Selective Literature Review
To measure financial performance financial ratios used
in the study. The financial
ratios are used to provide the user with different types of information
and help the user to see how a company has performed before. Financial
ratios can also be used to predictfuture performance (Brealey, Myers and
Allen, 2017). An advantage with financialratios is according to Lan (2012)
that it is possible to link different financialstatementstogether. An
example is comparing Net income (from the Income statement) and Totalassets
(from the Balance sheet) to get the company’s Return on Assets. According
to Jewell and Mankin (2011), the use of financial ratios is to gather
information aboutfinancial performance that already happened. The use
of only these numbers is called normative use. This information could
be used to compare in an objective way thecompany’s financial performance
to other companies in the same industry or compare the company’s
financial performance with the whole economy.The research made by Tsuruta
(2015) finds that small companies in Japan with high financial leverage
have better financial performance than companies with low financial leverage.
Both when measured as Return on Equity (ROE) or Sales growth. This is
in line with the trade-off theory, that financial leverage does have an
impact on the company’s financial performance (Brealey, Myers and
Allen, 2017). The authors explain variation in this relation mostly because
of the opportunities of investments that are possible
to do with more capital available to the company. This reasoning is instead
supported by the pecking order theory’s claim that the chosen financing
source used by the company depends on the financial performance. Tsuruta
(2015) also claim that it is important to be aware of where the debt comes
from, and how the bank as the lender can bring
knowledge and distinctive management to the company. The research shows
that companies with financial leverage can perform better because of the
requirements from banks. When a bank provide a company with a loan, the
bank expect to get the money
back, and has therefore an interest in helping the company to run the
business in an efficient way with a focused management team. In the research
(Tsuruta, 2015), it is unclear if the relationship between financial leverage
and a company’s financial performance is direct or if the financial
performance depends more on the contribution
from the bank, like monitoring, and impose different covenants to keep
the company solvent.
R of E Please click to enlarge image
R Square
The value 0.9999 shows a very high level of fit. 99.99% of the variation in the dependent variable RoE is explained by the independent variables EBITDA, Long Term Debt and Liquidity Ratio.
Significance Levels F and P statistics
Significance F indicates the statistical significance of the multiple regression findings. Significance F level at 0.009651 is less than 0.05, therefore these results are statistically significant. We look for a similar situation regarding P values. EBITDA, Long Term Debt and Liquidity Ratio are all less than 0.05, these results are statistically significant.
R Square The value 0.9999 shows a very high level of fit,slightly
less than RoE. 99.99% of the variation in the dependent variable RoE is
explained by the independent variables EBITDA, Long Term Debt and Liquidity
Ratio.
Significance Levels F and P statistics Significance F indicates the statistical
significance of the multiple regression findings. Significance F level
at 0.010391 is less than 0.05,although nearer then RoE. Therefore these
results are statistically significant. We look for a similar situation
regarding P values. EBITDA, Long Term Debt and Liquidity Ratio around
0.03 are all less than 0.05, these results are statistically significant.
The regression line and coefficients The equation of the regression line
is RoA = EBITDA + Lond Term Debt + Liquidity Ratio. when we insert our
calculated coefficients this becomes RoA = EBITDA * 0.000624 - 0.6386
* Long Term Debt + Liquidity Ratio * 8.290128. This tells us that there
is a small positive relationship between EBITDA and RoA, a negative relationship
between RoA and Long Term Debt (for each single unit increase in Long
Term Debt RoA will decrease by 0.6386), and a larger positive relationship
between RoA and Liquidity Ratio.
Sources
Schlumberger Balance Sheets
http://financials.morningstar.com/
Further Analysis to follow
penninescripts