The determinants of profitability in non-financial UK SMEs

Abstract

Purpose The purpose of this study is to examine determinants of profitability of non-financial firms listed small- and medium-sized enterprises (SMEs) in the UK from 2012 till 2020. It has been argued that profitability plays a key role in economic development and growth. Despite the important role that SMEs play in developed economies like UK, academic research into SMEs profitability determinants in developed countries is not extensive. Design/methodology/approach The methodologies used include dynamic panel data estimation techniques. Relationship of nine independent variables with profitability was examined. Two models are created using return on assets (ROA) and return on equity (ROE) as dependent variables. Size, age, efficiency, working capital, liquidity, leverage and volatility of the firm represent firm-specific independent variables. Two macroeconomic variables, namely, gross domestic product and inflation are also used as independent variables. Data obtained from Thomson Reuters Data Stream for 93 listed SMEs companies in the UK from 2012 to 2020. Fixed effects, random effects and generalized method of moments were used in data analysis. Findings All variables showed significant influence on profitability, except liquidity reflecting insignificant impact on profitability in two regression models conducted for 93 firms under study. Efficiency, liquidity and leverage are the only three independent variables with similar impact on both ROA and ROE. Practical implications Identifying determinants of profitability will help stakeholders and corporate executive make sound decisions to ensure sustainability and stability at the firm level. This is particularly important given the key role played by SMEs in economic development and growth. The findings of this study would help direct financial management practices to ensure a favorable sustainable organizational performance. Originality/value This study differs from previous studies that focused mainly on developing countries; with limited research conducted on profitability of SMEs in developed economies. To the best of the author’s knowledge, this is the first study to examine factors influencing profitability of SMEs in UK. Previous studies concentrated on service sector like insurance and hotel firms.

The impact of ASEAN economic community, firm characteristics and macroeconomics on firm performance and firm value: An investigation of Shariah-compliant firms in Indonesia

“…According to the resource-based view (RBV), there is a positive relationship between firm age and firm profitability, for instant older firms, which is associated with better experience, branding organization, networking and market capability which benefit to generate higher profitability. In line with the theory, some previous research such as [ [27] , [28] , [29] , [30] ], suggested that firm age drives a positive impact on profitability. However [ [31] , [32] , [33] ], explained that firm age has a negative impact on profitability.…”

“…This indicated that the greater the firm size, growth opportunities, investment opportunities and firm efficiency, the higher the firm financial performance. In line with Cyril and Singla [ 32 ] and Youssef et al [ 27 ], the older and bigger firms tend to operate at higher level of profitability due to negotiation power in financial cost over a period of time in achieving optimal financial leverage that impacts on profitability. Moreover, the result also explained that the bigger firm can better adapt to new macroeconomics conditions to achieve benefits of the potential market offered by the AEC agreement that leads to higher profitability.…”

“…The result indicates that greater economic growth has a strong influence on firm financial positions, as well as on firm profitability. Moreover, Youssef et al [ 27 ] in another study further provided evidence from non-financial SMEs in the UK, economic growth rate had a positive impact on ROA, but adversely impacted on ROE. This condition occurs due to the link between applying higher leverage and business risks that cause decreases in ROE, whereas ROA was positively impacted due to economic growth resulting in increasing purchasing power to the demand for goods or services that causes rising firm profitability.…”

What Factors Determine Banking Profitability In Indonesia During The Covid-19 Pandemic?

“…The assets owned by the bank did not have a significant impact on profit. This is possible because of inefficient asset allocation (Youssef et al, 2022). Nevertheless, the effect of bank size on the level of profitability is still mixed with findings.…”

Corporate Governance and Profitability of Insurance Companies: Empirical Insights from Pakistan

“…For instance (Angbazo, 1997;Athanasoglou, Brissimis, & Delis, 2008;Barajas, Steiner, & Salazar, 1999;Berger, 1995;Claessens & Yurtoglu, 2013;Guru, Staunton, & Balashanmugam, 2002;Joh, 2003;Kao, Hodgkinson, & Jaafar, 2019;Khan, Muttakin, & Siddiqui, 2013;Kosmidou, Tanna, & Pasiouras, 2005;Mamatzakis & Remoundos, 2003;Naceur & Goaied, 2001;Olutunla & Obamuyi, 2008;Young, Peng, Ahlstrom, Bruton, & Jiang, 2008). Additionally, studies conducted across multiple countries have explored both internal and external determinants of bank profitability, including, (Abreu & Mendes, 2002;Alarussi & Alhaderi, 2018;Ayaz, Mohamed Zabri, & Ahmad, 2021;Demirgüç-Kunt & Huizinga, 1999;Jamil, Mohd Ghazali, & Puat Nelson, 2021;Molyneux & Thornton, 1992;Pasiouras & Kosmidou, 2007;Tarighi, Appolloni, Shirzad, & Azad, 2022;Wetzel & Hofmann, 2019;Youssef, Salloum, & Al Sayah, 2022). The relevant and significant findings in the banking and insurance sectors were highlighted by (Naceur & Goaied, 2001;Olutunla & Obamuyi, 2008).…”