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Return on Asset and Return on Equity Effects of Net Operating Cycle: Jordanian Study

Authors:
  • Business Faculty Applied Science Private University

Abstract

One indicator of short-term liquidity uses the acti vity ratios as a liquidity measure. The net operati ng cycle of a firm is the sum of the number of days it takes to s ell inventory and the number of days until the resu lting receivables are converted to cash subtracting the n umber of days of payables. The current study aims to inspect the effect of the net operating cycle on the profitability of Jordan ian services’ sector represented by return on asset (ROA) and ret urn on equity (ROE) during the period from 2009 unt il 2013. The results of the study shows that there is no sig nificant effect of net operating cycle on health ca re and hotels sectors’ return on asset (ROA), there is no signifi cant effect of net operating cycle on health care s ectors’ return on asset (ROA) and there is no significant effect o f net operating cycle on hotels sectors’ return on asset (ROA). Also the results indicates that there is no signifi cant effect of net operating cycle on health care a nd hotels sectors’ return on equity (ROE), there is no signif icant effect of net operating cycle on health care sectors’ return on equity (ROE) and there is no significant effect of net operating cycle on hotels sectors’ return on equity (ROE).
Research Journal of Finance and Accounting www.iiste.org
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Return on Asset and Return on Equity Effects of Net Operating
Cycle: Jordanian Study
Lina Warrad
Associate Professor, Accounting Department, Faculty of Economic and Administrative Sciences,
Applied Science University, Jordan-Amman (11931), P.O. Box (166)
Abstract
One indicator of short-term liquidity uses the activity ratios as a liquidity measure. The net operating cycle of a
firm is the sum of the number of days it takes to sell inventory and the number of days until the resulting
receivables are converted to cash subtracting the number of days of payables.
The current study aims to inspect the effect of the net operating cycle on the profitability of Jordanian services’
sector represented by return on asset (ROA) and return on equity (ROE) during the period from 2009 until 2013.
The results of the study shows that there is no significant effect of net operating cycle on health care and hotels
sectors’ return on asset (ROA), there is no significant effect of net operating cycle on health care sectors’ return
on asset (ROA) and there is no significant effect of net operating cycle on hotels sectors’ return on asset (ROA).
Also the results indicates that there is no significant effect of net operating cycle on health care and hotels
sectors’ return on equity (ROE), there is no significant effect of net operating cycle on health care sectors’ return
on equity (ROE) and there is no significant effect of net operating cycle on hotels sectors’ return on equity
(ROE).
Keywords: Net Operating Cycle, Return on Asset (ROA), Return on Equity (ROE), Amman Stock Exchange
(ASE).
1. Introduction
Financial statements report both firms’ position at a point of time and operations over some past period.
However, the real value of financial statements lies in the fact that they can be used to help predict future
earnings, dividends, and free cash flow. (Brigham, F., et al. 2005)
Activity analysis serves to evaluate both the quality and liquidity of financial statement elements (both
assets and liabilities) as part of performing credit analysis. Examination of these components is frequently used
synonymously with measurements of efficiency. (Financial Accounting & Reporting, 2002)
The dimension of liquidity refers to speed with which assets are converted into cash or require
payment. The liquidity is often measured in terms of turnover, the number of times either assets are collected or
sold or liabilities are paid. (Financial Accounting & Reporting, 2002)
Equity investors are concerned with firm’s ability to generate, sustain, and increase profits.
Profitability can be measured by return on investment (ROI), relates profits to the investment required to
generate them such as: return on asset (ROA) and return on equity (ROE).
The concept of which the firm profitability is affected by the changes in net operating cycle in recent
years has obtained much attention among the researchers around the world. The studies have been focused on a
linear relationship between net operating cycle and different performance indicators in the understudy firms, and
mostly suggested a shorter net operating cycle for increase of profitability in these firms. (Valahzaghard, M., et
al. 2014)
The current study will try to investigate the process through which the firm performance is influenced
by the changes in net operating cycle mentioned by (Valahzaghard, M., et al. 2014), by applying the study on the
profitability of Jordanian services’ sector represented by return on asset (ROA) and return on equity (ROE)
during the period from 2009 until 2013.
