Impact of Intellectual

Capital Efficiency on
Profitability
(A Case Study
of LSE 25 Companies)
Muhammad Abdul Majid Makki,
Suleman Aziz Lodhi

Presented By:
Zahra Batool
(11022720059)
Mehvish Rubab (11022720023)
Shakeela Naz
(11022720-039)
Sundas Yaqoob (11022720036)
Sadia Shaheen (11022720053)

Zahra Batool
Presented By:

(11022720-059)
Zahra Batool
059)
Mehvish Rubab
023)
Shakeela Naz
039)
Sundas Yaqoob
036)
Sadia Shaheen
053)

(11022720

(11022720

(11022720

(11022720

(11022720

INTELLECTUAL CAPITA
The value of a companys employee knowledge,
business training, & any proprietary information
that may provide a company with a competitive
advantage.
It includes:
Human Capital
Structural Capital
Capital Employed Efficiency

ABSTRACT
To examine the relationship
between intellectual capital
efficiency and firm's profitability.
Examines the role of IC efficiency in
firms net profit using value added
intellectual coefficient (VAIC).
Investigates its correlation with
firms profitability, using regression
models.
A five-year data set for LSE Index

INTRODUCTION
Now, World economies are moving
from manufacturing towards
knowledge-based economic activity
Business resources comprise 20%
tangible assets and 80% that are
intangible
IC is an influential intangible
strategic asset capable of
transforming a national company
into a multinational

CONTI.........
IC management become very
important due to service
sectors
This research focuses on
firms net profit, Is it changes
with a change in IC efficiency
using the VAIC?
Provides standardized
measure of calculating and
comparing IC performance

Mehvish Rubab
Presented By:

(11022720-023)
Zahra Batool
059)
Mehvish Rubab
023)
Shakeela Naz
039)
Sundas Yaqoob
036)
Sadia Shaheen
053)

(11022720

(11022720

(11022720

(11022720

(11022720

MEASUREMENT
OF INTELLECTUAL
CAPITAL

FIRST APPROACH

Focuses on cost
compute IC through the difference
between market and book value.

SECOND APPROACH
Profit or value-oriented
Focuses on measuring IC efficiency

LITERATURE REVIEW
90% researchers
conclude +ve
correlation between
VAIC, profitability
and market valuation
10% researchers
conclude -ve
correlation between
VAIC, profitability
and market valuation

WHY PIONEER
The first 100 years of our
countrys history were about
who could build the biggest,
most efficient farm.
The second 100 years were
about the race to build
efficient factories.
The third 100 years are about

RESEARCH GAP
Extending the IC approach
to all the listed companies in
Pakistan
While focusing on the
impact of IC efficiency on
future financial performance
and total capitalization of
companies.
Focus on Intangible Assets

Shakeela Naz
Presented By:

(11022720-039)
Zahra Batool
059)
Mehvish Rubab
023)
Shakeela Naz
039)
Sundas Yaqoob
036)
Sadia Shaheen
053)

(11022720

(11022720

(11022720

(11022720

(11022720

EORATICAL

FRAMEWORK
CEE
(X1)

IC Efficiency
(VAIC)

HCE
(X2)
SCE
(X3)

Profitability
(NP)

METHODOLOGY
MODELS
VAIC indicates corporate
value creation efficiency &
regression used to check
dependency of firm
profitability.
1) VAIC
VAIC = CEE + HCE + SCE
2) Regression
Yi = 0 + 1(CEE) + 2(HCE) +

CALCULATION OF VARIABLES
(i) VA = OUT IN (sales-cost of
materials & services)
(ii)CEE = VA/CE (capital
employed= net book value of
total assets).
(iii)HCE = VA/HC (Human Capital
= total salaries and wage )
(iv)SCE = ST/VA (Structural
Capital = VA HC. )

HYPOTH
ESIS

There is no relatinship between IC and firm pro

There is relationship between IC and firm profi

SAMPLE
The study is based on
financial data of the top 25
companies of LSE (volume
wise) from 2002-2006.
VAIC does not provide
money value of IC, It simply
adds IC efficiency factors
Efficiency index

Sundas Yaqoob
Presented By:

(11022720-036)
Zahra Batool
059)
Mehvish Rubab
023)
Shakeela Naz
039)
Sundas Yaqoob
036)
Sadia Shaheen
053)

(11022720

(11022720

(11022720

(11022720

(11022720

NALYSIS AND RESULTS

Table illustrates mean of
human capital efficiency is
6.5368 with a range from
-3.221 to 21.9286.
This means that LSE-25
companies produced Rs.6.54
for every 1 rupee spent on
human capital.
The average VAIC and ICE

Variables

Min

Max

Mean

S.D

Value Added
(Rs. In million)

25

-39

70604

12974

17511

Human Capital
(Rs. In million)

25

12

14700

2726

3689

Capital Employed (Rs.

In million)

25

4248

158840

39420

37734

Structural Capital (Rs.

In million)

25

-5097

67384

10248

15516

Cap. Emp. Efficiency

25

-0.0027

0.7450

0.3081

0.2097

Hum. Cap Efficiency

25

-3.2221

21.9286

6.5368

5.1534

Structural. Capital
Efficiency

25

-0.9591

1.3104

0.7559

0.3847

Net Profit
(Rs. In million)

25

-12763

45970

5228

10733

EPS (Rs.)

25

-6.80

43.90

8.21

10.66

ICE

25

-1.9117

22.8829

7.2927

5.2865

VAIC

25

-1.9144

23.6279

7.6008

5.3994

GRESSION ASSUMPTION
Regression model is
appropriate because D-W
Test value is closer to 2
Data is normal because
value is between 0.2 to 0.6
Variance inflationary
factor (VIF) of less than 1.50
in all cases, indicating no

Conti.
Variances at each level of
independent variables were
found homogeneous indicating
no
hetroscedasticity.
CEE
has a significantly
positive effect on net
profitability as R= 42.5%
That all three components
of VAIC have a strong impact
on net profit

Sadia
Shaheen

USEFULNESS OF
STUDY

Paper is good source of

reference for future research in
Pakistani corporate sector
The data by qualified
accountants and audited by
statutory auditors increasing
reliability.
VAIC components show a
significant explanatory power

Conti.
More than 90% of investors

and portfolio managers will

benefit from this study while
developing a portfolio.
VAIC can be used by
regulatory authorities to identify
weaknesses and strengths of
industries
To help determine which

LIMITATIONS OF THE
This research
STUDY
is limited to
LSE-25 index companies.

Cannot be generalized to
apply to whole stock market
Human and structural
capital efficiency is not
comparable among different
sectors within LSE-25

FUTURE
RESEARCH
IC efficiency on future
financial performance and
total capitalization of
companies
The impact of IC in the
intellectual- intensive
pharmaceutical sector .

CONCLUDING
REMARKS
Contribution Of Research
Academic Researchers:
deciding potential role of IC
efficiency in a firms
performance
Business Professionals:
allocating their precious
resources to support IC firms
financial performance.

TO TAKE
INITIATIVE
Supervisory
body
The SECP and its
technical advisors
The Institute Of
Chartered
Accountants Of
Pakistan
The Institute Of Cost
And Management
Accountants Of

Any
Query???
???