The relationship between liquidness and profitableness has been investigated by many research workers ( Eljelly, 2004 ; Zainudin, 2006 ; Rehman and Nasr, 2007 ; Bhunia, Khan and Mukhuti, 2011 ) . Some of these research workers claimed the opposite relationship between liquidness and profitableness of a house ( Eljelly, 2004 and Rehman and Nasr, 2007 ) and some research workers argued that positive relationship exist between them ( Zainudin, 2006 ; Bhunia, Khan and Mukhuti, 2011 and Bhunia, 2012 ) . The positive relationship shows that houses which have higher liquidness have a leaning to do better net incomes ( Zainudin, 2006 ) .

There are two basic steps of liquidness ; current ratio and quick ( acerb trial ) ratio. I have used current ratio to cipher liquidness as it is a broad step of liquidness that gives assurance to short-run creditors that current liabilities will pay off by neutralizing current assets ( Zainudin, 2006 ) and largely used by research workers as a placeholder of liquidness ( Rehman and Nasr, 2007, Bhunia, Khan and Mukhuti, 2011 and Bhunia, 2012 ) . So the liquidness of a house would be calculated as under:

Liquidity= Current Ratio

= Current assets/Current liabilities

## 3.3.2.2 Inventory turnover ratio

Inventory turnover ratio pointed out how rapidly house sells its stock list, measured as rate of goods motion into the house from natural stuff to finished goods and out of the house in the signifier of gross revenues ( Stickney & A ; Weil, 2002 ) . Variability in stock list turnover ratio is caused by segment-wise-effect and when houses work in gross revenues decline province so bigger alterations are due to alterations in gross revenues ( Kolias, Dimelis & A ; Filios, 2010 ) . Usama ( 2012 ) argued that minimal stock list turnover in yearss and hard currency transition rhythm can make higher net income. Capkun, Hameri & A ; Weiss ( 2009 ) examined the stock list public presentation by entire stock list and the distinguishable constituents of stock list such as natural stuff, work in procedure and finished goods. They found that stock list public presentation is positively correlated with fiscal public presentation of the house and association between the public presentation of distinguishable constituents of stock list and fiscal public presentation differ across stock list constituents.

Previous researches show assorted consequences sing stock list turnover ratio as Gaur, Fisher & A ; Raman ( 2004 ) , Boute et Al. ( 2007 ) and Kolias, Dimelis & A ; Filios ( 2010 ) claimed that stock list turnover and profitableness are negatively correlated while Capkun, Hameri & A ; Weiss ( 2009 ) and Sahari, Tinggi & A ; Kadri ( 2012 ) argued that stock list turnover ratio and house public presentation are positively correlated. The expression to mensurate stock list turnover ratio is as under:

Inventory turnover ratio= Entire sales/inventory

## 3.3.2.3 Debt-to-equity ratio

Debt-to-equity ratio is used to measure the hazard associated with house ‘s funding construction ( Wild, Larson & A ; Chiappetta, 2007, p. 689 ) . It shows the proportion of equity and debt which the house is utilizing to finance its assets. A steadfast adopts suited mix of beginnings of finance such as maintained net incomes, issue of ordinary and penchant portions and debt to maximise stockholders wealth ( Afza & A ; Hussain, 2011 ) . Debt funding gives a revenue enhancement shield to a house therefore they took high degree of debt to derive maximal revenue enhancement benefits and finally increase profitableness. However, the addition of debt funding increases the possibility of bankruptcy ( Myers, 2001 ) . A high purchase or a low equity capital ratio causes to cut down the bureau cost related to outside equity and raises house value ( Berger & A ; Bonaccorsi di Patti, 2003 ) . The degree of investing can be increased through the usage of borrowed capital and it increased the return of invested capital but it besides increased the hazard for the house and for the proprietors due to fixed disbursals of involvement ( Eriotis, Frangouli & A ; Neokosmides, 2011 ) .

