Relationship between profitability indicators and maximization market value added and intrinsic for the industrial companies

Al-Ali, Ali H.Hindi; Al-Shabeeb, Sarah K. Ibrahim Article Relationship between profitability indicators and maximization market value added and intrinsic for the industrial companies Global Business & Finance Review (GBFR) Provided in Cooperation with: People & Global Business Association (P&GBA), Seoul Suggested Citation: Al-Ali, Ali H.Hindi; Al-Shabeeb, Sarah K. Ibrahim (2024) : Relationship between profitability indicators and maximization market value added and intrinsic for the industrial companies, Global Business & Finance Review (GBFR), ISSN 2384-1648, People & Global Business Association (P&GBA), Seoul, Vol. 29, Iss. 2, pp. 71-84, https://doi.org/10.17549/gbfr.2024.29.2.71 This Version is available at: https://hdl.handle.net/10419/305960 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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Introduction This study explores the relationship between profitability indicators and the maximization of market value added and intrinsic value in the industrial companies. Various profitability indicators and Received: Nov. 28, 2023; Revised: Dec. 25, 2023; Accepted: Jan. 15, 2024 † Corresponding author: Ali H.Hindi Al-Ali E-mail: [email protected] measures for maximizing the added and real market value are examined using financial statements and annual reports published in Iraq Stock Exchange (Chun, 2021). ''Value is a crucial goal for companies to remain in business and gain a competitive advantage (Odusanya, et al., 2018)''. It is a prerequisite for the company's long-term survival and success. Value maximization serves as a major goal for achieving various financial objectives. Profitability is also a fundamental measure of the company's ⓒ Copyright: The Author(s). This is an Open Access journal distributed under the terms of the Creative Commons Attribution Non-Commercial License (https://creativecommons.org/licenses/by-nc/4.0/) which permits unrestricted non-commercial use, distribution , and reproduction in any medium, provided the original work is properly cited. GLOBAL BUSINESS & FINANCE REVIEW, Volume. 29 Issue. 2 (MARCH 2024), 71-84 pISSN 1088-6931 / eISSN 2384-1648∣Https://doi.org/10.17549/gbfr.2024.29.2.71 ⓒ 2024 People and Global Business Association GLOBAL BUSINESS & FINANCE REVIEW www.gbfrjournal.org for financial sustainability and people-centered global business1) Relationship between Profitability Indicators and Maximization Marke t V alue Added and Intrinsic for the Industrial Companies A li H.Hindi Al-Ali†, Sarah K. Ibrahim Al-Shabeeb F aculty of Administration and Economics, University of Kufa, Iraq A B S T R A C T Purpose: This research aims to study the impact of profitability indicators on maximizing the market value added and intrinsic value for industrial companies listed on the Iraq Stock Exchange. Design/methodology/approach: The research was structured using the analysis study method, incorporating various financial indicators, such as Net Profit Margin, Basic Earning Power, Return on Assets, Return on Equity, to examine their impact on market value added and intrinsic value. Findings: The researchers utilized financial data form fourteen industrial companies operating in Iraq ; listed in the financial market, spanning the period from 2011 to 2022. The data underwent analysis employing financial methods and various statistical tools, including single and multiple regression analysis as well as transaction analysis. The results revealed that the profitability indicators adopted by the studied companies exerted varied effects on maximizing the market value or intrinsic value. This variance was observed in accordance with the nature and orientations of each company. The underlying reason for this variation can be attributed to the direct relationship of the financial indicators used directly with the investors, thereby influencing management decisions. Research limitations/implications: The paper focuses on four variables representatives of firm profitability indicators to maximize both the market value added and the intrinsic value; it is necessary expanding the independent variables. Originality/value: This research contributes to the literature on Maximizing value levels for industrial companies. It aids firm leaders and decision-makers understanding the significant role of profitability indicators in maximizing value in financial markets by offering a more comprehensive view of their effectiveness. Keywords: Profitability indicators, Market value added, Intrinsic value, Industrial companies GLOBAL BUSINESS & FINANCE REVIEW, Volume. 29 Issue. 