Analysing the Impact of Financial Ratios on a Company’s Financial Performance

Abstract

This study was conducted to analyze the relationship between several chosen financial ratios and the financial performance of companies. Chosen financial indicators were Current Ratio, EPS, Firm size, Leverage Ratio and BV/MV Ratio. Financial performance of the companies was assessed through growth of the net profit margin. Ten companies which were registered in Colombo Stock Exchange which were categorized as diversified holdings were chosen as the sample. Financial data from 2013-2018 were considered for this study. A panel data analysis was used to determine the relationships between the independent variables and the dependent variables with given consideration to time series analysis and cross sectional analysis. According to the results of the study only current ratio, leverage and the firm size had significant relationships with the financial performance of the company. Current ratio and firm size positively impacted the company’s profitability, where as leverage impacted negatively. This study aims to enable informed decision making of the financial actors of an organization to enhance the profitability of the given organization.