Elsas, Flannery & A ; Garfinkel ( 2006 ) argued that debt funding produces negative long tally public presentation more than equity financing whereas financing with internal financess ne’er produce of import portion underperformance. Amjed ( 2011 ) claimed that debt funding is considered to be cheaper than equity funding due to revenue enhancement benefit and concluded that long term debt has a negative impact on house ‘s public presentation and short term debt has a positive impact on house ‘s public presentation. Eriotis, Frangouli & A ; Neokosmides ( 2011 ) claimed that debt-to-equity ratio has a negative impact on house ‘s public presentation. The expression of debt-to equity ratio is provided below:

Debt-to-equity ratio= Total debt/Total equity

## 3.3.2.4 Size ownership

Size shows the degree of house ‘s operations. Larger houses are stronger to confront hazardous state of affairss and have better agencies to travel through these types of state of affairss. Size besides brings stronger dickering power to the house over its rivals and providers and bigger houses have superior engineering ( Bhattacharyya & A ; Sexena, 2009 ) . ) . Gibrat ( 1931 ) presented a jurisprudence that growing rate and size of a house are independent. His jurisprudence advocated that during a specific period, the chance of alteration in size is same for all the houses in the given industry.

Small houses are more productive but lower endurance chance due to two to four times more degree of hazard as comparison to big houses ( Dhawan, 2001 ) . Small houses have high net income rate addition as comparison to medium or big houses and when these houses become bigger, their net incomes rate become higher ( Ammar et al. , 2003 ) . Past surveies have different positions sing size and profitableness relationship. Some research workers found that profitableness of a house increases as house size lessenings ( Dean, Brown & A ; Bamford, 1998 ; Ammar et al. , 2003 ; Ramasamy, Ong, & A ; yeung, 2005 ; Abu-Tapanjeh 2006 and Punnose, 2008 ) while other claimed that house size and degree of profitableness are positively correlated ( Treasy1980, Amirkhalkhali & A ; Mukhopadhyay, 1993 and Bhattacharyya & A ; Sexena, 2009 ) .

Many placeholders are used for size by many research workers harmonizing to the demands of their survey. Mostly entire gross revenues, entire assets or market capitalisation is used as placeholder of size. In this survey, entire gross revenues is used as placeholder of house size. Majumdar ( 1997 ) and Bhattacharyya and Sexena ( 2009 ) besides used entire gross revenues to mensurate steadfast size. For informations symmetricalness, I used natural log of entire gross revenues. So the house size would be:

Size= Log ( Total Gross saless )

## 3.4 Population

Population is the concerned group of persons, informations or points from which sample is taken. The concerned population in this survey is the Chemical houses listed on the Karachi stock exchange for the period of 2005-2010. The entire figure of chemical houses listed on Karachi stock exchange is 36.

## 3.5 Sample and Sampling technique

To happen out the determiners of house ‘s profitableness, this survey took the sample of 20 houses from Textile industry of Pakistan which are listed on Karachi Stock Exchange ( KSE ) during 2005 to 2010 as it is the oldest and largest stock exchange in Pakistan. The houses were selected for the sample by utilizing simple random trying technique as this technique assures that each constituent in the population has an equal chance of being selected in the sample ( Zikmund, 2002, p.384 ) .

## 3.6 Datas beginnings

This survey took merely steadfast particular factors which affect house ‘s profitableness. So, the information for house ‘s specific factors was calculated from the fiscal statements of the several houses and study provided by State Bank of Pakistan viz. ‘Financial Statement Analysis of Companies ( Non-Financial ) , listed at Karachi Stock Exchange ‘ issue 2005-2010. This research is a longitudinal research because same variables were observed repeatedly for the period of six old ages from 2005 to 2010.

## 3.7 Hypothesis

This survey contains one dependant variable i.e. returns on assets ( ROA ) and four independent variables such as liquidness, stock list turnover ratio, debt-to-equity ratio and size. So, the testable hypotheses ( the surrogate hypothesis ) are afterlife:

H11: There may be a negative relationship between liquidness and profitableness of a house. Firms with higher degree of liquidness may possess lower degree of profitableness and frailty versa.

H12: There may be a positive relationship between stock list turnover ratio and profitableness of a house. Firms with higher stock list turnover ratio may possess higher degree of profitableness and frailty versa.

H13: There may be a negative relationship between debt-to-equity ratio and profitableness of a house. Firms with higher degree of debt-to-equity ratio may possess lower degree of profitableness and frailty versa.