2 (MARCH 2024) 71-84 72 performance, reflected in this financial report. It demonstrates the company's ability to generate profits relative to sales and assets during a specific period. Therefore, the profitability of companies and strategies for enhancing them should be evident in their ultimate value. This topic has sparked significant discussions in the literature and continues to be of interest in the realms of economics, finance, accounting and management. Profitability serves as a crucial indicator for evaluating a company's performance, representing its ability to generate profits through effective asset utilization. This profitability, in turn, manifests in the company's future value. Maximizing the company's value equates to enhancing shareholders' wealth by maximizing the market value of shares. Consequently, elevated Stock ensure a higher company valuation, influencing investor confidence in both current and future performance. Additionally, maximizing the real (intrinsic) value of the company refers to its fundamental value determined through fundamental analysis, irrespective of market value. It is typically calculated by adding the discounted future income generated by that company, stock or product to obtain its present value (Grove & Lockhart, 2019). (Yosita, et al, 2022)emphasized that the company's goal is to maximize the shareholders' wealth by increasing the overall value of the company. the value of the company, however, cannot be solely described only by the its share price; it extends to include the company's intrinsic value. This valuation is assessed in various way, with Profitability indicators serving as key the independent variable in our study. Currently, among the measurement tools recommended by the researchers to maximize value, some include the profit margin, representing the percentage of sales after deducting all costs including interest, taxes and preferred stock dividends. (Mulyadi, et al., 2020), basic earning power measures the company's ability to generate profits and compare it to the total assets, reflecting the company's efficiency in managing all investments in the form of assets (Kurnia, 2022), additionally return on assets is a ratio indicating the company's proficiency in using all its assets to achieve post-tax profit (Rina, et al., 2022). The return on equity represents the percentage of profitability indicating the measure of the income available to the owners of companies, including ordinary or preferred stockholders, for the capital that they invest in the company. An increase in this ratio signifies rise in the net profit of the company in consideration. Investors can utilize the return on equity index as a crucial factor in selecting shares or investing their capital (Amanda, & Zulkifli, 2022). To maximize value added, a measure of success in enhancing shareholder wealth by allocating resources effectively, companies use it as an indicator to gauge the amount of wealth created for investors , reflecting the achieved prosperity (Rahayu, & Utami, 2023). On the other hand, maximizing intrinsic value (Substantial), referred to as fair value, involves determining the total present value of net cash flow. This can be measured by the company's free cash flow (FCFF), which is expected to be obtained through discounted cash flow models (Sijabat, & Fachrudin, 2022). Iraqi industrial companies are considered the fundamental cornerstone for economic development, playing a vital role in providing employment opportunities, promoting investments, and achieving economic progress. These companies vary in size, activities, and sectors, facing several challenges, including deteriorating infrastructure, complex regulations and administrative procedures, limited funding and investments, skills and training shortages, and rising production costs and employee wages. To enhance the competitiveness and expansion of Iraqi companies, it is crucial to strengthen the business environment, improve infrastructure, and provide financial support to startups and medium-sized enterprises. This will foster the economic environment, enabling companies to grow and prosper. Consequently, this study aims to understand the operations of Iraqi companies in general and the industrial sector in particular through financial and statistical analysis of the companies' financial statements. It seeks to comprehend the nature of their investment decisions and the mechanisms employed to maximize their value, thus maximizing shareholder value. The study also aims to identify the challenges faced by these companies and provide Ali H.Hindi Al-Ali, Sarah K. Ibrahim Al-Shabeeb 73 scientific and practical solutions for them. On the basis of the foregoing, The primary purpose of this study can be clarified through the researchers' endeavor to interpret and analyze the relationship between indicators of profitability, maximizing the market value added, and the intrinsic value of the industrial companies listed in Iraq Stock Exchange through a number of measures and indicators used to measure the profitability of companies and maximize the added and real market value. In the current study, three important financial variables were collected, representing the primary concern of the financial manager on one hand, and the fundamental focus of the investor on the other. This study serves as an extension and complement to the theoretical findings of previous researchers. However, it distinguishes itself by incorporating less commonly used variables, setting it apart from other studies. The primary focus of this study is to explore the financial tools that could play a role in enhancing the value of the