2. Previous Studies
The relationship of a tool in working capital management known as a net operating cycle, , with profitability,
liquidity and debt structure was represented by Tulay, Y.,et al. (2002) study that covered the period from 1995
to 2000 and applied on 167 firms whose stocks are listed on the Istanbul Stock Exchange (ISE). The four
variables were examined comparatively on the basis of period, industry and firm size. It was examined that the
relationships of these variables and the impact of the net operating cycle, liquidity and debt structure on the
companies’ profitability y. The results showed that net operating cycle is positively related to liquidity ratios and
negatively related to return on asset (ROA) and return on equity (ROE). High leverage ratio affected adversely
the liquidity and profitability of the company. There is no statistically significant relationship between the net
operating cycle and the leverage ratio. There was no significant difference in the net operating cycle on the basis
of period, but it differs on the basis of sector and firm size.
The relationship between the length of the net operating cycle and the profitability and size of the
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firms, beside set industry benchmarks for net operating cycle of merchandising and manufacturing companies
was investigated by Uyar, Ali (2009) study which the data were collected from the financial statements of the
corporations listed on the Istanbul Stock Exchange (ISE) for the year 2007. The researcher used ANOVA and
Pearson correlation analyses for empirical investigation. The results showed that the retail/wholesale industry
had the lowest mean value of the net operating cycle, and the textile industry had highest mean value of the net
operating cycle. Also the findings showed that there is a significant negative correlation between the net
operating cycle and the firm size and the profitability. The results were not generalized to non-listed companies,
and the sample consists of merchandising and manufacturing companies. Therefore, the results were valid for
those industries. The presented industry benchmarks to the firms to evaluate their net operating cycle
performance.
The impact of the single components of net operating cycle, specifically number of days of sales
outstanding, number of days of inventory on hand and number of days of payables on firm profitability which
measured by operating income and stock market return was represented by Karadagli, Ece (2013) study by using
pooled panel analysis for the period from 2001 to 2010. Moreover, the study investigated the possible effects of
group affiliation on the impact of net operating cycle and its components on firm profitability. The results
revealed that shortening of net operating cycle and its single three components improve firm profitability in
terms of both accounting and market measures of performance. The results also showed that both the affiliated
and the unaffiliated firms can enhance firm performance in terms of both performance measures through
shortening their net operating cycles, this effect was stronger for unaffiliated firms and hence working capital
management seems to be more important for them.
The effect of net operating cycle on Swedish small and medium-sized enterprises’ (SMEs)
performance was presented by Yazdan, F., et al. (2014) study which applied over the period from 2008 to 2011.
The study analyzed cross-sectional panel data covering 13,797 SMEs by used a seemingly unrelated regression
(SUR) model. It revealed that net operating cycle significantly affected profitability. Also, the firm performance
significantly affected by the firm-level control variables size, age, and industry affiliation.
3. Hypotheses
In order to study the effect of the net operating cycle on the return on asset (ROA) and return on equity (ROE) of
Jordanian services’ sector for the period from 2009 to 2013, the researcher will test the following hypotheses:
First Main Hypothesis
H
01
: There is no significant effect of net operating cycle on health care and hotels sectors’ return on asset
(ROA).
Sub Hypothesis
H
11
: There is no significant effect of net operating cycle on health care sectors’ return on asset (ROA).
H
12
: There is no significant effect of net operating cycle on hotels sectors’ return on asset (ROA).
Second Main Hypothesis
H
02
: There is no significant effect of net operating cycle on health care and hotels sectors’ return on equity
(ROE).
Sub Hypothesis
H
12
: There is no significant effect of net operating cycle on health care sectors’ return on equity (ROE).
H
22
: There is no significant effect of net operating cycle on hotels sectors’ return on equity (ROE).
4.