H14: There may be a negative relationship between size and profitableness of a house. Firms with larger size may possess lower degree of profitableness and frailty versa.

## Table 3.1 Explanatory variables with their placeholder and expected relationship with the profitableness ( ROA )

## Variable Name

## Proxy for the variable

## Expected relationship

Liquid

Current Ratio ( CR )

Negative

Inventory turnover

Inventory turnover ratio ( INVT )

Positive

Debt-to-equity ratio

Debt-to-equity ratio ( DER )

Negative

Size

Log ( Total Gross saless ) ( SZ )

Negative

## Chapter 4

## Analysis and Discussion

This chapter includes the statistical analysis of the sample informations and gives inside informations sing empirical findings of the survey.

## 4.1 Analysis

This portion would bespeak the empirical findings of the survey. The first tabular array provides the descriptive statistics which quantitatively describe the chief features of the information. The 2nd tabular array contains correlativity matrix which shows the association between all the variables. The 3rd tabular array entails the OLS arrested development estimations with fixed effects and 4th tabular array contains the random effects to set up the relationship between dependant and independent variables.

## 4.1.1 Descriptive Statisticss

Descriptive statistics portrays sum-up of the information which is used in the survey to clearly understand the scope and features of the informations. Table 4.1 represents descriptive statistics for 20 Pakistani Chemical houses for a period of 6 old ages from 2005 to 2010 and for a 120 firms-year observations. Mean shows the mean value of the informations and average indicates the in-between value of the information. In the tabular array 4.1, mean for the dependant variable i.e. return on assets is 15.927 and average is 13.66. Standard divergence

## Table 4.1 Descriptive Statisticss

## ROA

## LQ

## INVT

## DER

## SZ

## A

## Mean

A 15.92700

## A

1.736000

## A

12.59517

## A

1.037250

A 6.539098

## A

## Median

## A

13.66000

A 1.455000

A 6.560000

## A

0.945000

A 6.563317

## A

## Maximum

A 45.13000

A 5.130000

A 222.5300

## A

3.490000

A 7.945245

## A

## Minimum

-10.98000

A 0.230000

A 0.000000

A 0.190000

A 5.361393

## A

## Std. Dev.

A 11.32618

## A

0.972208

A 22.98619

A 0.671968

A 0.618107

## A

## Lopsidedness

A 0.566959

## A

1.599074

## A

6.861938

A 1.111136

A 0.069343

## A

## Kurtosis

## A

2.577047

## A

5.240897

A 60.02378

## A

4.483081

A 2.357129

## A

## Jarque-Bera

A 7.323292

## A

76.24882

A 17200.28

## A

35.69009

A 2.162585

## A Probability

A 0.025690

## A

0.000000

A 0.000000

## A

0.000000

A 0.339157

## A

## Sum

## A

1911.240

## A

208.3200

## A

1511.420

A 124.4700

A 784.6917

## A

## Sum Sq. Dev.

A 15265.60

## A

112.4775

## A

62875.43

## A

53.73339

## A

45.46468

## A

## Observations

A 120

A 120

A 120

## A

120

A 120

signifies the typical divergence from the mean. The standard divergence of return on assets is 11.32618.

The first chief independent variable i.e. liquidness ( current ratio ) has mean value 1.736 ; median is 1.455 and standard divergence is 0.972208. The 2nd independent variable which is inventory turnover ratio has mean 12.59517 ; median is 6.56 and standard divergence is 22.98619. The mean, average and standard divergence of 3rd independent variable i.e. debt to equity ratio are 1.03725, 0.945 and 0.671968 severally. In the instance of house size ( natural logarithm of entire gross revenues ) , which is the last independent variable has average 6.539098 ; median is 6.563317 and standard divergence is 0.618107.

The information of dependant variable which is return on assets and all the independent variables is positively skewed. The kurtosis is besides positive among all the variables. The Jarqua-Bera trial is used to look into the normalcy of the information rejects the void hypothesis that all the dependant and independent variables are usually distributed because Jarqua-Bera statistic is really high in most of the variable ‘s consequences and the P value is zero in about all of the instances. Therefore, the informations relating to the variables used in the appraisal is non usually distributed because the lopsidedness and kurtosis coefficients are non equal to 0 and 3 severally.

