Impact of Financial Ratios on Financial Performance Evidence from Listed Manufacturing Companies in Colombo Stock Exchange

Abstract

Financial ratios can be considered a regularly used measure of assessing the financial performance of entities. In a volatile business environment, financial ratios play a vital role in assessing the financial performance of several industries. Therefore, it is important to analyze the effect, it will have on the financial performance of manufacturing sector companies which are listed on the Colombo Stock Exchange. The main purpose of this study is to investigate how the financial ratios will impact the financial performance by considering listed manufacturing companies in CSE by taking various ratios. In order to carry out this quantitative research, the data is collected from published annual reports of 30 manufacturing companies for a period of 6 years (2015-2020) which comprises both time series and cross- sectional data together. The data is analyzed using E views software. Current ratio, Debt to Equity ratio, Earnings per share ratio and Total Assets Turnover ratio are the independent variables while the Firm size is the control variable. The dependent variable is the Net profit margin. According to the results of this study, only Debt to equity ratio, Earnings per share ratio, and Total assets turnover ratio had a significant impact on financial performance. Debt to equity ratio and Total assets turnover ratio negatively impacted the net profit margin, while Earnings per share impacted positively. With these major findings, this research consists of some limitations such as depending only on manufacturing companies, and those are solely dependent on annual report data. As recommendations for future studies, this study will provide an insight for future investors to make informed decisions and the findings of this study will enable future researchers to get an idea for further improvements.