Impact of firms’ size, leverage, and net profit margin on firms’ profitability in the manufacturing sector of Bangladesh: An empirical analysis using GMM estimation

Abstract

The study investigated the factors that influence the return on assets (ROA) of manufacturing firms in Bangladesh. The study relied on secondary data sourced from the audited annual reports of 15 leading manufacturing firms in Bangladesh, covering a period of ten years from 2013 to 2022. The sample firms were selected based on their listing on the Dhaka Stock Exchange (DSE)-30 and Chittagong Stock Exchange (CSE)-30 indices and their status as leading firms in the manufacturing sector using the purposeful sampling method. The study employed the one-step generalized method of moments (GMM) estimator to analyze the data, addressing the presence of endogeneity and heteroskedasticity. The results of the study indicated that the natural logarithms of net profit margin (NPM) and total sales (TS) have a significant positive relationship with ROA, while the natural logarithm of total assets (TA) has a significant negative relationship with ROA. However, the study did not find any significant relationship between the leverage ratio (D RATIO) and ROA. The lagged value of the dependent variable (L) was also found to be insignificant. The study's findings suggest that firms can enhance their ROA by improving their profitability and increasing their sales while avoiding excessive growth in their asset base. Additionally, larger firms may face diseconomies of scale that reduce their profitability. However, the lack of a significant relationship between leverage and ROA is somewhat surprising, and further research is needed to better understand the relationship between leverage and ROA in different contexts. Overall, the study utilized a rigorous data collection approach to ensure the reliability and validity of the data used for analysis, providing accurate results that can be relied upon for making informed decisions.