Profitability and optimal debt level of large firms in Serbia

Abstract

The aim of this research is to analyse the impact of debt management on the profitability of firms. The research was conducted for a five-year period from 2016 to 2020, on a sample of 299 large non-financial firms in Serbia. The Generalized Method of Moments (GMM) is used to examine the ratio of the share of total debt in total assets to the profitability expressed through the ROA indicator. The first thing considered is the linear relationship between indebtness and profitability followed by the nonlinear relationship between indebtness and profitability. The results of research show that there is a statistically significant correlation and a linear, negative ratio of indebtedness indicators in relation to the profitability of the observed firms. The results of the study do not show a nonlinear (concave) relationship. They show both negative and statistically significant impact of tangibility on the profitability of large companies in Serbia, while company size and inflation do not have a significant impact on profitability.

Is there a relationship between debt and profitability?: Evidence from dairy industry in Serbia

“…Some research demonstrate negative relationship between indebtedness and profitability like Czech food processing industry, highlighting that companies should concentrate to debt policy to avoid worsening the competitive position and declining credibility (Blazkovă & Dvoulety, 2018, p.41); food processing (meat and milk) industry in Serbia (Dakić et al, 20219, p.498), emphasizing that results can be used by wide range of stakeholders for creating strategy; agricultural companies in Nigeria (Dioha & Kamaluga, 2019); listed agricultural companies in China (Liu et al, 2020) and Swedish dairy farm industry (Bergmatk & Dahlber, 2015). Milošev (2021) confirms negative relationship of leverage and profitability on example of large companies in Serbia. Negative impact of debt on ROE is confirmed by Stryckova (2017, p.106) in six business sectors in Czech, including Agriculture, fishery, and forestry.…”

“…showing non-linear relationship between the level of debt and profitability. Hence, independent variable DR quadratic (DRsq) is included in the model, same as in papers from Raharja & Mranani (2019), Kebewar (2013), Ngo et al (2020), Basdekis et al (2020), andMilošev (2021). Dakić, et al, (2019).…”

Solvency of the corporate enterprise

“…The optimal level of profitability measures the long-term success and thus its survival." (Milošev, 2021).…”