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Factors affecting profitability in Malaysia

Ali Saleh Alarussi (Tunku Puteri Intan Safinaz School of Accountancy, Universiti Utara Malaysia, Sintok, Malaysia)
Sami Mohammed Alhaderi (Department of Management, Universiti Utara Malaysia, Sintok, Malaysia)

Journal of Economic Studies

ISSN: 0144-3585

Article publication date: 13 August 2018

13799

Abstract

Purpose

The purpose of this paper is to examine the factors affecting profitability in Malaysian-listed companies. It has been argued that profitability is the main pillar for any company to survive in the long run. Although profitability is the primary goal of all business ventures, scant attention has been paid to the factors that affect profitability in developing countries. This study investigates the factors affecting profitability in Malaysian-listed companies.

Design/methodology/approach

This research is based on five independent variables that were empirically examined for their relationship with profitability. These variables are: firm size (as measured by total sales), working capital (WC), company efficiency (assets turnover ratio), liquidity (current ratio) and leverage (debt equity ratio and leverage ratio). Data of 120 companies listed on Bursa Malaysia covering the period from 2012 to 2014 were extracted from companies’ annual reports. Pooled ordinary least squares regression and fixed-effects were used to analyze the data.

Findings

The findings show a strong positive relationship between firm size (total sales), WC, company efficiency (assets turnover ratio) and profitability. The results also show a negative relationship between both debt equity ratio and leverage ratio and profitability. Liquidity (current ratio) has no significant relationship with profitability.

Research limitations/implications

Due to the time limitation, the data includes only 120 companies listed in bursa Malaysia and covers the period from 2012 to 2014.

Practical implications

These results benefit internal users (such as mangers, shareholders and employees). They can realize the determinants of enhancing the profitability of their company after the depreciation of the Malaysian currency and therefore concentrate more on the factors that enhance their companies’ profitability. On the other side, other external users (such as investors, creditors, new established companies, tax authority) also may get advantages of these results. It is clear that those users concern about the profitability of companies and the determinants of their profitability after the currency’s depreciation.

Originality/value

This study differs than previous studies in many ways: first, it focuses on non-financial listed companies in Malaysia. Previous studies have concentrated on companies in the financial sector, such as banking and financial institutions or on industrial organizations. Second, this study analyzes the data in companies’ annual reports for a three-year period from 2012 to 2014. During this period, the economy in Malaysia was fluctuating due to currency depreciation. Third, the study used both return on equity and earnings per share as indicators of profitability. Fourth, the results of the study provide empirical evidence that large size firms with efficiently managed assets can improve operating income and ultimately enhance profitability. Last but not least, this study applies the resource-based theory and the trade-off theory.

Keywords

Acknowledgements

The authors of this paper has not made the authors research data set openly available. Any enquiries regarding the data set can be directed to the corresponding author.

Citation

Alarussi, A.S. and Alhaderi, S.M. (2018), "Factors affecting profitability in Malaysia", Journal of Economic Studies, Vol. 45 No. 3, pp. 442-458. https://doi.org/10.1108/JES-05-2017-0124

Publisher

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Emerald Publishing Limited

Copyright © 2018, Emerald Publishing Limited

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