Identifying Performance Determinants Through Ratio Analysis

This book focuses on understanding the impact of three financial parameters - solvency, liquidity and turnover on performance of Indian manufacturing firms. Indian manufacturing industry was chosen for this study. A total of 52 Indian manufacturing companies were analyzed in order to understand the relationship between profitability, solvency, liquidity and turnover ratios. Principal Components Analysis was applied on the ratios to verify the factors of solvency, liquidity and turnover, and these factors were used in a linear regression analysis to understand the relationship with financial performance. The book concludes that liquidity negatively impacts the return on equity and also the size of the firm. The present theory can be explained as - having a high liquidity indicates that the company is not investing sufficiently, which in turn decreases the return on equity. Therefore, Indian manufacturing firms should keep their liquidity low by investing sufficiently.