Determinant of Free Cash Flows Impact upon Financial Performance of
cement industry of Pakistan
2014
Muhammad Amjad Islam 57678 Page 1
POPULATION DATA OF THE PROJECT: The population for my project study is those companies that produce cement and are listed in KSE 100 index. Those companies are listed under Construction and Materials (Cement) sector. Sample size: From Karachi Stock Exchange website a list of companies were obtained which are listed under Construction and Materials (Cement) sector. A list of 37 companies was found. Since the population of the paper includes those companies which produce cement and are listed in KSE 100 index, those companies which do not produce cement were removed from the list. After the removal of non-cement producing companies, a list of 21 companies were found. The sample size of this paper will be consisting of five companies from cement industry. For the data analysis, since the data source is secondary, I will be using the financial reports of those companies from 2000-2014. 1 Attock 2 Best way 3 Central Forest 4 Cheerat 5 Dadabhoy 6 Dee wan 7 D.G.K. 8 Dandoot Determinant of Free Cash Flows Impact upon Financial Performance of cement industry of Pakistan 2014
Hence, the following five companies will be used as sample of the study: Symbolic representation Name of the company Market value ACPL ATTOCK CEMENT PVT LTD. 114,522,468 CHCC CHERAT CEMENT COMPANY 105,138,103 DGKC D.G KHAN CEMENT COMPANY 438,119,097 Determinant of Free Cash Flows Impact upon Financial Performance of cement industry of Pakistan 2014
Muhammad Amjad Islam 57678 Page 3
FCCL FAUJI CEMENT COMPANY LTD 1,331,115,839 KOHC KOHAT CEMENT COMPANY 154,508,688
ANALYSIS TECHNIQUE: To analyze and formulate the Determinants for free cash flows impacts upon profitability of selected companies I have decided to use ordinary Least Square regression will be applied. Firm value (profitability) is dependent variable; Dividend, Manufacturing (labor cost), interest rate, and corporate tax has been employed as one of the determinants of profitability
SAMPLING TECHNIQUES: The techniques I have used to evaluate my project is Random Sample Sampling, of Probability Sampling technique. Since the researcher has access to the list of the population, this sampling technique is found most appropriate here. REASONS: The main reason behind using the Random Sample Sampling, of Probability Sampling method is easy to reduce complexity of the project. Additionally, it will reduce biasness in selection of sample from the population, and produce more reliable results. INSTRUMENT: The sources that I have selected for my studies include; research papers, on Dividend, financial leverage size of industry and corporate tax. Beside this, I have used companys official annual reports and ms excel calculation of each individual variable to put valuable data on SPSS results. VALIDATION OF THE INSTRUMENTS: Determinant of Free Cash Flows Impact upon Financial Performance of cement industry of Pakistan 2014
Muhammad Amjad Islam 57678 Page 4
The data which I have gathered from various websites are legally formal and authentic sources as involved in their financial statements report.
Dependent variable: Y i =Firm value (profitability) Independent variable: Firm value is dependent variable; Dividend, corporate tax, interest rate, and size of the company in term of market capitalization are Independent variables in this research and are calculated by the following equation. Y i = 1 + 2 X 2i + 3 X 3i + 4 X 4i + B 5 X 5i
Where 1 = Intercept B2X2i = Dividend B3X3i = labor cost B4X4i = corporate tax B5X5i = Interest rate Dividend Yield: The dividend yield variable will be calculated by sum of all the annual cash dividends part of net income distributed among common stock holders. Labor cost: Determinant of Free Cash Flows Impact upon Financial Performance of cement industry of Pakistan 2014
Muhammad Amjad Islam 57678 Page 5
Labor cost, can be categorized as direct and indirect cost, is the total of monetary amount paid to employees, which also includes the employee benefits cost. Direct costs, it is as, the amount paid to the labors for making a physical product, as an example, workers on assembly line. On the other hand, in direct cost is the amount of wages paid to the support labor, for example the office staff, who dont take work in the operation area. Interest rate: Interest rate can be defined as the additional amount, charged by a lender to a borrower, on the principal amount. Interest rates are mainly charge on annual basis, which is known as annual percentage rate (APR). Inflation rate is directly proportional to the inflation rate of the economy, which, subsequently affect the profitability of the firm. Corporate Tax Rate: levy placed on the profit of a firm, with different rates used for different levels of profits. A corporation has to pay corporate tax, for a given taxable period, usually one year, against the profit it has earned during that period. They are generally applied to companies' operating earnings, after expenses such as COGS, SG&A and depreciation have been deducted from revenues.
