Determinants of Profitability - An empirical investigation using Indian Cement Industry

Actually, profitability is a highly sensitive economic variable which is affected by a host of factors operating through a variety of ways. Some of them affect product prices and quantities; some affect cost of production while others make changes in capital stock, size, market share and growth of the firm. Further, corporate policy relating to various functions will affect profitability. Some of them are relevant in the short-run while others have impact in the long-run. It is difficult to build a theory of profitability, which accounts for all such factors. Because of these difficulties, it is quite natural to analyze the variation in profitability by taking the partial approach i.e., to find the effect of certain major variables, ignoring the implications of other left out independent variables at a time. The present study is a step towards this direction. The determinants of profitability in Indian cement industry during the study period are analyzed using the technique of ordinary least square. The analysis reveals that current ratio is the strongest determinant of profitability of Indian cement industry. The overall analysis of determinants of profitability reveals that current assets turnover ratio, size, inventory turnover ratio, leverage, past profitability, operating expenses to sales, growth rate of assets and vertical integration significantly explain the profitability of Indian cement industry during the study period.