CHAPTER ONE
INTRODUCTION
1.1 Background to the study
Performance of a firm or an industry is very important as it shows the results achieved over a
time period. Firm performance is dependent upon micro economic variables and macro
economic variables. Micro-economic variables are the internal firm specific variables.
Management is able to control these variables. Macro-economic variables are the external
variable which the management is not able to control.
Financial performance is a key concept in the economic environment, influenced by rapid
changes, fierce competition and globalization. Firm financial performance in broader sense
refers to the degree to which financial objective being or has been accomplished and is an
important aspect of finance and firm‟s determinant. It is the process of measuring the result of
a firm‟s policies and operations in monetary terms. Financial performance consist of a firms‟
profitability, that is, how large the revenues exceed the costs incurred in generating them.
Financial performance can be defined as a measurement of the results of a firm‟s polices and
operations in monetary terms. In assessing the overall financial condition of a company, the
income statement and the statement of financial position are important reports, as the income
statement captures the company’s operating performance and the statement of financial
position shows its net worth.
Profit is indispensable for the existence of business. It is the driving force for the business
enterprises. The perpetual existence of the firms depends on the profit earning capacity of the
firm, which is considered to be the foremost factor in influencing the reputation of the firm.
Profit is an absolute term, whereas, the profitability is a relative concept. Profit refers to the
total income earned by the enterprise during the specified period of time, while profitability
refers to the operating efficiency of the enterprise. Profitability delivers the evidence about
the company‟s ability to spawn earnings. An enhancement in profitability sparks to an
increase in stock price, thereby registering capital gains. Financial gurus consider profitability
as a measure of efficiency. Profitability reveals the snapshot measure of corporate success
and thus serves as a prime metric of economic performance.
A firm‟s financial performance and which factors have an effect on it is a recurring topic in
academic literature. Many aspects of a firm have been linked to financial performance in
order to determine the extent of influence these have on it. It is used to develop an
understanding of what factors can determine the financial performance of a firm and to what
extent. However, not one common collection of determinants has yet been established
(Nikolaus, 2015).There are on the one hand studies that focus on the effect of corporate
governance aspects on performance such as: Hu‟s and Izumida‟s (2008) causal analysis of
ownership concentration and corporate performance. Other studies focused on capital
structure and, more precisely, on leverage and its relationship with performance. An example
of such a study is one by Vithessonthi and Tongurai (2015), who compare the effect of
leverage on performance in domestically-oriented and internationally-oriented firms.In order
to add to the few studies that combine determinants of different natures and also take less
developed countries into account this study aims to investigate the determining factors of
financial performance of listed Consumer goods firms in Nigeria.
The Consumer Goods sector which is one of the largest industries worldwide is being faced
with numerous challenges. The Nigerian manufacturing sector which is a subsector under the
Consumer Goods industry has performed dismally in 2016 as manufacturers faced several
challenges which affected them negatively (Agency report, 2017). Operators said that the
sector was faced with myriads of challenges ranging from the scarcity of foreign exchange,
infrastructure deficit, high banking charges and lack of raw materials. About 272 firms were
shut, while some reduce their production, staff strength and remuneration of workers (Agency
report, 2017).
The survival of the manufacturing sector was threatened by the fact that more than half of the
firms which survived the massive shut down were classified as ailing. The entire business
terrain was adversely affected by the poor power supply, bad roads, high interest rate and
high cost of energy which contributed to high cost of production (Agency report, 2017). This
has posed serious adverse effect on the liquidity of the firms and the inflation rate of the
economy as a whole. Another major challenge was the intense scarcity of foreign exchange
which distorted the ability of manufacturers to import raw materials for production thereby
adversely affecting the liquidity of the firms.
Similarly, one of the manufacturers operators lamented on the foreign exchange rate loss of
about N500billion reflected in their account which led to factory closure, unemployment
(which affected the GDP of the economy) and loss of investment(which also affected the size
of the investment contributed in the company, thereby distorting firm size). According to
him, the exchange rate losses required additional working capital to shore up cash differences
between N320 and N197 (Agency report, 2017). The Managing Director of May and Baker,
said the inability of manufacturers to access foreign exchange through the interbank affected
industrial production and contributed to inflation.
Erisco Foods Limited, an indigenous tomato paste manufacturer, relocated its 150 billion
dollars tomato paste processing plant to china due to the same problem. Erisco Foods has a
production capacity of 450,000 metric tons of tomato paste and had 22 brands with over
2,000 workers in Nigeria (Agency report, 2017).
The financial performance of firms could be affected by both internal and external factors.
The internal factors are those management controllable factors which account for the inter
firm differences in profitability. On the other hand, external factors are uncontrollable factors
which affect firms decision and which management have no control over. However, factors
such as growth in money supply, interest rate, inflation rate and gross domestic product are
macroeconomic or market-specific factors which are out of control of management.
In line with the above explanation, the study therefore combined three firm specific variables
(liquidity, leverage and firm size) and two macroeconomic variables (GDP growth rate and
inflation rate) against the financial performance of consumer goods firms in Nigeria. The
choice of these five variables was based on their empirical relationship with the dependent
variable, also, this variables kept reoccurring in the literatures as viable determinants of
financial performance as previous researchers likeDuraj and Moci (2015), Mirza and Javaed
(2013) andOngor and Kusa (2013)among others all made use of at least one of these variables
and their findings proved these variables to be significant determinants of firm‟s financial
performance.