Research Methodology
This study aims to investigate the impact of net operating cycle on return on asset (ROA) and return on equity
(ROE). This is as an empirical study in health care sector and hotels sector based on Jordanian data. The study
population consisted of all health care firms’ and hotels listed at Amman Stock Exchange (ASE) during the
period (2009-2013). In addition, the required financial data for the study factors / variables will be gathered from
the database of ASE available online during the study period. The database of ASE is based on the annual firm
reports of the studied firms. Thereby, source of data is database of ASE. Besides; quantitative strategy has been
adopted for this study. This is because the study wants to explore the impact of net operating cycle on ROA and
ROE. Also, the study wants to explore the relation and the strength of the relation amongst the factors / variables
discussed in this study. Thus, the study is based on use the Statistical Package for Social Sciences (SPSS v. 20),
were the study has been used Correlation and Simple Regression analysis to test the hypotheses.
4.1. The Research Sample
The study investigates financial reports for 6 Jordanian services’ sectors listed on the Amman Stock Exchange
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(ASE) for the period from 2009 to 2013
4.2. Variables of the Study
4.2.1. Dependent Variables- Return on Asset (ROA), Return on Equity (ROE)
Return on Asset (ROA): Measure the profitability relative to funds invested in the company by common
stockholders, preferred stockholders, and suppliers of debt financing. (Financial Reporting and Analysis, 2012)
It can be calculated as follow:
Return on Asset (ROA) = Net Income (Financial Reporting and Analysis, 2012) (1)
Average Total Assets
Return on Equity (ROE): Measures the return per owner dollar invested. (Financial Decision Making, 2015)
It can be calculated as follow:
Return on Equity (ROA) = Net Income (Financial Reporting and Analysis, 2012) (2)
Average Total Equity
The difference in the two denominators is total liabilities. ROE will therefore always be greater than ROA.
(Financial Decision Making, 2015)
4.2.2. Independent variable- Net Operating Cycle
Net Operating Cycle: describes the flow of cash out of a business and back into it again as a result of normal
trading operations.
Cash goes out to pay for supplies, wages and salaries and other expenses, although payments can be delayed by
taking some credit. A business might hold inventory for a while and then sell it. Cash will come back into the
business from the sales, although customers might delay payment by themselves taking some credit. (ACCA,
2010)
It can be calculated as follow:
Net Operating Cycle = Number of days of inventory on hand (DOH) + Number of days of sales
outstanding (DSO) –number of days of payables. (3)
4.3. Data Analysis and Results
In order to achieve the study objectives, the study checked some of the pre-requisites of a certain key statistical
application. The study data is checked for Normality by Normality test (Shapiro-Wilk test), and the result for this
test was been the study data is normally distributed.
4.3.1. Descriptive Data Analysis
The current study has been used measures of central tendency through mean, standard deviation, the lowest and
highest values. This is in order to describe and explain the nature of data and characteristics of data of this study.
The study used these measures due to the commonly used in previous studies. The following sections explain the
result of these measures according to variables of this study respectively:
- Net Operating Cycle:
The following table shows the result of measures of central tendency (mean, standard deviation, the
lowest and highest value).
Table (1), Net Operating Cycle
Sector Net Operating Cycle
2009 2010 2011 2012 2013
- Heath Care Sector 99.80 99.31 130.32 142.99 67.65
Minimum 67.65
Maximum 142.99
Mean 108.014
Std. Deviation 29.55
- Hotels Sector -12.89 -9.06 -4.38 -20.02 -15.98
Minimum -20.02
Maximum -4.38
Mean -12.466
Std. Deviation 6.05
Table 1 shown the results of the descriptive data analysis for the study period (2009 2013), it can be
concluded on the basis of mean values that the maximum mean for Net Operating Cycle during the study period
was (108.014) for Heath Care Sector, and the minimum mean for Net Operating Cycle during the study period
was (-12.466), and this is for Hotels Sector. Besides, the standard deviation was (29.55; 6.05respectively). Also,
the lowest and highest values in Heath Care Sector data were 67.65; 142.99respectively). The lowest and highest
values in for Hotels Sector data were (-20.02; -4.38respectively). The reason for this conclusion is the fact that
the global financial crisis (August, 2008) may be affected the Net Operating Cycle during the study period.
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- Return On Asset (ROA):
This study has discussed the return on asset (ROA) variable in Heath Care Sector and Hotels Sector,
case of Jordan. The following table shows the result of measures of central tendency (mean, standard deviation,
the lowest and highest value) for health care and hotels sectors’ return on asset (ROA) during the study period
(2009-2013).