entity, particularly when accompanied by high profitability. II. Literature Review A. Profitability Indicators Profitability indicators are ratios used to gauge a company's ability to achieve a satisfactory level of profit as a percentage (Husain, et al., 2020). These indicators illustrate how effectively a company utilize its assets to generate profit and enhance shareholder value (Song, 2021). Among the most crucial indicators used the following (Jihadi, et al., 2021): 1. Net Profit Margin The Net Profit Margin (NPM) calculates the remaining percentage of sales after subtracting total expenses and costs including as interest and tax (Nariswari, & Nugraha, 2020). Therefore, a high net profit margin indicates a well-performing company. The net profit margin equation is:       2. Basic Earning Power This ratio illustrates the company's capacity to generate profits from its assets and is calculated by dividing total profit before deducting interest and taxes by total assets (Laeli, & Purba, 2015). It represents the percentage of the company's income without factoring in invested capital, or tax and interest obligations. The higher this percentage, the more favorable it is for the company (Brigham, & Ehrhardt, 2020). The basic earning power equation is:       3. Return on Assets Return on assets (ROA) stands as one of the critical ratios that investors scrutinize when analyzing a company's financial performance reports. It gauges the company's total ability to achieve profits using all the assets owned. ROA serves as a measure of the overall efficiency of the company's operations (Ningsih, & Sari, 2019). It can be found through the following equation:        4. Return on Equity Another crucial ratio for shareholders and investors in general is Return on Equity (ROE). This ratio reflects the extent to which equity or private capital contributes to the company's profits (Widyastuti, , et al., 2023). The calculated ratio can be used to measure the company's ability to generate profit or net profit after tax from the total capital invested. The equation for return on equity is:        GLOBAL BUSINESS & FINANCE REVIEW, Volume. 29 Issue. 2 (MARCH 2024) 71-84 74 B. Market Value Added The Market Value (MVA) can be expressed as the value of the shares minus the shareholders' capital (Sundari, et al., 2023). It signifies the difference between the company's market value and the total invested capital. The ratio serves as a measures of the company's financial performance throughout its existence. A Positive Market Value Added indicates successful financial management in maximizing shareholders' wealth (Setianingtyas, et al., 2015). Success in maximizing shareholders' wealth implies that shareholders receive returns surpassing their invested capital. The maximizing of shareholders' wealth is achieved by increasing the market value of the company's capital beyond the value initially paid by Shareholders. This , in turn, attracts numerous investors to engage in trading the company's shares (Diana, & Sriyono, 2022). Market Value Added is defined as the difference between the market value of the company's shares and the book value as indicated in the balance sheet (Ardana, et al., 2023). It is calculated by using the following equation:          C. The Intrinsic Value The intrinsic value, also known as the real value is defined as the actual value of the company. It is late compared with the share price in the market to determine whether the company's share price is overvalued, undervalued, or fair value. The intrinsic value of the company refers to its basic essence (Chandra et al, 2017) and is estimated through the discounted cash flow model. This model is considered more accurate of evaluating the company because this model takes into account the time value of money, and according to (Brigham, & Ehrhardt, 2020) ,when using the Free Cash Flow (FCF) model, the total intrinsic value of the company includes the value of operations along with to the value of short-term investments (Nguyena & Nghiem, 2023), (assuming that the company does not own other non-performing assets, which applies to most companies), this is called the intrinsic value or the intrinsic value to distinguish it from the market value. The intrinsic value is estimated from the expected cash flows, using the following equation:        D. Hypotheses H1: Profitability indicators, such as Net Profit Margin, Basic Earning Power, and Return on Assets, significantly influence the maximization of market value added in companies listed on the Iraq Stock Exchange. H2: The presence of profitability indicators, including Net Profit Margin, Basic Earning Power, and Return on Assets, has a substantial impact on the maximization of intrinsic value in companies listed on the Iraq Stock Exchange. H3: Profitability indicators play a significant role in influencing the overall value maximization of companies listed on the Iraq Stock Exchange. III. Methodology A. Research Type The current research aims to study and test hypotheses concerning the impact of a several of variables representing the independent variable, namely (profitability indicators) on two dependent variables (market value added and