Risk Analysis and its impact on return: A Study on Manufacturing Companies in Sri Lanka

Transcription

1 Basic Research Journal of Business Management and Accounts ISSN Vol. 1(5) pp December 2012 Available online http// Copyright 2012 Basic Research Journal Review Risk Analysis and its impact on return: A Study on Manufacturing Companies in Sri Lanka Puwanenthiren Premkanth University of Jaffna, Jaffna, Sri Lanka Premkanth85@yahoo.com Accepted 25 December, 2012 The necessity of well organized manufacturing sector is realized in every country s economical development. Sri Lanka's apparel manufacturing sector is highly developed and has evolved as an export oriented industry for over two decades. Currently around more companies in Sri Lanka produce a wide range of products including branded names -most of them catering to the international market. This study is aimed to analysis the Risk and Return of the portfolio management of the manufacturing sector. Portfolio management is the collection of different investments that make up on investor s total holding. Risk and Return of the portfolio management is very important aspect in the financial management. Analysis of portfolio management of manufacturing sector is very useful for customers and investors. Data were obtained from the CSE handbook and web sites. The efficiency of the portfolio management of manufacturing sector is analysis based on the portfolio management ratio analysis and correlation analysis. The detail of the analysis is explained in the study in detail. As a result of the analysis it could be seen that positive strong correlation between the risk and return. It leads a high risk on the investor s fund to earn high return of manufacturing sector. Keywords: Risk Management,Performance,Return INTRODUCTION Sri Lanka's apparel manufacturing sector is highly developed and has evolved as an export oriented industry for over two decades. Currently around more companies in Sri Lanka produce a wide range of products including branded names -most of them catering to the international market. Today clothing labelled "Made in Sri Lanka" can be found in major department stores in the USA, UK, Germany and Australia. This research is aimed to analysis the Risk and Return of manufacturing firms in Sri Lanka. Portfolio management is the collection of different investments that makeup on investor s total holding. Risk and Return of the portfolio management is very important aspect in the financial management. Portfolio management will involve the various investments such as many different types of financial assets. Risk involved in such investment and derived from them. Every manufacturing firm is dependent on its total advances portfolio has made manufacture vulnerable to risk in- non- performing advances, which is turn has led to liquidity and the long-term sustainability of such profits depends to large extent on identifying and managing the multitude of risk facing the manufacturing companies. Currently investments of manufacturing companies are considered as a very important aspect of the development of any country. It is an investment only the main profit of such books depend, in conformity to this principal analysis on portfolio management of manufacturing companies is launched. The government's industrial policy includes encouraging investment in industries in which it believes Sri Lanka has a comparative advantage. The Board of Investment (BOI) offers various incentives for investment in five industry segments: electronics and components for electronic assembling, industrial and machine tools (a new emphasis), ceramics and glassware, rubber-based industries, and light and heavy engineering. Another key policy element is deregulation, and in 2001 a committed on deregulation was formed to study regulatory impediments to Sri Lanka's industrial development. Statement of problem Research problem focused here is risk of the manufacturing