INTERPRETATION AND RESULT
HYPOTHESIS #1 TAXATION EFFECT: The regression analysis is used to achieve the result of a paper by testing the entire set of variables. For this paper, the dependent variable, Profitability is tested with the independent Determinant of Free Cash Flows Impact upon Financial Performance of cement industry of Pakistan 2014
Muhammad Amjad Islam 57678 Page 6
variable Corporate Tax. After entering the data in SPSS and running the regression tool I have received the following Descriptive Statistics table.
From the above table I have come to conclusion that Mean of Profitability, Corporate Tax, are 13.9773 respectively. And as so the Std. Deviation of above variables, in the sequence as mentioned, is 14063. This gives us the conclusion that the data is equally distributed and taken from random sampling technique..
The above table shows the summary of regression analysis. Here in this table we have R as .862, which shows a relation between the independent variables, corporate tax, but it suggests that they have significant impact on the dependent variable Profitability. The R square approves this with its high value of 0.744. Is a significant indicator that all the independent variables are giving strong influence on the dependent variable. The adjusted R square which is the variance is 0.74, which means that the dependent variable like Corporate tax responsible only for 74% of change in the Profitability, and this is not a good indicator to conclude that these independent variables has any strong influence to bring a change in the Profitability. Determinant of Free Cash Flows Impact upon Financial Performance of cement industry of Pakistan 2014
Muhammad Amjad Islam 57678 Page 7
The value of R Square was 0.741, while the value of adjusted R square was 0.7480 we can see the value of R Square is greater than Adjusted R Square which shows that there is a improvement required.
Determinant of Free Cash Flows Impact upon Financial Performance of cement industry of Pakistan 2014
Muhammad Amjad Islam 57678 Page 8
The value of ANOVA is helpful to describe the importance of a research hypothesis. In this paper is 0.592 and value of significance level is 0.00. From the Sum of squares we find that regression is .592 and residual is .796. The P-Value is less than as compared to my alpha =0.05 it is significant linear equation and on basis of this significance level which is less than , we accept substitute hypothesis and Reject null hypothesis. Also there is a highly correlation 74.10%.
Table value of Coefficients gives us the (linear regression) (Y: a + bX) Driven. Thus, our forecast equation for the research two variables is Profitability Determinant of Free Cash Flows Impact upon Financial Performance of cement industry of Pakistan 2014
Muhammad Amjad Islam 57678 Page 9
It can be observe that the data is skewed which might be the cause of higher standard deviation than mean. HYPOTHESIS#2 Interest rate & finance cost: The regression analysis is used to achieve the result of a paper by testing the entire set of variables. For this paper, the dependent variable, Profitability is tested with the independent Determinant of Free Cash Flows Impact upon Financial Performance of cement industry of Pakistan 2014
Muhammad Amjad Islam 57678 Page 10
variable Finance cost (Interest Rate). After entering the data in SPSS and running the regression tool I have received the following Descriptive Statistics table.
From the above table I have come to conclusion that Mean of Profitability, Interest Rate are 13.67, 7.9636, and .0561 respectively. And as so the Std. Deviation of above variables, in the sequence as mentioned, is .10371. This gives us the conclusion that the data is equally distributed and taken from random sampling technique.
The above table shows the summary of regression analysis. Here in this table we have R as .505, which shows a relation between the independent variables finance cost (Interest rate) but it suggests that they have significant impact on the dependent variable Profitability. The R square approves this with its high value of 0.904. Is a significant indicator that all the independent variables are giving strong influence on the dependent variable. The adjusted R square which is the variance is 0.814, which means that the dependent variable like finance cost (Interest rate) are responsible only for 44% of change in the Profitability, and this is not a good indicator to conclude that these independent variables has any strong influence to bring a change in the Profitability. Determinant of Free Cash Flows Impact upon Financial Performance of cement industry of Pakistan 2014
Muhammad Amjad Islam 57678 Page 11
The value of R Square was 0.816, while the value of adjusted R square was 0.814 we can see the value of R Square is lesser than Adjusted R Square which shows that there is a improvement required.
The value of ANOVA is helpful to describe the importance of a research hypothesis. In this paper is 0.904 and value of significance level is 0.650. From the Sum of squares we find that Determinant of Free Cash Flows Impact upon Financial Performance of cement industry of Pakistan 2014
Muhammad Amjad Islam 57678 Page 12
regression is .650 and residual is 146. The f-Value is less than as compared to my alpha =0.05 it is significant linear equation and on basis of this significance level which is less than , we accept substitute hypothesis and Reject null hypothesis. Also there is a highly correlation 74.10%.
Table value of Coefficients gives us the (linear regression) (Y: a + bX) Driven. Thus, our forecast equation for the research two variables is Profitability Determinant of Free Cash Flows Impact upon Financial Performance of cement industry of Pakistan 2014
Muhammad Amjad Islam 57678 Page 13
It can be observe that the data is skewed which might be the cause of higher standard deviation than mean. HYPOTHESIS#3 LABOR (MANUFACTURING COST) The regression analysis is used to achieve the result of a paper by testing the entire set of variables. For this paper, the dependent variable, Profitability is tested with the following independent variables, Manufacturing cost (Labor Cost). After entering the data in SPSS and running the regression tool I have received the following Descriptive Statistics table. Determinant of Free Cash Flows Impact upon Financial Performance of cement industry of Pakistan 2014
Muhammad Amjad Islam 57678 Page 14
From the above table I have come to conclusion that Mean of Profitability, Corporate Tax, Interest Rate, and Labor Cost and Dividend are 13.67 and 1.11. And as so the Std. Deviation of above variables, in the sequence as mentioned, is .10371, 0.1717. This gives us the conclusion that the data is equally distributed and taken from random sampling technique.
The above table shows the summary of regression analysis. Here in this table we have R as .781, which shows a relation between the independent variable manufacturing (Labor cost) but it suggests that they have significant impact on the dependent variable Profitability. The R square approves this with its low value of 0.610. Is a significant indicator that all the independent variables are giving strong influence on the dependent variable. The adjusted R square which is the variance is 0.604, which means that the dependent variable like Labor cost, are responsible only for 73% of change in the Profitability, and this is not a good indicator to conclude that these independent variables has any strong influence to bring a change in the Profitability.
Determinant of Free Cash Flows Impact upon Financial Performance of cement industry of Pakistan 2014
Muhammad Amjad Islam 57678 Page 15
The value of ANOVA is helpful to describe the importance of a research hypothesis. In this paper is 0.781 and value of significance level is 0.01. From the Sum of squares we find that regression is .485 and residual is .311. The F-Value is less than as compared to my alpha =0.05 it is significant linear equation and on basis of this significance level which is less than , we accept substitute hypothesis and Reject null hypothesis. Also there is a highly correlation 74.00%.
Determinant of Free Cash Flows Impact upon Financial Performance of cement industry of Pakistan 2014
Muhammad Amjad Islam 57678 Page 16
Table value of Coefficients gives us the (linear regression) (Y: a + bX) Driven. Thus, our forecast equation for the research two variables is Profitability Determinant of Free Cash Flows Impact upon Financial Performance of cement industry of Pakistan 2014
Muhammad Amjad Islam 57678 Page 17
It can be observe that the data is skewed which might be the cause of higher standard deviation than mean. HYPOTHESIS#4 Dividend pay out: The regression analysis is used to achieve the result of a paper by testing the entire set of variables. For this paper, the dependent variable, Profitability is tested with the following independent variable dividend. After entering the data in SPSS and running the regression tool I have received the following Descriptive Statistics table.
Determinant of Free Cash Flows Impact upon Financial Performance of cement industry of Pakistan 2014
Muhammad Amjad Islam 57678 Page 18
Regression Statistics Multiple R 0.999691657 R Square 0.999383412 Adjusted R Square 0.999301198 Standard Error 0.883450312 Observations 5
From the above table I have come to conclusion that Mean of Profitability, Corporate Tax, Interest Rate, and Labor Cost and Dividend are 13.9773, 7.9636, 7.42627, 9.5775 and 3.0582 respectively. And as so the Std. Deviation of above variables, in the sequence as mentioned, is 3.01377, 2.24829, 1.97154 and 1.14063. This gives us the conclusion that the data is not equally distributed. The value of R which is the variance is 0.998, which means that the dependent variable like dividend are responsible only for 88% of change in the Profitability, and this is not a good indicator to conclude that these independent variables has any strong influence to bring a change in the Profitability. The value of R Square was 0.941, while the value of adjusted R square was 0.883 we can see the value of R Square is greater than Adjusted R Square which shows that there is an improvement required.