intrinsic value). The two researchers utilized a combination of experimental and analytical evidence to explore the influence of profitability indicators adopted by industrial companies as the independent variable, with the maximizing the value of both types (market and intrinsic) as a dependent variable. Ali H.Hindi Al-Ali, Sarah K. Ibrahim Al-Shabeeb 75 B. Research Community and Sample This study focused, on industrial companies operating in Iraq and listed in the financial market. The sample was derived from a collection of published financial statements spanning the years 2011 to 2020, encompassing fourteen companies. The criteria for selecting this specific sample in the current research were as follows: 1. The selected companies for the research sample - namely: (IIDP, IITC, IHFI, INCP, IMOS, IMCI, IFCM, IKLV, IMAP, IMIB, IRMC, IBPM, IBSD, IKHC) are actively listed on Iraq Stock Exchange and continue to operate to the present day. 2. The research sample companies consistently publish their financial statements periodically and regularly throughout the period extending from 2011to 2022. 3. The research sample companies have integrated financial data available during the period 2011to2022, ensuring comprehensive coverage all research variables. C. Data Collection Technique The primary data obtained for this research comprise historical financial records spanning the period from 2011to2022. These data were directly sourced from information published in Iraq Stock Exchange, as well as the financial reports of the researched companies. In addition, the secondary data of the research, it included data that It was dealt with by previous studies and literature related to the problem that was studied and analyzed in the current research, which was presented in the form of research and scientific reviews such as books, documents, reports, and any other sources that helped enrich the research scientifically. IV. Result and Discussion A. Results 1. Descriptive Statistics In this research, descriptive statistics serves the purpose of offering a precise and comprehensive overview of the data associated with industrial companies. Table 1 provides insights into the lower and upper limits, as well as with the values of the arithmetic mean and standard deviation for all variables. The following results were derived by testing descriptive statistics within the SPSS program Statistician: Through the outputs of the statistical program shown in Table 1, it is observed that the descriptive statistics of the study variables were as follows: 1-a. The sample size was (14) industrial companies for a period of (12) years, i.e. with a total of (N=168) statistical observations. 1-b. The minimum value for (X1), (X3) and (X4) was (0.00), while in (X2) it was (0.02), and N Minimum Maximum Mean Std. Deviation Net Profit Margin (X1) 168 .00 .63 .0802 .09574 Basic Earning Power Ratio (X2) 168 .02 .69 .2483 .16944 Return on Assets (X3) 168 .00 .31 .0441 .05037 Return on Common Equity (X4) 168 .00 .14 .0357 .03849 Market Value Added (Y1) 168 6.81 10.58 9.3493 .69045 Intrinsic Value (Y2) 168 7.44 9.68 8.9111 .43378 Valid N (listwise) 168 Table 1. Descriptive statistics GLOBAL BUSINESS & FINANCE REVIEW, Volume. 29 Issue. 2 (MARCH 2024) 71-84 76 in (Y1) it was (6.81), while in (Y2) the smallest value was (7.44). 1-c. (X1) (0.63), (X2) (0.69), (X3) (0.31), (X4) (0.14), (Y1) (10.58), and (Y2) had a maximum of (9.68). 1-d. The mean for (X1) was (0.0802), (X2) (0.2483), (X3) (0.0441), (X4) (0.03849), (Y1) (9.3493), and (Y2) the mean was (8.9111). 1-e. The standard deviation of (X1) was (0.09574), (X2) (0.16944), (X3) (0.05037), (X4) (0.0357), (Y1) (0.69045), and (Y2) the standard deviation was (433780). B. Testing Research Hypotheses 1. Testing the Nature of the Data To ascertain whether the research variables conform to a normal distribution the underwent a normal distribution test. This step is crucial for later inclusion in the regression model; as test (t) and (f) assume that the residual value follows a normal distribution when utilizing graph analysis and statistical tests are used. In this research, the normal distribution was tested using the (KolmogorovSmirnov test), and the results of are presented in Table 2. Through the above results, it is observed that the value of (Asymp) is not significant for the two variables — profitability indicators and maximizing market value added — with values of (0.875) and (0.150), respectively. However, for the intrinsic value variable, significance is evident with value of (0.003), as indicated by (Sig <0.05). These results lead to the conclusion that the majority of the data follows a normal distribution. 