## 4.1.2 Correlation Analysis

The grade of association between the variables is judged by Pearson ‘s correlativity coefficient ( R ) . Table 4.2 presents the correlativity analysis of all the variables which are used in the analysis. The basic intent of correlativity analysis is to observe the presence of multicollinearity. Gujrati ( 2008, p.337 ) recommends that the job of multicollinearity exist if the correlativity coefficient exceeded 0.80. In correlativity matrix, no value is greater than or equal to 0.80. So, there is no high correlativity among the variables which are used in the analysis. Tax returns on assets has important and positively correlativity of 42.57 % with liquidness, 39.11 % with stock list turnover ratio, 42.48 % with house ‘s size and negatively correlated with 27.79 % with debt to equity ratio.

## Table 4.2 Correlation Matrix

## ROA

## LQ

## INVT

## DER

## SZ

## ROA

## A

1.000000

A 0.425709

## A

0.391140

-0.277932

A 0.424855

## LQ

## A

A 1.000000

-0.175564

-0.648455

A 0.002791

## INVT

## A

## A

1.000000

A 0.233890

A 0.388966

## DER

## A

## A

1.000000

A 0.227785

## SZ

## A

## A

## A

## A

## A

1.000000

Inventory turnover is positively associated with debt to equity ratio and house ‘s size with 23.39 % and 38.90 % severally. Debt to equity ratio is positively associated with 22.78 % with house ‘s size.

## 4.1.3 Arrested development Analysis ( The Fixed Effects Model )

Table 4.3 provides the arrested development analysis to analyze the influence of liquidness ( LQ ) , inventory turnover ratio ( INVT ) , debt to equity ratio ( DER ) and size of a house ( SZ ) on its profitableness ( ROA ) . In this theoretical account, determiners of house ‘s profitableness are estimated with fixed effects. The consequences of arrested development analysis shows that this theoretical account is good fitted holding F-statistic 17.5899 and p- value is 0.000. The adjusted R2 value is 0.762270 which predicts that about 76 % fluctuation in the profitableness ( ROA ) unambiguously or jointly due to independent variables. Durbin-Watson stat value is 1.641899, points out that no consecutive correlativity is present in the information as the trial value is about equal to 2 which is the standard value and it is less than the table value dU= 1.663 under 1 % degree of significance.

## Table 4.3 Arrested development Analysis: The fixed effects theoretical account ( ROAit= I?0+I?1 LQit+I?2 INVTit+I?3 DERit+I?4 SZit+eit )

## Variable

## Coefficient

## Std. Mistake

## t-Statistic

## Prob.A A

## C

5.868965

21.19104

0.276955

0.7824

## LQ

4.596135

0.977998

4.699533

0.0000

## INVT

0.063956

0.036370

1.758493

0.0819

## DER

-3.315956

1.584092

-2.093285

0.0390

## SZ

0.720754

3.245100

0.222105

0.8247

## Effectss Specification

## Cross-section fixed ( dummy variables )

## R-squared

0.808218

## A A A A Mean dependant volt-ampere

15.92700

## Adjusted R-squared

0.762270

## A A A A S.D. dependant volt-ampere

11.32618

## S.E. of arrested development

5.522370

## A A A A Akaike info standard

6.432348

## Sum squared resid

2927.671

## A A A A Schwarz standard

6.989846

## Log likeliness

-361.9409

## A A A A Hannan-Quinn criter.

6.658750

## F-statistic

17.58990

## A A A A Durbin-Watson stat

1.641899

## Prob ( F-statistic )

0.000000

The comparative importance of all independent variables liquidness ( LQ ) , inventory turnover ratio ( INVT ) debt to equity ratio ( DER ) and size of a house ( SZ ) in the finding of house ‘s profitableness ( ROA ) depends upon the higher coefficient value and t-statistic. Consequences revealed that liquidness has more influence on the profitableness of a house than other variables. Liquidity, stock list turnover and house ‘s size have positive coefficients of 4.596135, 0.063956 and 0.720754 with t-statistics of 4.649953, 1.758493and 0.222105 severally while debt to equity ratio has negative coefficient of -3.315956 with t-statistics of -2.093285. Furthermore, the variables liquidness, debt to equity ratio and stock list turnover are important at 1 % , 5 % and 10 % degree of significance.