2 Premkanth. 79 sector affect the return and efficiency of portfolio management of manufacturing firms return will vary according to the risk return of manufacturing firms will determine the efficiency of portfolio management. This research aimed in whether risk of the manufacturing sector affects the return and efficiency of portfolio management. Objective of research The manufacturing system and Product play an important role in the daily life of the general public. Therefore it is important system in details. The followings are the objectives of this study. 1. The compare the desired relationship between investment risk and return. 2. Portfolio management is an important feature in the activities of manufacturing sector. The manage the various risk of the manufacturing companies. Significance of the study This survey will attempt to identify how the risk of the manufacturing sector investment attests on the return and efficiency of the portfolio management of the manufacturing sector. Finding of this research may help manufacturing sector to make suitable, manage the various risk and lead of efficient portfolio management. This result also helps to companies or individuals identify the best way of their investment to get maximum profit. Literature Review P. David, T. Yoshikawa, M.D.R Chari and A.A. Rashed argue the effect of foreign ownership on strategic investment in Japanese corporations by developing and testing two competing perspectives, they found that foreign ownership is move positively associated with strategic investments for form with growth opportunities than those lacking such opportunities. The relationship is robust across both types of strategic investments studies. R and D capital intensity. Porter(1992) explain the effect of combing banking and non bank. Financial activities on banking organizations risk and return. In general, securities activities, insurance agency, and insurance underwriting are all risker and more profitable than banking activities. They also have the potential to provide diversification benefits to banking organizations. While real estate operations are more profitable than banking. Real estate development may not be real estate activities in general and their diversification benefits for banking organization are less clear. The Economist (2002) examines risk, return and the prospects for portfolio diversification among major painting and financial markets over the period The art markets examined are contemporary masters, franch impressionists, Morden European, lath century European, old master, surrealists,20 th century English and modern us paintings. The financial markets comprise us treasury bills. Corporate and government bonds and small and large company stocks in common with the literature in this area, the study finds that the returns on paintings are much lowers and the risk much higher than conventional investment markets, move over, while low correlation of returns suggest that opportunities for portfolio diversification in art works also and in conjunction with equity markets exist, the construction of Markowitz mean-variance efficient portfolios indicates that no diversification gains are provide by art in financial assets portfolios. However diversification benefits in portfolios comprised solely of art works are possible, with contemporary masters, 19 th century European, old masters and 20 th century English paintings dominating the efficient frontier during the period in question. Zebras and Cabman ( 1984) presented a set of summary statistics of returns and risks for asset classes that may be used as benchmarks for establishing allocation levels, a subsequent article comments on how customized benchmarks may provide a more appropriate basis of comparison than generic indexes (McIntosh, 1997). Harein investigate the risk and return characteristics of risk arbitrage for a sample of 187 stock swap offers in the form of collars for the periods. Using cross sectional analysis, they find that initial arbitrage spread is significantly positively correlated with acquirer s stock volatility and the deal duration. using time series analysis, we identify a significant non-linear relationship in risk return profile for risk arbitrage portfolio: both strategy 1 (long the target for the fixed value collar offers; long the target and short the acquirer for the fixed ratio collar offers) and strategy 2.(delta hedging) produce returns that are strongly positively correlated with the market return in a severely declining market and are not significantly correlated with the market return in a flat or rising market. Sampling design Table 1 below indicates clearly the sample of this research. Manufacturing sector is producing products and services, in Sri Lanka. There are 32 companies are available but researcher selected the 12 companies for this study as sample. Data Collection Primary and secondary data will be used for the study.primary data collected form questionnaire and secondary

3 80. Basic Res. J. Bus. Manag. Acc. Table 1. Sampling design Country Type of sector No. of companies No of companies available selected Sri Lanka Manufacturing Figure 1. The following figure illustrates the conceptual model Table 2. Operationalization Concept Variable Indicator Measurement Risk Overall CAPM Equation Risk Risk = Risk free + Risk premium Rc =R f + (Rm - R f ) β Market risk Dividend cover Earning yield Earning per share Dividend per share Earning per share Market value Return Earning Earning per share ratio Price earning ratio Profit ROE ROCE Profit after tax and preference share dividend Number of equity shares(ordinary share) Market price per share Earning per share P A IT and preference share dividend*100 Equity share holder s fund Profit before interest and tax * 100 Capital employed data are collected from books, journal, magazines and annual report ect. Researchers are use to secondary data method. Collected data from secondary sources will be analysed. For this purpose, researchers use the following analysis method. 1. Ratio analysis 2. Risk analysis (CAPM Model) 3. Graphic analysis Conceptual model See figure 1 above Operationalization See table 2 above

4 Premkanth. 81 Table 3. Risk (X) Independent variable, Return (Y) Dependent variable Year Return Risk Table 4. Correlations **Correlation is significant at the 0.01 level Table 5. Coeficiente, a dependent variable: Return Model 1 (Constant) Risk Unstandardized a. Dependent Variable: Return Standardized B Std. Error Beta t Sig Hypotheses The following hypotheses are formulated for the purpose of this study. H 1 :- Manufacturing companies portfolio management is efficiency. H 2 :- High degree of risk lead to high degree of return. Correlation coefficient analysis In this study, which is undertaken to find out the relationship between the risk and return of manufacturing firms. Correlation analysis is carried out in order to find out the nature of relationship between the variable based on the value of correlation coefficient, Here, Table 3 and 4. According to the coefficient correlation, there is positive moderate relationship between risk and return during the So conclusion may be made, that there is positive relationship between the risk and return. Through this finding, manufacturing firms can derive the high return from high-risk involved investment. Coefficient of determination (R 2 ) A more useful indicator will be the coefficient of determination, which is defined at the squared value of Pearlman s moment correlation coefficient. The coefficient of determination of the Manufacturing firms during last 5 years as showing the following table Table 5. The coefficient of determination rp 2 is It means that 96.9% of variability of risk can be accounted. For by its liner strong relationship with return it follow that 4.1% of variability of risk is not explained by the return. By using the correlation analyzes it can be found that how the relationship is between the variables and but the nature of the relationship is between the variables. It is not a proper way to describe the relationship exactly between the variables by using the correlation analyzes. Therefore regression analyses are the most suitable way in order to find out the exact relationship between the variables.