Determinant of Free Cash Flows Impact upon Financial Performance of cement industry of Pakistan 2014
Muhammad Amjad Islam 57678 Page 19
ANOVA
df SS MS F Significance F Regression 1 189.1540384 94.87702 12156.17 8.41346E.25 Residual 4 0.117072668 0.007805 Total 5 1.89871111
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Intercept -0.73958006 0.059312128 -1.24693 0.231531 -0.20037886 0.0524621 Dividend 0.432862334 0.00686002 63.09928 1.305E.19 0.418240548 0.4474525
The value of ANOVA is helpful to describe the importance of a research hypothesis. In this paper is 0.94 and value of significance level is 0.8413. From the Sum of squares we find that regression is 26.808 and residual is 163.931. The P-Value is less than as compared to my alpha =0.05 it is significant linear equation and on basis of this significance level which is less than Determinant of Free Cash Flows Impact upon Financial Performance of cement industry of Pakistan 2014
Muhammad Amjad Islam 57678 Page 20
, we accept substitute hypothesis and Reject null hypothesis. Also there is a highly correlation 43.10%.
It can be observe that the data is skewed which might be the cause of higher standard deviation than mean.
Determinant of Free Cash Flows Impact upon Financial Performance of cement industry of Pakistan 2014
Muhammad Amjad Islam 57678 Page 21
Conclusion And Recommendations In this paper, as the work was carried out, hypothesis was tested using the regression analysis statistical technique. I have found that Finance cost, Labor Cost, and Corporate tax were over all explanatory power, which shows a strong relationship and due to this strong relationship, the null hypothesis was rejected @5% significance level. Because the coefficient of determination of R2 on the independent variable has moderate relation . The research, with the primary objective, was conducted to analyze the Economical factor impact on profitability of Cement Manufacturing Sector in Pakistan and different variable (Dividend, Corporate Tax, Finance Cost, Labor Cost) and result showed both are variable positive relationship (Slope) which according to result of research hypothesis . The results suggested that Dividend, Corporate Tax, Finance Cost, Labor Cost has strong impact on profitability of Cement Manufacturing Sector. It is oblivious that when a firm earns a great amount of profit, it has, as per taxation rules, has to pay more corporate tax to the government of that economy. Similarly, when a firm earns more profit which means its business is lucrative and flourishing and its gaining more business, which requires the firm to increase its number of units produced or to expand its line of production. This, in resulting, requires the company to hire more labor, and invent more on the production line. This, in straight manner, results the firm to pay more finance cost and labor cost. Because the production line is expanded the other expenses like stock storage, utilities bills will also increase. On the basis of my work and as the result, after the interpretation of data, suggested significant Correlation is 0.862 which means it has significant relation among profitability of the Cement Determinant of Free Cash Flows Impact upon Financial Performance of cement industry of Pakistan 2014
Muhammad Amjad Islam 57678 Page 22
Manufacturing sector and the corporate Tax. Though there is (moderate) relation between Profitability and corporate tax as a result of research can say that there is significant relation among variable. Dose Finance Cost and dividend have impact on Profitability of Cement manufacturing sector in Pakistan? It has a significant impact on the profitability, this in result the null hypothesis. On the analysis of the data I have found the value of correlation as 0.904 which shows a moderate relation between the dependent variable of profitability and the independent variable finance Cost. It is, as we can say the relationship between the independent and dependent variable is moderate we can reject the null hypothesis. We can conclude that the increase in finance cost has direct impact on the increase of profitability of cement manufacturers. Dose Labor Cost and interest rate impact on Profitability of Cement manufacturing sector in Pakistan ? From the previous empirical studies, the relationship between labor cost and profitability was validated. And it was found through this study that the relationship between these two variables exists. Although the result suggested a correlation value of 0.781 which is found as moderate relationship . With this value of correlation the null hypothesis is rejected and the relationship between the two variables is accommodated as moderate relation. Recommendations In the light of my research and analysis on the topic to impacts of Economical factor on Profitability of cement manufacturing sector in Pakistan We have found link As for the bank loans and interest rates of the government's policy are not favourable. The need of the developing a coherent plan for the government is to allow the type of exclusion / excellence in the cement manufacturing sector. Serious steps are required to be taken by the policy makers on government side for the cement manufacturing sector in order to reduce corporate tax so that the profitability of the firm makes the firm able to investment more in the economy which will create more job opportunities. Determinant of Free Cash Flows Impact upon Financial Performance of cement industry of Pakistan 2014
Muhammad Amjad Islam 57678 Page 23
Cement sector requires a high amount of energy to remain functional. Therefore the government makes ensure that the manufacturers get uninterrupted supply of energy. Government in collaboration of the manufacturers should introduce new technology of cement manufacturing which will help to reduce labor and manufacturing cost. The investment volume is not satisfactory in the cement sector as compared to the Potential available. Government should provide more incentives to the investors so that they invest in this sector.