The Effect of ReTurn On Assets and Net Profit Margin on Current Ratio – an Emperical Study in the Sugar Sector of Pakistan

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THE EFFECT OF RETURN ON ASSETS AND NET PROFIT MARGIN ON CURRENT RATIO – AN EMPERICAL STUDY IN THE SUGAR SECTOR OF PAKISTAN

By

Muhammad Ali Ishaq (0526)

Research submitted in partial fulfillment of the requirements
for the course of Analysis of Financial Statements at
Iqra University, North Nazimabad, Karachi.

Iqra University
May, 2015

Table of Contents

1. INTRODUCTION        

1.1: Definition of Variables        

1.1.1:        Current Ratio        

1.1.2:        Net Profit Margin        

1.1.3: Return on Assets        

2. LITERATURE REVIEW        

3. MODEL FRAMEWORK        

4. ESTIMATIONS AND RESULTS        

4.1:        Regression Analysis        

4.2:        Heteroskedasticity        

4.3:        Multicollinearity        

4.4:        ANNOVA        

5. CONCLUSIONS AND IMPLICATIONS        

REFERENCES        

APPENDIX        

1. INTRODUCTION

The objective of this research is to provide empirical evidence about the impact of return on assets and net profit margin on current assets, and to provide a reliable model. For the purpose of this research, data of 25 companies have been selected, belonging to Sugar Mills in the Food industry of Pakistan. The data has been collected from the publicly available financial data published on the website of State Bank of Pakistan. This research analyzes Current Ratio, Net Profit Margin and Return on Assets which are defined below:

1.1: Definition of Variables

1.1.1:        Current Ratio

        Current Ratio calculates the ability of a company to pay back its current liabilities with its current assets. A higher than 1 ratio means higher capability of paying back all of its current liabilities. A ratio lower than 1 means the company will not be able to pay off its obligations if required at the current point in time. Current ratio is calculated using the following formula:

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1.1.2:        Net Profit Margin

        Net Profit Margin is a profitability ratio that shows the percentage profitability of a company based on the amount of sales. Basically, it shows how much percentage of a company’s sales amount to its net profit. It is particularly useful in comparing the profit margins of several companies; a higher margin is favorable. Net Profit Margin is calculated with the following formula: