Financial soundness and growth : special reference to listed manufacturing companies (capital goods) in Sri Lanka

Abstract

The financial strength of listed companies is a critical concern for various stakeholders, including investors, management, and regulatory bodies. This study aims to explore the impact of financial soundness on the growth of listed manufacturing companies in the Capital Goods sector in Sri Lanka. Specifically, the research focuses on ten manufacturing companies traded on the CSE over a period of five years (2019-2023). The primary research question addresses the relationship between financial soundness and growth in these manufacturing companies: Capital Goods. Financial soundness is measured using the Z-Score (Altman's model), a widely recognized indicator of financial health. Growth is assessed through three key metrics: market value growth, profit growth, and current ratio growth. In this study, financial soundness serves as the independent variable, while growth metrics are the dependent variables. The analysis employs descriptive statistics and simple linear regression techniques to examine these relationships. Secondary data is sourced from the financial reports of the selected companies for the specified period. The findings of this study reveal there is a significant positive relationship between financial soundness and net profit growth, indicating that financially robust companies tend to experience higher net profit growth. The analysis also uncovered a significant relationship between financial soundness and market value growth. This implies that financially sound companies are more likely to increase their market valuation, potentially due to investor confidence and their ability to perform well in the market. The study also shows a substantial association between financial soundness and current ratio increase. The current ratio reflects a company's capacity to satisfy its short-term obligations, so this finding suggests that financially sound companies are also improving their liquidity over time. The study's significance lies in its contribution to the understanding of financial health and growth dynamics within the context of an emerging market. Policymakers and corporate managers can leverage these insights to develop strategies that enhance financial stability and drive sustainable growth. Additionally, this research addresses a gap in the literature concerning the Sri Lankan manufacturing sector specially to Capital goods, providing a foundation for future studies. However, several limitations must be acknowledged. The study's reliance on secondary data may introduce biases related to data accuracy and reporting standards. Moreover, the analysis is confined to a five-year period, which may not capture long- term trends and cyclical economic variations. The sample size of ten companies, though reflective of the sector, limits the generalizability of the findings. Future research could expand the sample size, extend the analysis period, and incorporate additional variables to provide a more comprehensive understanding of the financial soundness-growth nexus. In conclusion, this study underlines the complex relationship between financial health and growth within Sri Lanka's manufacturing sector, providing valuable insights for stakeholders focused on promoting economic development and enhancing corporate resilience.