Determinants of Profitability of Manufacturing companies A case of Adama City, Ethiopia

Abstract

Profitability is one of the most important objectives of financial management because one goal of financial management is to maximize the owner` s wealth. In this paper an attempt has been made to examine firm level factors determine profitability of manufacturing companies in Adama city, Ethiopia. Seven explanatory variables; age of company, size of company, leverage ratio, growth, liquidity ratio, tangibility of assets and volume of capital of the firm were regressed against the dependent variable profitability proxied by ROA.In connection of this, a sample of six companies were taken and secondary data was collected from audited financial statements (Balance sheet and Profit/Loss account) of selected companies, for the period of five years (2009 to 2013) with the total of thirty observations. This study is explanatory research design with judgmental sampling method to select the sample companies. Data was then analyzed on quantitative basis using multiple regression analysis. From the regression results; volume of capital, growth, tangibility, leverage, liquidity, size, and age are identified as most important determinant factors of profitability. Hence, growth, volume of capital, liquidity, size, and age are positively related. In contrast, tangibility ratio and leverage ratio are negatively related with profitability. The study revealed that growths, volume of capital, liquidity, leverage, tangibility are significant determinants whereas age and tangibility are insignificant determinants of profitability of manufacturing companies in Adama city. Key words: Profitability, Adama City, Manufacturing companies, Return on asset.