The Determinants of Profitability of Listed Finance Companies in Sri Lanka

Abstract

The profitability is one of the major concerns in any business entity as the success and growth of a business largely depends on its profitability. Hence, identifying the determinants of profitability is similarly important. However, the reported results on profitability determinants in the literature show contradictory findings while it is hard to find sufficient evidence in this regard for Sri Lankan context. Therefore, this study aims at identifying the firm specific determinants and macro-economic determinants of the profitability referring to the listed finance companies in Sri Lanka. Company size, capital ratio, loan ratio and deposits ratio were taken as firm specific determinants while inflation and GDP growth rates were considered as macro-economic variables. The Return on Assets and Return on Equity were considered as the proxy for the profitability. 125 firm year observations were taken as the sample of this study covering 25 listed finance companies for five years period from 2011 to 2015. Random effect regression model was used to analyse the strongly balanced panel data set of the study. The result revealed that the company size, capital ratio, loan ratio and GDP growth rate have a positive and significant impact on profitability while Company size and the GDP growth rate show the highest relationship. However, the deposits ratio and inflation show a negative impact on profitability. This study recommends the corporate managers to maintain healthy capital ratios to improve the size with diversified branch networks and invest in more on loans and advances to enhance the profitability.