators of performance measurement except the one
variable, that means the observed effect is statistically significant, the null hypothesis are rejected, and the
alternative hypothesis are accepted.

Table 6. One-Sample t-Test

95% Confidence Interval of the

Financial Difference
Sig. Mean
Indicators
t df (2-tailed) Difference Lower Upper
GPR 7.092 7 .000 21.99 14.660 29.325
NPR 3.144 7 .016 9.68 2.400 16.967
OPR 9.206 7 .000 31.48 23.401 39.578
90 Financial Performance of Firms: Evidence from ...

TAR 13.436 7 .000 0.46 0.382 0.545

LnFATR 10.061 7 .000 0.70 0.539 0.871
LnWCTR 1.102 7 .307 43.46 -49.800 136.723
CCC 10.222 7 .000 34.65 26.641 42.676
TDER 11.296 7 .000 1.16 0.920 1.408
TDTA 20.463 7 .000 0.52 0.467 0.590
ICR 4.000 4 .016 0.80 0.244 1.355
CuR 8.187 7 .000 0.99 0.710 1.286
QR 5.737 7 .001 0.44 0.263 0.633
CR 3.697 7 .008 0.09 0.034 0.154

Multiple regression anlysis is a most widely and commonly used technique in the area of research
work to measure the impact of predictor variables on the predicted variable. It allows to predict one
variable on the basis of several other variables. The F statistics in the regression model shows the overall
fitness of the model. The coefficients values indicates that 1% (or 1 unit) increase in the value of predictor
variables results in increase/decrease in predicted variable by 1% (1 unit). From the regression model, one
can see that the Hypothesis 1 where the F statistics value of profitability ratio is significant at the 5%
level of significance, which means that we will accept the alternative hypothesis and reject the null
hypothesis. That is, when Return on Investment (ROI) increases, profitability ratios also increases.
Hypothesis 2 also signifies, as the F value is less than 0.05. So we ruled out the null hypothesis, and
accept the alternative hypothesis. I.e; When Return on Investment increases, asset utilization ratios also
increases. Similarly, Hypothesis 3 F statistics value is significant at 5% level of significance for the cash
conversion cycle. Therefore the alternative hypothesis is accepted. i.e; When ROI decreases, the cash
conversion cycle time also increses. Thus, null hypothesis is rejected in the favor of alternative
hypothesis. Hypothesis 4 regression analysis suggest that the F statistics value of leverage ratios is high
with the alpha value of 0.05, resulting in the acceptance of null hypothesis and concludes that when ROI
increase, leverage ratio doesn’t increases. Finally, Hypothesis 5 indicates a significant value at 0.05 level
of significance. Therefore alternative hypothesis is accepted. When ROI increases, the liquidity ratios also
increases. Thus, ROI increment also increases the liquidity position of the company. The overall value of
R2 indicates that 83.2% of the variation in ROI is explained by the regressors.

Table 7. Multiple Regression Analysis

Overall R2 Value = 83.2 %

Coefficients Sig Value St. Error R2 Sig. F
Profitability Ratios 99.64% 0.00
Gross Profit Ratio - GPR 0.055 0.05 0.05
Net Profit Ratio - NPR 0.420 0.00 0.02
Operating Profit Ratio - OPR -0.033 0.02 0.02
Asset Utilization Ratios 98.19% 0.00
Total Assets Turnover Ratio -TATR 29.83 0.03 14.52
Fixed Assets Turnover Ratio - LnFATR -17.72 0.01 9.63
 Farah Naz et al. 91

Working Capital Turnover Ratio - LnWCTR 0.019 0.00 0.00

Cash Conversion Cycle 13.56% 0.04
Cash Conversion Cycle - CCC 0.06 0.02 0.04
Leverage Ratios 34.89% 0.49
Total Debt Equity Ratio - TDER 21.94 0.48 27.49
Total Debt to Total Assets Ratio - TDTA -43.27 0.03 62.49
Interest Coverage Ratio - ICR -3.58 0.30 2.87
Liquidity Ratios 89.51% 0.00
Current Ratio - CuR -1.14 0.00 2.43
Quick ratio - QR -10.70 0.03 7.54
Cash Ratio - CR 118.00 0.02 29.95

Conclusion

This research paper examines the importance of ratio analysis in predicting the financial performance and
constructing a model of analyzing the overall financial performance of Pakistan cement industry. This
study serves the fundamental objective of how financial indicators can be useful in predicting the
financial performance of the industry. The study concludes that there is a positive relation among the five
under observed ratios with the financial performance except the leverage shows which are not significant
to the ROI at the 5% level of significance. The financial indicator gives an output of R2 = 0.832 in
structural model of regression analysis. This shows that the ratios taken for calculations in creating the
model explains variation of 83.2% in the ROI. Asset utilization and profitability ratios are highly
correlated with financial performance. The company should focus on them to improve its performance
and position over the time period. Companies should also manage the liquidity position because high
liquidity will make loss in capital and low liquidity will make the returns lower. The study also reveals
that no positive strong relation exists between the liquidity and leverage structure. Leverage and Liquidity
has a negative impact because it is understood the in these position the capital is used to get more
profitability and growth. Also, leverage is not a strong predictor for measuring the financial performance.
One can say that, the overall financial performance of the company depends upon the profitability
position, liquidity position, and cash conversion cycle and asset utilization ratios which have high
correlation with one another.

Future Implications

The research is limited in scope because of the small sample size and time period. The sample taken was
only cement companies of Pakistan for creating model. The time duration of study was from the year
2006 to 2014. These nine years illustrate a lot of variability with respect to data. Beside these two
constraints, one can also study the other factors like MVA, EVA, IRR, etc in order to measure the
financial performance with in the sector. To remove the study limitations, the size of sample on which
population or industry is generalized for the research and the number of years of consideration to be
analyzed should be increased, which ultimately results in the low variation of data with respect to
variables being observed. The researchers can also do comparative analysis of different countries cement
sector.
92 Financial Performance of Firms: Evidence from ...

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Appendix

Cement Companies Listed at Karachi Stock Exchange (FY 2014)

1. Al-Abbas Cement Industries Ltd.

2. Attock Cement Pakistan Ltd
3. Bestway Cement Ltd.
4. Cherat Cement Co. Ltd.
5. D.G. Khan Cement Co. Ltd
6. Dadabhoy Cement Industries Ltd.
7. Dandot Cement Co. Ltd.
8. Dewan Cement Ltd. (Pakland Cement Ltd.)
9. Fauji Cement Co. Ltd.
10. Fecto Cement Ltd.
11. Flying Cement Ltd.
12. Gharibwal Cement Ltd.
13. Kohat Cement Co. Ltd.
14. Lafarge Pak. Cement Ltd. (Pakistan Cement Ltd.)
15. Lucky Cement Ltd.
16. Maple Leaf Cement Factory Ltd.
17. Pioneer Cement Ltd.
18. Zeal Pak Cement Factory Ltd.
(Source: www.kse.com.pk)