Table (2), Return on Asset (ROA)
Sector ROA
2009 2010 2011 2012 2013
- Heath Care Sector -1.43 3.04 2.08 6.13 3.86
Minimum -1.43
Maximum 6.13
Mean 2.736
Std. Deviation 2.768
- Hotels Sector 3.60 2.94 1.44 1.41 2.07
Minimum 1.41
Maximum 3.60
Mean 2.292
Std. Deviation 0.959
The above table shown that the lowest values of health care and hotels sectors’ return on asset (ROA)
were (-1.43; 1.41respectively) during the study period (2009-2013). Also, the highest values of it were (6.13;
3.60) during the study period for health care sector and hotels sector respectively. The mean for health care
sectors’ ROA during the study period was (2.736), and the mean for hotels sectors’ ROA also was (2.292), with
the standard deviation (2.768; 0.959 respectively).
- Return On Equity (ROE):
The following table shows the result of measures of central tendency (mean, standard deviation, the lowest and
highest value) for study sectors’ return on equity (ROE) during the study period.
Table (3), Return on Equity (ROE)
Sector ROE
2009 2010 2011 2012 2013
- Heath Care Sector -3.27 2.68 1.76 8.46 4.10
Minimum -3.27
Maximum 8.46
Mean 2.746
Std. Deviation 4.232
- Hotels Sector 3.82 2.78 0.33 -0.90 0.24
Minimum -0.90
Maximum 3.82
Mean 1.254
Std. Deviation 1.964
The above table shown that the lowest values of health care sectors’ return on equity (ROE) was (-3.27), and the
lowest values of hotels sectors’ return on equity (ROE) was (-0.90) during the study period (2009-2013). Also,
the highest values of ROE were (8.46; 3.82) during the study period for health care sector and hotels sector
respectively. The mean for health care sectors’ ROE was (2.746), and the mean for hotels sectors’ ROE was
(1.254) during the study period, besides, the standard deviation (4.242; 1.964 respectively).
Correlations between Variables
Based on health care sector and hotels sector data in Jordan, during the study period (2009-
2013).Spearman correlation test has been used in this study in order to find the relationship between the study
variables / factors. The result of this test as follows:
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Table (4), Correlations between Variables
Net
Operating
Cycle ROA ROE
Net Operating Cycle Pearson Correlation 1
Sig. (2-tailed)
ROA Pearson Correlation .192 1
Sig. (2-tailed) .596
ROE Pearson Correlation .332 .977 1
Sig. (2-tailed) .348 .000
According to the basis of P-Values in Spearman correlation test that shown in the above table 4, there is
a positive correlation (high correlation) between ROA and ROE (0.977) and it is under the significance level (of
0.05). Besides, there is no significance correlation between Net Operating Cycle and ROA (0.192), and between
Net Operating Cycle and ROE (0.332).
Hypotheses Testing
On the basis of the measured data by Simple Regression analysis to test the hypotheses in this study, the
following parts show the result of this test according to each hypothesis, both main and sub-hypotheses.
First Main Hypothesis
H01: There is no significant effect of net operating cycle on health care and hotels sectors’ return on asset
(ROA).
This study aims to investigate the impact of net operating cycle on Jordanian health care and hotels sectors’
return on asset (ROA), based on the period (2009-2013). Moreover, the following table 5 shows the result of
Simple Regression test in order to achieve the objective of this study.
Table (5), First Main Hypothesis
Beta R Square Adjusted R
Square T Sig.
.192 .037 -.084 0.553 .596
The table 5 indicated that the correlation of net operating cycle and Jordanian health care and hotels sectors’
ROA, is calculated to be (.192), and the significance level for this hypothesis(0.596) shown that it is greater than
the Significance level (0.05), hence null hypothesis (H01) is accepted. Besides, R
2
value of the full model
regression is (0.037). Thereby, there is no significant impact of net operating cycle on Jordanian health care and
hotels sectors’ ROA during the study period (2009-2013).