## 4.1.4 Remarks

The purpose of this survey is to place the determiners of house ‘s profitableness while utilizing the information of Chemical houses in Pakistan which are listed on Karachi Stock Exchange. While analysing the house specific factors, liquidness is found to hold positive impact on profitableness. So, H11 is rejected. Inventory turnover ratio shows the positive impact on profitableness harmonizing to survey findings. So, H12 is accepted in this respect. Furthermore, the impact of debt-to-equity ratio is found negative on house ‘s profitableness. So, we accept H13. Size of the house indicated positive impact on house ‘s profitableness. So, H14 is rejected with regard to analyze consequences. All the variables are found important determiner of house ‘s profitableness except size of the house which has insignificant consequence harmonizing to the survey findings.

## 4.1.5 Arrested development Analysis ( The Random Effects Model )

Table 4.4 entails the arrested development analysis to analyze the influence of liquidness ( LQ ) , inventory turnover ratio ( INVT ) , debt to equity ratio ( DER ) and size of a house ( SZ ) on its profitableness ( ROA ) . In this theoretical account, determiners of house ‘s profitableness are estimated with random effects. In random effects model the intercept shows the average value or mean value of all the intercepts and mistake term shows the random divergence of individual intercept from the average value.

The findings of arrested development analysis indicates that this theoretical account is good fitted holding F-statistic 14.92818 and p- value is 0.000. The adjusted R2 value is 0.318882 which predicts that about 32 % fluctuation in the profitableness ( ROA ) indiscriminately due to

## Table 4.4 Arrested development Analysis: The random effects theoretical account ( ROAit= I?0+I?1 LQit+I?2 INVTit+I?3 DERit+I?4 SZit+eit )

## Variable

## Coefficient

## Std. Mistake

## t-Statistic

## Prob.A A

## C

-22.16595

13.27979

-1.669149

0.0978

## LQ

4.447065

0.922300

4.821712

0.0000

## INVT

0.097785

0.033657

2.905343

0.0044

## DER

-3.070943

1.450723

-2.116837

0.0364

## SZ

4.943581

2.047117

2.414900

0.0173

## Effectss Specification

## S.D.A A

## RhoA A

## Cross-section random

6.345424

0.5690

## Idiosyncratic random

5.522370

0.4310

## Leaden Statisticss

## R-squared

0.341777

## A A A A Mean dependant volt-ampere

5.332229

## Adjusted R-squared

0.318882

## A A A A S.D. dependant volt-ampere

6.785963

## S.E. of arrested development

5.600447

## A A A A Sum squared resid

3606.976

## F-statistic

14.92818

## A A A A Durbin-Watson stat

1.382481

## Prob ( F-statistic )

0.000000

## Unweighted Statisticss

## R-squared

0.453175

## A A A A Mean dependant volt-ampere

15.92700

## Sum squared resid

8347.605

## A A A A Durbin-Watson stat

0.597366

independent variables. On the other manus, Durbin-Watson stat value is 1.382481, points out that no consecutive correlativity is present in the information as the trial value is less than the table value dU= 1.663 under 1 % degree of significance.

Coefficient value and t-statistic indicates the comparative importance of all independent variables liquidness ( LQ ) , inventory turnover ratio ( INVT ) debt to equity ratio ( DER ) and size of a house ( SZ ) in the finding of house ‘s profitableness ( ROA ) . Results revealed that liquidness has more influence on the profitableness of a house than other variables. Liquidity, stock list turnover and house ‘s size have positive coefficients of 4.447065, 0.097785 and 4.943581 with t-statistics of 4.821712, 2.905343 and 2.414900 severally while debt to equity ratio has negative coefficient of -3.070943with t-statistics of -2.116837. Furthermore, the variables liquidness and stock list turnover ratio are important at 1 % and debt-to-equity ratio and size are important at 5 % degree of significance.