2. Testing the Multiple Linearity To determine whether a strong correlation exists among the independent variables within the regression model with the dependent variable, the multiple linear relationship test was conducted. Lack of a strong correlation is considered statistically acceptable. From the results presented in Table 3 it is observed that the variance inflation factor (VIF) for the variables (X1, X2, X3, X4) is smaller than (5). This indicates the absence of a multiple linear problem between the independent and dependent variables. XY1Y2 N 168 168 168 Normal Parameters a,b Mean .1021 9.3493 8.9111 Std. Deviation .05602 .69045 .43378 Most Extreme Differences Absolute .046 .088 .139 Positive .041 .057 .055 Negative -.046- -.088- -.139Kolmogorov-Smirnov Z .592 1.138 1.802 Asymp. Sig. (2-tailed) .875 .150 .003 a. Test distribution is Normal. b. Calculated from data. Table 2. One-sample Kolmogorov-Smirnov test Coefficients a Model Collinearity Statistics Tolerance VIF 1 X1 .650 1.540 X2 .987 1.014 X3 .643 1.556 X4 .676 1.478 a. Dependent Variable: Y Table 3. Multiple linearity test Ali H.Hindi Al-Ali, Sarah K. Ibrahim Al-Shabeeb 77 3. Testing Correlation Conducting a correlation test unveils the nature and strength of the relationship between the research variables. In Table 4, it is observed that the correlation between profitability indicators and maximizing the total value of industrial companies (both added and real market) is moderately positive, with a value of (24.3%). C. Regression Analysis The statistical tool (R2), known as the coefficient of determination, indicates the model's ability to explain the variation of the dependent variable. Its value ranges between zero and one, with a value close to one signifying that the independent variable providing almost all the information needed to predict changes in the dependent variable. In Table 4, the determination coefficient (R Square) is noted (0.059), implying that the financial profitability indicators explain approximately (5.9%) of the value maximization of the research sample companies. The remaining (94.1%) of the value influences are attributed to other variables not included in our research model. To assess the reliability of the independent variable statistics, a (t-test) was conducted in this paragraph. The statistical (t) test evaluates the extent to which the independent variable can affect the variance of the dependent variable. Tables 5 and 6 present the result of this test: From the above table, it can be seen that the value (t) of the Net Profit Margin amounted to (-2.023), and also that the value of (t) for the Basic Earning Power Ratio amounted to (-1.294), as well as the value of (t) for the rate of return on Assets (ROA) amounted to (2.037), and finally the value (t) of the rate of return on equity (ROE) amounted to (1.425), and when comparing these values with the tabular value, we find that some are less and others are greater, and on the basis of that; formulating the regression model for the first dependent variable is as follows:    Model Summary b Model R R Square Adjusted R Square Std. Error of the Estimate Durbin-Watson 1.243 a.059 .036 .54207 2.022 a. Predictors: (Constant), X4, X2, X1, X3 b. Dependent Variable: Y Table 4. Testing correlation Coefficients a Model Unstandardized Coefficients Standardized Coefficients t Sig. B Std. Error Beta 1 (Constant) 9.359 .111 84.277 .000 X1 -1.370- .677 -.190- -2.023- .045 X2 -.402- .311 -.099- -1.294- .197 X3 2.637 1.295 .192 2.037 .043 X4 2.353 1.651 .131 1.425 .156 a. Dependent Variable: Market Value Added Table 5. T-Test GLOBAL BUSINESS & FINANCE REVIEW, Volume. 29 Issue. 2 (MARCH 2024) 71-84 78 Also, through Table 6, it can be seen that the value (t) of the Net Profit Margin amounted to (-1.955), and also that the value of (t) for the Basic Earning Power Ratio amounted to (-0.449), as well as the value of (t ) for the rate of return on assets (ROA) amounted to (1.468), and finally the value of (t) for the rate of return on equity (ROE) amounted to (1.682), and when comparing these values with the tabular value, we find that some are less and others are greater, and on the basis of that, formulating the regression model for the first dependent variable is as follows:    The multiple relationships between the independent variable, the profitability indicators and its different dimensions on the two dependent variables, the market value added and real, can be expressed through the following Figure 1. D. Testing Reliability by Simultaneous Statistic In this section, an analysis of variance test (F-Statistics -ANOVA) is performed, as the statistical test (F) in its general form shows whether the independent variables that were entered into the model have a direct and simultaneous effect on the dependent variables, and the results of the F test were processed using the program SPSS shown in the following table: Based on the results of Table 7, which were obtained by conducting the (F) test, we find that the calculated value (F-Calculate > F-Table) using a confidence level (95%), and thus (H_0) is rejected, and this means that there is an effect between indicators Profitability, market value added, and the intrinsic value of industrial companies in the research sample, and the alternative hypothesis (H_1) is accepted because (Sig ≤ 5%). Coefficients a Model Unstandardized Coefficients Standardized Coefficients t Sig. B Std. Error Beta 1 (Constant) 8.884 .070 126.028 .000 X1 -.841- .430 -.186- -1.955- .052 X2 -.089- .197 -.035- -.449- .654 X3 1.207 .822 .140 1.468 .144 X4 1.763 1.048 .156 1.682 .095 a. Dependent Variable: Intrinsic Value Table 6. T-Test Figure 1. Effect relationships for study variables