First Sub-Hypotheses:
H011: There is no significant effect of net operating cycle on health care sectors’ return on asset (ROA)
This hypothesis looks at the impact of net operating cycle on Jordanian health care sectors’ return on asset
(ROA), based on the period (2009-2013). The current study is based on use the Simple Regression test, and the
result of this test as follows:
Table (6), First Sub Hypothesis
Beta R Square Adjusted R
Square T Sig.
.276 .076 -.232 .497 .653
From the above table, the correlation of net operating cycle and Jordanian health care sectors’ ROA is calculated
to be (.276), and the significance level for this hypothesis(0.653) shown that it is greater than the Significance
level (0.05), hence null hypothesis (H011) is accepted.R
2
value of the full model regression is(0.076). Thereby,
there is no significant impact of net operating cycle on Jordanian health care sectors’ ROA during the study
period.
H012: There is no significant effect of net operating cycle on hotels sectors’ return on asset (ROA).
This hypothesis aims to investigate the impact of net operating cycle on Jordanian hotels sectors’ return on asset
(ROA), this is during the period (2009-2013). The result of the Simple Regression as follows:
Table (7), Second Sub Hypothesis
Beta R Square Adjusted R
Square T Sig.
.095 .009 -.321 0.165 .879
R
2
value of the model regression is (0.009) at Beta value of(0.095), thereby the correlation of net operating cycle
and Jordanian hotels sectors’ ROA is calculated to be (.095), which is greater than significance level of (0.05), so
it provides enough evidence that the model is not significant. As a conclusion, there is no significant impact of
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net operating cycle on Jordanian hotels sectors’ ROA during the study period (null hypothesis is accepted).
Second Main Hypothesis
H02: There is no significant effect of net operating cycle on health care and hotels sectors’ return on equity
(ROE).
In order to investigate the impact of net operating cycle on Jordanian health care and hotels sectors’ return on
equity (ROE), the study is based on Simple Regression test to achieve the objective of this study. Based on the
period (2009-2013).The following table 6 shows the result of Simple Regression test.
Table (8), Second Main Hypothesis
Beta R Square Adjusted R
Square T Sig.
.332 .110 -.001 0.996 .348
The table 6 indicated that the correlation of net operating cycle and Jordanian health care and hotels sectors’
ROE is calculated to be (.332), and the significance level for this hypothesis (0.348) shown that it is greater than
the Significance level (0.05). Besides, R
2
value of the full model regression is (0.110). Thereby, there is no
significant impact of net operating cycle on Jordanian health care and hotels sectors’ ROE during the study
period (2009-2013), hence null hypothesis (H01) is accepted.
Second Sub-Hypotheses:
H021: There is no significant effect of net operating cycle on health care sectors’ return on equity (ROE)
The hypothesis looks at the impact of net operating cycle on Jordanian health care sectors’ return on equity
(ROE), during the period (2009-2013). The current study is based on use the Simple Regression test, and the
result of this test as follows:
Table (9), First Sub Hypothesis
Beta R Square Adjusted R
Square T Sig.
.346 .120 -.174 .639 .568
The above table shown the result of Simple Regression test for the current hypothesis, besides, the correlation of
net operating cycle and Jordanian health care sectors’ ROE is calculated to be (.346), and the significance level
for this hypothesis (0.568) shown that it is greater than the Significance level (0.05), hence null hypothesis
(H021) is accepted. In addition, R
2
value of the full model regression is (0.120). Finally, there is no significant
impact of net operating cycle on Jordanian health care sectors’ ROE during the study period (2009-2013).
H022: There is no significant effect of net operating cycle on hotels sectors’ return on equity (ROE).
In order to investigate the impact of net operating cycle on Jordanian hotels sectors’ return on equity (ROE)
during the period (2009-2013), the study has used the Simple Regression test and the result of it as follows:
Table (10), Second Sub Hypothesis
Beta R Square Adjusted R
Square T Sig.
.346 .120 -.173 0.639 .568
R
2
value of the model regression is (0.120) at Beta value of (0.346), thereby the correlation of net operating
cycle and Jordanian hotels sectors’ ROE is calculated to be (.346), which is greater than significance level of
(0.05), so it provides enough evidence that the model is not significant. As a conclusion, there is no significant
impact of net operating cycle on Jordanian hotels sectors’ ROE during the study period (2009-2013), in other
words null hypothesis is accepted.
