The determinants of profitability of SMEs in Lancashire : An empiric investigation

Abstract

This dissertation analyzes the potential determinants of profitability for an observed sample of SMEs in Lancashire. The goal is to identify which factors are significant towards enhancing a company’s profitability while providing local businesses with an empirically verifiable study that they can consult to address their performance. The investigation has been carried out with a linear regression model that aims to measure the impact of a series of variables on a particular profitability ratio: the return on assets. The pertinent data was retrieved from FAME database and the statistical model was performed with Gretl software. Overall, variables relating to working capital, liquidity and leverage were the ones that had the most compelling effect on profitability. The variables to assess these factors which appeared to be significant were the long term leverage ratio, current asset turnover, liquidity ratio and solvency ratio. In general, leverage and solvency had a positive effect on profitability and excessive investments on working capital and liquid assets had a negative effect. Since the basic hypotheses of the model were satisfied and it was proved to be jointly explanatory, we can consider these results as valid and robust. Finally, a set of limitations regarding the sample and two of the variables were identified. These, as well as a series of recommendations made in the end, should be considered by future researchers in order to expand the scope and suitableness of the analysis.