The Consumer Goods sector in Nigeria has significant scope to expand. Poverty levels are
still quite high, with food and other necessities dominating consumer budgets. For this
reason, the food sub-sector of Consumer Goods has a very large market to cater for, while
penetration rates in the other categories still have significant room to expand. In this study,
the key determinants (liquidity, leverage, firm size, GDP growth and inflation) of the
financial performance of the Consumer Goods sector are analysed.
1.2 Statement of the problem
The Consumer Goods sector is seen as one of the fastest growing sectors in the country with
its key drivers as large market size, youthful population and urbanization. The consumer
goods sector which is one of the largest industries worldwide is being faced with numerous
challenges. This sector has performed poorly in 2016 as manufacturers faced several
challenges which affected them negatively (Agency report, 2017).Operators said that the
sector was faced with multiple challenges ranging from the scarcity of foreign exchange,
infrastructure deficit, high banking charges and lack of raw materials which led to the
shutdown of about 272, while some reduce their production, staff strength and remuneration
of workers (Agency report, 2017).
The survival of the manufacturing sector was threatened by the fact that more than half of the
firms which survived the massive shutdown were classified as incapacitated. The entire
business terrain was adversely affected by the poor power supply, bad roads, high interest
rate and high cost of energy which contributed to high cost of production (Agency report,
2017). This has posed serious adverse effect on the liquidity of the firms and the inflation rate
of the economy as a whole. Another major challenge was the intense scarcity of foreign
exchange which distorted the ability of manufacturers to import raw materials for production
thereby adversely affecting the liquidity of the firms.
Having discussed some of the practical issues affecting this sector, there are some pertinent
theoretical issues ranging from literature gaps, variable measurement gaps as well as domain
gaps which serves as a premise for conducting this research. There has been inconclusive
literature and continuous debate on which variable constitute an appropriate determinants of
financial performance of firms (Mirza and Javed, 2013). There is wider gap specifically in the
case of growing economies like Nigeria, because most of the research done is based on data
gotten from developed economies (Duraj and Moci, 2015; Vintilă andNenu; Xu
andBanchuenvijit, 2015 2015) among others.The purpose of this study is to empirically
investigate the effect of Liquidity, Leverage, Firm size, GDP growth and Inflation rate among
other determinants on the financial performance of consumer goods firms in Nigeria.
The choice of these five variables was based on the prevailing problems faced by the
consumer goods sector especially the manufacturing subsector which has been discussed
above. It was also as a result oftheir empirical relationship with the dependent variable, as
previous researchers likeDuraj and Moci (2015), Mirza and Javaed (2013) andOngor and
Kusa (2013)among others all made use of at least one of these variables and their findings
proved these variables to be significant determinants of financial performance, even though
they also had mixed findings as regards the direction of their significant level. However, to
the best of the researcher‟s knowledge, none of these variables have been used in determining
the financial performance of consumer goods firms in Nigeria.
Very fewstudies conducted in relation to firm performances have focused on both internal
and external factors that affect the overall performances of firms (Chantapong, 2005;Olweny
and Shipho, 2011). However, this study intends to consolidate and enrich the empirical
literatures with focus on some of the firm specific factors and macroeconomic factors that
affect firm‟s financial performance in relation to the Consumer Goods industry in Nigeria. To
the best of our knowledge, no recent similar study in Nigeria has been conducted in this
sector. The reason of cause may not be far from the fact that the sector has been recently
restructured as the likes of the food and beverages industry has been merged with other house
hold and personal care products to form the consumer goods industry.
Most literatures focus on factors influencing the performance of banks (Osuka and Richard,
2013; Ayanda, Christopher and Mudashiru, 2013) and insurance companies (Malik, 2011;
Charumathi, 2012; and Wanjugu, 2014). Similarly, the outcome of the studies conducted in
developed and some developing countries may not be applicable to Consumer Goods firms in
Nigeria simply because the environment in which these firms operate differs in terms of
supervision, regulation and operation. In addition, variables that were used in other studies,
especially from developed market may not be consistent with the system of operation in the
Nigeria Consumer Goods industry. To this end, the relationship between firm determinants
and financial performance of Consumer Goods firms in Nigeria calls for an empirical
investigation. Therefore, mere extension of the findings of studies in other countries with
their different conditions to Nigeria is not possible.
Profitability is a vital concern to all groups who have a direct or indirect interest in the firm.
In spite of these vital roles that profit plays in the going concern of firms, the profitability
status of most Consumer Goods firms operating in Nigeria in relation to liquidity, leverage,
firm size GDP rate and inflation rate of the firms have not attracted much attention of
researchers in the area of finance. This may be attributed to lack of thorough evaluation of
factors (internal and external) that play critical role in profit realization of Consumer Goods
firms in Nigeria. Therefore, it is of interest to know the extent to which these factors
(liquidity, leverage, GDP rate and inflation rate) affect the financial performance of listed
Consumer Goods firms in Nigeria. The firm specific and macroeconomic factors of the
Consumer Goods firms are to be investigated to provide valuable information in regards to
their effects on performance.
1.3 Research questions
The study therefore sought to address the following questions:
- Does liquidity significantly affect the financial performance of listed Consumer
Goods firms in Nigeria? - Does leverage significantly affect the financial performance of listed Consumer Goods
firms in Nigeria? - Does firm size significantly affect the financial performance of listed Consumer Goods
firms in Nigeria - Does GDP growth ratesignificantly affect the financial performance of listed
Consumer Goods firms in Nigeria? - Does inflation rate significantly affect the financial performance of listed Consumer
Goods firms in Nigeria?