6. Summary and Conclusion
This study is achieved to approve if there is an effect of net operating cycle on the profitability of Jordanian
services’ sector represented by return on asset (ROA) and return on equity (ROE) during the period from 2009
until 2013.
The following table shows the result of test the study hypotheses, both main and sub hypotheses.
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Table (11), Conclusion
Hypothesis Result
H01: There is no significant effect of net operating cycle on health
care and hotels sectors’ return on asset (ROA). Null hypothesis is accepted
H011: There is no significant effect of net operating cycle on health
care sectors’ return on asset (ROA) Null hypothesis is accepted
H012: There is no significant effect of net operating cycle on hotels
sectors’ return on asset (ROA). Null hypothesis is accepted
H02: There is no significant effect of net operating cycle on health
care and hotels sectors’ return on equity (ROE). Null hypothesis is accepted
H021: There is no significant effect of net operating cycle on health
care sectors’ return on equity (ROE) Null hypothesis is accepted
H022: There is no significant effect of net operating cycle on hotels
sectors’ return on equity (ROE). Null hypothesis is accepted
7. Acknowledgement
The author is grateful to the Applied Science Private University, Amman, Jordan, for the financial support
granted to this research project (Grant No. DRGS-2014-2015-198).
References
[1] Karadagli, Ece (2013), “Profitability Effects of Cash Conversion Cycle: Evidence from Turkish Companies”,
Actual problems in Economics, Vol. 141, Issue. 3, pp. 300-310
[2] Tulay, Y.,Guluzar, k. (2002), “Cash Conversion Cycle, Cash Management and Profitability: An Empirical
Study on the ISE Traded Companies “, ISE Review, Vol. 6, Issue. 22, pp. 1-15
[3] Uyar, Ali (2009), “The Relationship of Cash Conversion Cycle with Firm Size and Profitability: An
Empirical Investigation in Turkey”, International Research Journal of Finance and Economics, Issue. 24, pp.
186-93
[4] Valahzaghard, M., Ghalhari, T. (2014), “Relationship of Cash Conversion Cycle (CCC) and Profitability of
the Firm: Evidence from Tehran Stock Exchange”, International SAMANM Journal of Finance and Accounting,
ISSN 2308-2356, Vol. 2, No. 1
[5] Yazdan, F., Ohman, P., (2014),”The Impact of Cash Conversion Cycle on Profitability: An Empirical Study
Based on Swedish Data”, International Journal of Managerial Finance, 10(4). DOI: 10.1108/IJMF-12-2013-
0137
Other sources
[1] ACCA. The Association of Chartered Certified Accountants, Official Text of the Professional Qualification,
Financial reporting (FR), 2010
[2] Brigham, F., Ehrhardt, M. (2005), Financial Management Theory and Practice, 11
th
edition.
[3] Financial Accounting & Reporting, Becker convisor, CMA review, third edition, 2002.
[4] Financial Decision Making, Gleim, CMA review, part 2, 2015 edition
[5] Financial Reporting and Analysis, SchweserNotesTM for the CFA Exam, level 1, Book 3, 2012
Lina H. Warrad, Associate Profeesor, A head of Accountind department.
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... The author is grateful to the Applied Science Private University, Amman, Jordan, for the financial support granted to this research project (Grant No. DRGS-2014-2015). ...
