1.1 Background to the Study
With increase in global competition, survival of every business entity is a very pertinent question in business arena. In such a competitive environment, good performance is considered essential for business success. Thus, all over the world, the issue of firm performance has been a major focus by stakeholders as business organizations exist to make commensurate profit on their investment. It is this desire to make profit that prompts most investors to sacrifice their resources in anticipation of the profit. It can differentiate one company from the other. Therefore, a key measure of performance is profitability as business organizations are mostly concerned with profit and wealth maximization. Without profitability, a firm would find it difficult to attract investors and sustainability of business‟ operations in the long run would be at risk. Magaretha and Supartika (2016) posit that in a competitive marketplace, business owners must learn how to achieve a satisfactory level of profitability.
Profitability is a major aspect in current financial reporting by
corporate bodies. The profitability of a company shows the company‟s ability to
generate profit from utilization of its assets. Profit is realized when the
amount of revenue gained from a business activity exceeds the expenses and the
cost incurred to carry out the activity. Therefore, profitability measures the
performance of a company in terms of profit it realizes from assets utilized or
capital employed in business. Since most investors put their resources in
expectation of commensurate returns, the profit earned by a business is often
used to serve as a measure of success of that investment. Niresh and Velnampy
(2014) explain that profitability is the amount of money a firm can create with
whatever resources the firm has, implying that its inability to generate income
is a loss.
There is profit when income realized is greater than input cost, otherwise, it reflects poor performance.
Firm profitability and ways of improving it are extensively debated issues among managers and scholars (Pratheepan, 2014). This is born out of the fact that the primary objective of a business unit is to achieve maximum profit in addition to secondary objectives such as increase in sales, assets, and market share (Aparna, 2015). Profit is the indicator of efficiency of a business unit as it shows the level of efficiency with which a business unit makes use of funds or assets. The higher the profit, the more will be the efficiency of the business unit.
Some researchers such as Burja (2011), Saleem and Rehman (2011), Lobos and Szewczyk (2013), Asgari, Pour, Zedeh and Pahlavan (2015) contend that profit is affected by number of variables such as proportion of leverage, which affects the expense of the firm in terms of interest payment, firm size, liquidity, cash flows, corporate governance mechanisms such as board size, and audit committee meeting. It is the task of the firm‟s management to utilize right strategies from time to time taking into account of these factors that might exert considerable influence on the profit of the firm.
DETERMINANTS OF PROFITABILITY OF LISTED INDUSTRIAL GOODS FIRMS IN NIGERIA