Academic journal article Business and Economics Research Journal

Evaluating the Effects of Various Financial Ratios on Company Financial Performance: Application in Borsa Istanbul

Academic journal article Business and Economics Research Journal

Evaluating the Effects of Various Financial Ratios on Company Financial Performance: Application in Borsa Istanbul

Article excerpt

1. Introduction

Companies need to make various forward-looking financial decisions in order to achieve their main goals. There is a direct relationship between decisions to be made by a company and its financial performance. Companies need to make decisions to achieve an optimum financial performance in order to maintain their activities, to establish a competitive advantage and to reach their goals. Various financial ratios that come to the forefront in decisions made by companies also have an impact on financial performance of the companies. Using different financial ratios, companies are able to determine the extent of successes or failures of their activities.

Companies' ability to continue their operations, growth, and compete with competitors is associated with business performance. And, identifying the properties in question in a healthy manner is only possible by measuring and analyzing the financial performances of companies. Various analyzes are performed to evaluate the company performance. Especially in the course of financial planning of companies, the values in the current period or expectations for the period are evaluated by taking the current period of the companies into consideration. Therefore, measuring and analyzing the financial performance is one of the important responsibilities of company managers in companies (Akgüç, 1995:163-201). At this point, the company managers do interest in the company's current situation and financial success in the previous periods, and seek to answer the question of what the future performance of the company would be (Acar, 2003:36).

Financial performance reflects company profitability in the purest sense. In particular, evaluating the success of the business, and analyzing liquidity, leverage, operations and performance relationships are important to evaluate the current status and future success of companies (Green, 1978:39-45).

In the study to identify the impact of the several financial indicators on the company performance is intended. For this purpose, the study consists of five sections. The aim of the study is explained in the first section. The literatures that investigate the relationship between the company performance and several financial indicators are given in the second section. In the third section, the methodology and sample are described. In the fourth section the findings according to the analyzes are discussed. The results are explained in the last section.

2. Literature Review

It is observed that the competition among enterprises has been intensified together with globalization. Consequently, various indicators are taken into consideration when evaluating companies. After determining the financial performance of companies, identifying the parameters affecting the financial performance is also important for all financial actors in the market. Particularly the potential investors evaluate the financial performance of businesses and try to make successful investment decisions. Therefore, parameters affecting the financial performance of companies are particularly important (Aydeniz, 2009:264). These parameters can either be the indicators originated by the company itself, or can be the macro-economic indicators that affect the company.

Gardiner (1995:32) states that financial ratios are important guiding indicators for the actors in financial markets. The relationship between financial performance of companies and various indicators are discussed in numerous studies. Some of these studies address the variables that affect financial performance, whereas some others address the relationship between the causes of failure and financial indicators.

Hall and Weiss (1967:319-331) have found a significant positive relationship between the profitability -among the financial performance indicators- and size of the business in a study conducted with 400 companies chosen from Fortune-500 companies between the years 1956 and 1962. …

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