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Abstract The Risk-Adjusted Return on Capital (RAROC), as a modern performance measure, is introduced in comparison to traditional performance measures and has been calculated for all the banks listed on the Tehran Stock Exchange and Iran Fara Bourse, based on a new method extracted from earlier studies. The research period is 8 years, from 2012 to 2019. Assessing the effect of macroeconomic variables on this performance measure is another aim of this research. In doing so, RAROC has been estimated by using the Net Income, Expected Loss, and Supervisory Equity of banks. At the next stage, some macroeconomic variables have been selected to run the model. The impact of these variables on RAROC is investigated by a Multiple Linear Regression Model and Panel data analysis. Based on the results, the Inflation rate, the growth of currency exchange rate to Consumer Price Index (CPI) ratio and Liquidity Growth affect RAROC. Except for the inflation rate which has a reversed effect on the dependent variable, others have a straight impact on RAROC. Keywords: Risk-Adjusted Return on Capital (RAROC), Loss Given Default (LGD), Recovery Rate, Macroeconomic Variables, Banks. Introduction There are different kinds of common performance measures in banks. However, the impact of different types of risks is not considered in most of them, such as return on asset (ROA), return on capital (ROC), and return on equity (ROE). Consequently, these measures are not proper for performance evaluation in banks regarding the complex structure of banks and their huge impact on the whole economy. In this research, the Risk-Adjusted Return on Capital (RAROC) which is known as a contemporary performance measure, especially in banks, is compared to other performance measures, like return on assets (ROA), return on capital (ROC), return on equity (ROE), Return on Risk-Adjusted Capital (RORAC) and Risk-Adjusted Return on Risk-Adjusted Capital (RARORAC). Method and Data The Risk-Adjusted Return on Capital (RAROC) is calculated for all the banks listed on Tehran Stock Exchange and Iran Fara Bourse, using different methods based on which have been extracted from earlier studies. Therefore, the appropriate model is chosen among them regarding the information restriction. In doing so, the net income of these banks is extracted from their Income Statement by subtracting the whole expenses from the whole revenues of banks. The expected loss is estimated by the probability of default, loss given default, and exposure at default based on the model of research. For probability of default, the ratio of non-performing loans (NPL) is used. For calculating the exposure at default, the amount of net loans is used, and finally, for calculating loss given default, the recovery rate is utilized based on new studies in this area. After that, although there are two different ways of calculating the capital (economical capital and supervisory capital), the Supervisory Capital of banks is chosen, based on preceding studies, and that is extracted from banks’ financial statements based on the instruction issued by Central Bank of Iran. Considering this information together, the RAROC is calculated for all the banks listed on Tehran Stock Exchange and Iran Fara Bourse. Although the researchers had planned to run the model for a longer period, the research period has been limited to 8 years, from 2012 to 2019 because of a lack of data in calculating some important indicators. At the next stage, some macroeconomic variables are selected to run the model which are inflation rate, the ratio of the currency exchange rate to consumer price index (CPI), and liquidity growth. The impact of these variables on Risk-Adjusted Return on Capital (RAROC) is investigated by a multiple linear regression model. Findings Based on the findings, among macroeconomic variables, inflation rate, the ratio of the currency exchange rate to consumer price index (CPI), and liquidity growth affect RAROC. Except for the inflation rate which has a reversed effect on the dependent variable, others have straight impacts on Risk-Adjusted Return on Capital (RAROC). Conclusion and discussion In conclusion, the more the inflation rate will be, the less Risk-Adjusted Return on Capital (RAROC) listed banks on Tehran Stock Exchange will possess. On the other hand, the higher ratio of the currency exchange rate to consumer price index (CPI) and liquidity growth is, the higher the Risk-Adjusted Return on Capital (RAROC) is. To sum up, it could be recognized that some macroeconomic variables could have an impact on this new performance measure in banks. It means that, although Risk-Adjusted Return on Capital (RAROC) includes internal indicators in banks’ financial statements, it could be affected by external macroeconomic variables as well.
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This paper examines the impact of cash conversion cycle and its single components, specifically accounts collection period, inventory turnover in days and accounts payable period, on firm profitability as measured by operating income and stock market return by using pooled panel analysis for the period of 2001-2010. Besides, the possible effects of group affiliation on the impact of CCC and its components on firm profitability are also investigated. The findings suggest that a shortening of CCC and its single components, including accounts payable period improve firm profitability in terms of both accounting and market measures of performance. The findings also indicate that both the affiliated and the unaffiliated firms can enhance firm performance in terms of both performance measures through shortening their CCCs, this effect is more stronger for unaffiliated firms and hence working capital management seems to be more important for them. The results also suggest that the impact of CCC and its components on firm performance is stronger for the accounting measure of performance than for the market measure of performance.
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