5 82. Basic Res. J. Bus. Manag. Acc. Table 6. Coefficient Model 1 (Constant) Risk Unstandardized a. Dependent Variable: Return Standardized B Std. Error Beta t Sig Table 7. Null Hypothesis of the Manufacturing firms during the last 05 years ( ) on the basic of risk weighted Multiple R R Square Adjusted R Square Value of F Significance F Regression analysis Regression analysis made to find out the equation, which describes the relationship between the variable. From this analysis the dependent variable can be forecasted through the independent variable, regression line was Y= a+bx. Here the regression summary output is obtained through the statistical analysis. This output is given in the table 6. In this period, Coefficient of regression is 0.013, it indicates that for every year increase of the independent variable return, will increase by 0.013(Rs 000) that is Rs 13. On the basis of risk-weighted base, the coefficient of regression is It indicates that for every year increase of the dependent variable return will increase by that is Rs 1.3. Hence these analyses provide the hypothesis of high degree of risk lead to high degree of return.this fitness is shown by the rp 2 in the rp 2 summary output. This value rp 2 is 96.9% (based on risk weight) therefore only 96.9% of can be explained through this regression equation. That is the return affects the risk the risk only 96.9%. Rest of 4.1% denotes the other factors, which determines the return. However the rp2 subjective therefore f-test examine the fitness of regression equation. Null Hypothesis Here null hypothesis means no relationship presumes to risk and return. Now researcher can take the null hypothesis by the regression output. The following output show below. (On the basic of risk weighted) Table7. Regression equation could be accepted at 5% of significant level through the probability related to the value of F. The null hypothesis can be rejected because of the probability of significance level is less than 0.05 is Here, Null hypothesis is rejected. And the alternative hypothesis is accepted. Therefore the regression formula is accepted. Thus regression formula helps to explain the change of return by the effect of risk. Finding of the research. The following are identified based on the analysis of the Risk and return of the of the manufacturing firms. When analysis of the relationship between the risk and return, Return was calculated through ratio analysis and Risk was estimated to use CAPM model. The correlations between risk and return have a positive strong relation (0.9744). Therefore, when risk of investment increase, the return from the investment also increase. As a same way when risk decreases, the income also decreases. Finally the relationship between manufacturing sector risk and return could be conformed by its regression analysis. During research since null hypothesis rejected other hypothesis has been recognized and it is able to reveal the fact that there is direct liner relationship between risk and return. Hypotheses Testing It is proper to prove the hypotheses, which are put forward in this research compared to the findings of the research, got from the data. In this view. H 1- Manufacturing firms, portfolio management is efficiency This is rejected on basis of findings got the ratio analysis. Because researcher can observe the trend of ROCE, ROE and (ROCE/ ROE) ratio for past 5 year of the manufacturing firms is not sufficient level. Hence portfolio management of the manufacturing firms is

6 Premkanth. 83 inefficiency. H 2- High degree of risk lead to high degree of return This is accepted on the basis of finding got from the correlation analysis and regression analysis. According to this analysis, this hypothesis is accepted. Hence this research, the positive linear relationship between risk and return could be proved. Therefore when risk of investment increases, the return from investment also increase CONCLUSION A Risk and return of the portfolio management is the collection of different investments that make up investor s total holding. A portfolio management might be the investment in stocks and shares of investors or investment in capital projects of company finance is very important to every organization to play their activities successfully. In Sri Lanka, Manufacturing companies are play a very important role in economy of country. Many customers and investors believe these companies activities. Therefore Firms must manage their portfolio management in efficient manner. An investor s total holding diversified in the beneficial resources to reduce the risk of the manufacturing firms. The diversification of portfolio of investment is an important concept in financial management. In this survey, Risk and Return of the manufacturing companies is analysis. Capital of manufacturing firms is said as inefficient. The following researcher identified as main causes for the inefficient. Companies were not earned return according capital. Many companies were not achieved return according faced the risk. REFERENCES Ahthur WC, Michael ls, Peter CY (1995). Risk and Return and Insurance 7 th edition, (Mc Graw Hill Inc) Chales PJ (1994). Investment analysis Management 4 th edition, (JOHN) Wiley and sons, Inc Harry M (1950) Modern portfolio management page no Jack CF (1991). Investment analysis Management 5 edition, (Mc Graw Hill Inc) Jack CF, Stephen HA (1979). Portfolio Analysis 2 th edition,(pretice- Hall,Inc) Lawrence DS, Charles WH (1991). Intrudction to Fiancial Management 6 th edition, (New yorl:mc Graw Hill Inc)