The Effect of SMEs’ cost of capital on their financial performance in Nigeria by Ibrahim and Ibrahim
The study aimed at evaluating the impact of capital value on SMEs’ financial performance. The research questions, discussed in the article, were the empirical analysis of SMEs’ performance in terms of several determinants of the cost of capital. To achieve their objective, the authors focused on the determinants of the value of equity and ROA (return on assets) (Ibrahim & Ibrahim, 2015). The scholars chose SMEs as an object of the study was because these companies play a significant role in the framework of the economy under consideration.
The location of the study was in Nigeria during the period of five years (2008 – 2012). The material of the research was “a sample of five SMEs, listed on the Alternative Securities Market” (Ibrahim & Ibrahim, 2015, p. 8). The variables involved in this analysis were ROA and the cost of equity. The value of equity was necessary to define SMEs’ cost of capital. The study hypothesized that capital value does not influence ROA. To test this hypothesis, the authors applied the linear regression technique.
The study demonstrated an insignificant connection between the cost of capital and the financial performance of SMEs, as exemplified by ROA. The research found the “relationship between the variables at a 5% level of significance” (Ibrahim & Ibrahim, 2015, p. 11). In the course of linear regression analysis, the authors found that “there is an insignificant relationship of the tested variables and also the costs of capital have no significant effect on return on assets” (Ibrahim & Ibrahim, 2015, p. 11). The coefficients calculation revealed a negative effect of the capital value on ROA. The P-value exceeded the significance level of 5% and amounted to 0.123. Therefore, the scholars accepted the null hypothesis. The authors remarked that their research confirmed the data from previous studies (Ibrahim & Ibrahim, 2015).
Thus, the scholars found that there was an insignificant association between the variables. Based on these findings, the research accepted the null-hypothesis. In other words, the authors found that for SMEs, the cost of capital did not exert a significant influence on the return on assets, which reflects their financial performance. As the results demonstrate, SMEs should seek long-term funding sources. The study had several limitations.
Firstly, it was limited to investigating the context of small and medium enterprises. Secondly, only two determinants of the cost of capital were analyzed. Thus, further investigations are needed to explore other types of enterprises with more determinants. Furthermore, similar inquiries in different geographical regions are also necessary.
Cost of capital – the effect to the firm value and profitability: Empirical evidences in case of personal goods (textile) sector of KSE 100 index by Sattar
The study aimed to explore the impact of the value of capital, as represented by the total debt ratio and the weighted average capital cost (WACC) on the financial performance of companies by analyzing their profitability, ROA, and GDP (Sattar, 2015). The author addressed the issues of providing empirical data to bridge the existing research gaps about the companies from the Karachi Stock Exchange Index.
The author performed the research in Pakistan using the data from the Personal Goods (Textile) Sector. The study embraced four companies during the ten years from 2004 to 2013. The following companies were analyzed: Nishat Mills Limited, Kohinoor Textile Mills Limited, Colgate Palmolive (Pakistan) Limited, Bata Pakistan Limited (Sattar, 2015). This research focused on the dependent and independent variables. The dependent variables included the return on asset (ROA) and firm value (Sattar, 2015). The independent variables were as follows: “weighted average cost of capital, total debt ratio, size (total assets), and GDP” (Sattar, 2015, p. 25).
The study hypothesized that there were correlations between all determinants of the capital cost and the performance of companies under consideration. To test this hypothesis, the scholar applied the correlation test.
In the course of the analysis, the author found that the significant result was less than 0.05. Furthermore, the research showed that ROA depended on the WACC and GDP since the significant result was also lower than 0.05. However, Sattar (2015) points out that “total debt ratio and total assets are not correlated with ROA” (p. 27). Meanwhile, total debt ratio, total asset, and GDP did not correlate with each other, demonstrating the insignificant results. Based on the obtained findings, the author provided several recommendations for companies. Firstly, “a company should maintain its cost of capital and increase the size of the firm” (Sattar, 2015, p. 28). Secondly, the scholar advised distributing a part of a profit among a company’s shareholders to ensure their interest and stimulate further investment.
Thus, the study found strong correlations between the analyzed variables. Hence, “any change in independent variables, i.e., the WACC and GDP will bring change in the dependent variable (firm value and return on assets)” (Sattar, 2015, p. 27). Furthermore, the research found no influence on the total debt ratio on ROA. The study had several limitations. Firstly, it was limited to exploring the companies, representing the personal goods (textile) sector. Secondly, it embraced only the Pakistani KSE 100 Index listed companies. Thus, the prospects for future research are in the extension of the limits to cover other industries and different geographical areas.
References
Ibrahim, M., & Ibrahim, A. (2015). The Effect of SMEs’ cost of capital on their financial performance in Nigeria. Journal of Finance and Accounting, 3(1), 8–11.
Sattar, M.S.A. (2015). Cost of capital – the effect to the firm value and profitability: Empirical evidence in case of personal goods (textile) sector of KSE 100 index. Journal of Poverty, Investment and Development, 17, 24–28.