## 4.1.6 Remarks

The basic intent of this survey is to happen out those factors which affect house ‘s profitableness. The above theoretical account is used to happen out the relationship between the dependant and independent variable with the random effects theoretical account. The theoretical account exhibits that liquidness is significantly positively correlated with profitableness. So, H11 is rejected. Inventory turnover ratio shows the significantly positive impact on profitableness. So, H12 is accepted in this respect. On the other manus, the impact of debt-to-equity ratio is found to be significantly negatively associated with the house ‘s profitableness. So, we accept H13. Size of the house indicated significantly positive impact on house ‘s profitableness. So, H14 is rejected with regard to analyze consequences. All the variables are found important determiner of house ‘s profitableness in random effects theoretical account.

## 4.2 Discussion

The basic intent of this survey is to place the determiners of house ‘s profitableness while utilizing the information of Chemical houses in Pakistan which are listed on Karachi Stock Exchange. The research findings show that liquidness is significantly positively correlated with profitableness which satisfies the findings of ( Zainudin, 2006, Bhunia, Khan & A ; Mukhuti, 2011 and Bhunia, 2012 ) but it opposes the consequences of ( Eljelly, 2004 and Rehman and Nasr, 2007 ) . Inventory turnover ratio shows the significantly positive impact on profitableness harmonizing to survey findings which is consistent with the determination of ( Sahari, Tinggi & A ; Kadri, 2012 ) . On the other manus, the impact of debt-to-equity ratio is found to be significantly negatively associated with the house ‘s profitableness which supported the decision of ( Eriotis, Frangouli & A ; Neokosmides, 2011 ) . Size of the house indicated significantly positive impact on house ‘s profitableness harmonizing to the findings of ( Treacy, 1980 ; Bhattacharyya & A ; Sexena, 2009 and Amirkhalkhali & A ; Mukhopadhyay, 1993 ) and the findings rejected the statements of ( Ramasamy, Ong & A ; yeung, 2005, Ammar et al. , 2003 and Dean, Brown & A ; Bamford, 1998 ) .

On the whole, the selected variables are strongly associated with the profitableness of the house. Liquidity is the most of import factor to impact profitableness. Although size and debt-to equity ratio reveal strong power to impact profitableness, but their explanatory power is less than liquidness. On the other manus, stock list turnover ratio has a important positive relationship with profitableness but its explanatory power is less than other independent variables.

## Chapter 5

## Decision and Deductions

This chapter provides decision, restrictions and of the survey farther waies for future research.

## 5.1 Decision

The primary aim of this survey was to happen out the factors which determine the profitableness of the house while analysing the fiscal information of Chemical industry of Pakistan which are listed on Karachi Stock Exchange for the period of 2005 to 2010. The findings revealed that the selected variables have important relationship with the profitableness and they strongly affect the profitableness of the house. The findings suggested that liquidness has a strong positive impact on profitableness. Firms should keep optimum degree of liquidness to run into short term duties. The consequences besides show that stock list turnover ratio is positively associated with house ‘s profitableness. It means that house gets higher net income by rapidly change overing its stock list into hard currency. The findings reject the pecking order theory as debt-to-equity ratio has inverse relationship with profitableness as debt-to-equity ratio additions, the house ‘s profitableness decreases. It shows that house should non trust on heavy debt funding. The findings confirm the tradeoff theory that houses should concentrate on tradeoff of costs and benefits while choosing how much equity and debt to utilize as funding beginnings. Last, the findings reject the Gibrat ‘s jurisprudence and claimed that house size and profitableness are positively related. The consequences indicated that profitableness goes up as house ‘s size become larger.

## 5.2 Restrictions of the research

This survey is carried out in Pakistan which has developing economic system so there are many jobs with regard to handiness of informations as many uses and deceits are existed in publicly available informations. Many beginnings were used for informations aggregation. So, the quality of consequences of this survey depends upon the available informations of selected companies. Due to restrictions of clip and range of the research required to concentrate merely on limited figure of houses. Due to available resources, merely internal factors which affect profitableness are included in the survey.

## 5.3 Directions for the hereafter research

This research was first clip conducted in Pakistan to research the determiners of house ‘s profitableness in Karachi Stock Exchange. Further surveies should be carried out in Pakistan to research this phenomenon on different sectors or in other developing economic systems to measure whether the factors have same consequence in different economic systems. Comparative research on this subject could be employed while taking different sectors of the economic system. Furthermore, external factors could be used to analyse their affect on profitableness in developing economic system. Different theoretical accounts could be employed for farther in-depth analysis.