The behaviour of financial ratios for capital intensive and labour intensive enterprises during an upswing and decline phase of the economic cycle

[摘要] ENGLISH ABSTRACT:Financial performance ratios are generally based on a set of financial statements withouttaking cognisance of other factors that could affect the measurement of performance. Thebehaviour of financial performance indicators during an upswing and decline phase of theeconomic cycle, together with the nature and scope of an enterprise's activities may have aneffect on the manner in which financial performance indicators are used by an enterprise. Thequestion may arise whether or not a ratio's behaviour for capital intensive (CI) and labourintensive (LI) enterprises could capture the essence of external factors such as an upswing ordecline in the economic cycle as measured by the Gross Domestic Product (GOP).In this study an upswing phase (1987-1989) of three years and a decline phase (1990-1992) ofthree years have been selected after an analysis of the economic cycle over the period 1970 to1996. The distinction between the capital and labour intensity of an enterprise is based on ananalysis of the total assets, fixed assets and number of employees of industrial enterpriseslisted on the Johannesburg Stock Exchange (JSE). The initially selected 62 financialperformance indicators categorised under profitability, growth, cash flow, value-added andinflation-adjusted ratios are calculated for each enterprise of the CI (33) and LI (36) groupsand for each year of the research period.The primary objectives of the research are:• To distinguish between the CI and LI nature of enterprises listed in the industrial sector ofthe JSE by using measures of capital and labour intensity;• To obtain patterns and identify differences in the behaviour of the selected financialindicators between CI and LI enterprises during an upswing and decline phase of theeconomic cycle, as measured by the GOP;• To analyse and investigate patterns and differences to determine whether or not there isspecific justification(s) for the behaviour exhibited by the CI and LI enterprises for aparticular ratio during either or both the upswing and decline phases of the economiccycle;• To identify key financial indicators, which could possibly be used by CI and LIenterprises to forecast financial performance and to identify lead and lag patterns in theeconomic cycle.An elaborate statistical analysis is conducted of the ratios to satisfy the objectives stipulatedabove. The first part of the analysis is based on a single representative measure, whichrepresents an average of the three-year upswing and three-year decline phases respectively.Mean and median values are calculated for the CI and LI enterprises for both the upswing anddecline phases. A profile analysis based on Hotelling's T2 test is used for the analysis ofratios that exhibit approximate normal distributions. Non-parametric tests, Mann-Whitney Utestand Wilcoxon matched-pairs test, are used for the analysis of ratios that do not indicateapproximately normal distributions. The second part of the study focuses on an analysis of the ratios based on the individual yearsof the research period. The statistical techniques used for the analysis of the ratios based on asingle representative measure are also used in the analysis of the ratios based on the individualyears. The limitations identified during the analysis based on a single representative measureare addressed to a large extent in this section of the statistical analysis. By analysing themean and median values based on the individual years, it is possible to classify the ratios asone of five pattern groups exhibited by the CI and LI enterprises, i.e. normal expected, lag,lead, cyclical and mixed. The patterns of the various ratios within each of the pattern groupsare also analysed from a financial management perspective.The findings of the study confirm the stated hypothesis that there are differences in thebehaviour of financial indicators based on a single representative measure and over theindividual years of the research period between CI and LI enterprises during either or both anupswing and decline phase of the economic cycle.Furthermore, the analysis highlights several ratios based on a single representative measurethat could not be used universally by all enterprises to measure financial performance andonly during either an upswing or decline phase of the economic cycle. Ratios which are partof this category include return on total net assets (before tax), return on total net operatingassets, dividend per share, sales to total net assets and interest-bearing debt to totalshareholders' interest.The results based on the individual years of the analysis indicate that a large number of ratiosexhibit normal expected patterns. Among the traditional profitability indicators, 80% exhibitnormal expected patterns for the CI and LI enterprises during the upswing and decline phases.Traditional profitability ratios such as return on total net assets, return on net operating assets,return on total shareholders' interest and the value-creation ratio, economic value added formpart of the normal expected group of patterns. All the inflation-adjusted ratios indicatenormal expected patterns. These ratios indicate relative stability over the economic cycle andmay be appropriate for the purposes of medium- and long-term financial forecasting as theyfollow the trade cycle. Approximately 39% of the ratios indicate mixed patterns, i.e. differentpatterns for the CI and LI enterprises. The growth in attributable earnings, cash flow tointerest payments, market value of equity to book value of equity and market value addedratios indicate behaviour patterns for the CI and LI enterprises which may lead the economiccycle. These ratios may indicate the possibility of anticipating upswing and decline phases inthe economic cycle.The relevance of the results for a CI enterprise alludes to the use of more debt financingduring the decline phase to cover costs and working capital requirements when demand forproducts and services decreases as a result of a slow-down in the economy. The patternexhibited by EPS may allude to an anticipated upswing phase in the economic cycle. Anincrease in the cash flow to interest payments ratio during the decline phase may indicate animminent change in the cycle of the economy.The relevance of the results for LI enterprises indicates that an upswing in the economic cyclemay be anticipated by an increase in the working capital to operating cash flow ratio. Moredebt financing is used during the upswing period, which may be attributed to greater demandand consequently results in a higher gearing position for LI enterprises. An increase in thecash flow to interest payments ratio during the decline phase may indicate an imminentupswing in the economic cycle.Several limitations of the study include the use of a single upswing and decline phase torepresent the movements of the economic cycle; the approach used to distinguish between theCI and LI enterprises requires further analysis, and the large number of ratios could in futureresearch be limited to several indicators.The more important recommendations of the study include the use of multiple upswing anddecline phases of the economic cycle; more research into the lags and leads exhibited by theCI and LI enterprises for specific ratios should be conducted; the possibility of adopting adifferent approach to distinguish between CI and LI enterprises could also be considered; andfurther research is required to ascertain the reliability of indicators that highlight lead patternsfor forecasting an upswing or decline phase in the economic cycle.

[发布机构] Stellenbosch University