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Analysis Of Relationship Between Risk And Financial Ratios In Case Of Romanian Small And Medium-Sized Enterprises

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  • Kulcsar Edina

    (University of Oradea, Faculty of Economics)

Abstract

According to imperfect market principle, in small and medium sized enterprises’ business activity, the phenomenon of risk is always present. As a consequence of last great recession, the importance of risk management has accented. Enterprises and financial institutions handle more carefully their finances and pay more attention to their partners. The aim of present research consists in examination of relationship between risk and financial ratios. In this paper, we considered that the risk could be divided into operating risk, which is calculated by using Degree of Operating Leverage (DOL) and financial risk, expressed by Degree of Financial Leverage (DFL). The reason why we chose Romanian small and medium-sized enterprises is they are important on aspect of GDP stimulation and jobs creation. The data used for present analysis is ensured by simplified financial reports of 204 small and medium-sized enterprises registered in Bihor County between 2009 and 2012. The selected enterprises are operating in manufacturing (22,55%) and trading (77,45%) industry. The used financial ratios could be listed in four categories: liquidity, financial leverage, profitability and turnover. The used statistical methods for illustration of relationship between risk and financial ratios are: correlation analysis, multivariate linear regression, and stepwise linear regression. In case of correlation analysis, we could observed a weak relationship between these two types of leverage and financial ratios, both for manufacturing and trading firms. The result of applying multivariate regression model shows in case of manufacturing sme’s greater relation between operating risk and current, quick liquidity, receivables turnover, return on sales (ROS) and return on assets (ROA). Degree of financial leverage (DFL) could be well explained by receivables turnover, as an independent variable. In case of trading firms, operating risk is related with current and cash liquidity, receivables turnover, return on sales (ROS). Degree of financial leverage could be characterized by total debt ratio. We could find similar results with few exceptions if the stepwise regression analysis is applied. The difference between last two methods consists in levels of significance of the explanatory variables, which are more favorable in the case of last method. Overall, we could state, from the investigated three methods, the stepwise regression analysis is the most appropriate for examination of relationship between operating, financial risk and above mentioned 12 financial ratios.

Suggested Citation

  • Kulcsar Edina, 2015. "Analysis Of Relationship Between Risk And Financial Ratios In Case Of Romanian Small And Medium-Sized Enterprises," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(2), pages 389-397, December.
    • Handle: RePEc:ora:journl:v:1:y:2015:i:2:p:389-397
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    File URL: http://anale.steconomiceuoradea.ro/volume/2015/n2/046.pdf
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    References listed on IDEAS

    as
    1. Ohlson, Ja, 1980. "Financial Ratios And The Probabilistic Prediction Of Bankruptcy," Journal of Accounting Research, Wiley Blackwell, vol. 18(1), pages 109-131.
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    More about this item

    Keywords

    risk; degree of operating leverage (DOL); degree of financial leverage (DFL); financial ratios; correlation; multivariate linear stepwise regression;
    All these keywords.

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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