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Available online http//www.basicresearchjournals.org

Copyright 2012 Basic Research Journal

Review

Manufacturing Companies in Sri Lanka

Puwanenthiren Premkanth

University of Jaffna, Jaffna, Sri Lanka

Email: Premkanth85@yahoo.com

Accepted 25 December, 2012

The necessity of well organized manufacturing sector is realized in every countrys economical

development. Sri Lanka's apparel manufacturing sector is highly developed and has evolved as an

export oriented industry for over two decades. Currently around more companies in Sri Lanka produce

a wide range of products including branded names -most of them catering to the international market.

This study is aimed to analysis the Risk and Return of the portfolio management of the manufacturing

sector. Portfolio management is the collection of different investments that make up on investors total

holding. Risk and Return of the portfolio management is very important aspect in the financial

management. Analysis of portfolio management of manufacturing sector is very useful for customers

and investors. Data were obtained from the CSE handbook and web sites. The efficiency of the portfolio

management of manufacturing sector is analysis based on the portfolio management ratio analysis and

correlation analysis. The detail of the analysis is explained in the study in detail. As a result of the

analysis it could be seen that positive strong correlation between the risk and return. It leads a high

risk on the investors fund to earn high return of manufacturing sector.

Keywords: Risk Management,Performance,Return

INTRODUCTION

Sri Lanka's apparel manufacturing sector is highly

developed and has evolved as an export oriented

industry for over two decades. Currently around more

companies in Sri Lanka produce a wide range of products

including branded names -most of them catering to the

international market. Today clothing labelled "Made in Sri

Lanka" can be found in major department stores in the

USA, UK, Germany and Australia. This research is aimed

to analysis the Risk and Return of manufacturing firms in

Sri Lanka. Portfolio management is the collection of

different investments that makeup on investors total

holding. Risk and Return of the portfolio management is

very important aspect in the financial management.

Portfolio management will involve the various

investments such as many different types of financial

assets. Risk involved in such investment and derived

from them. Every manufacturing firm is dependent on its

total advances portfolio has made manufacture

vulnerable to risk in- non- performing advances, which is

turn has led to liquidity and the long-term sustainability of

such profits depends to large extent on identifying and

managing the multitude of risk facing the manufacturing

companies. Currently investments of manufacturing

the development of any country. It is an investment only

the main profit of such books depend, in conformity to

this principal analysis on portfolio management of

manufacturing companies is launched.

The

government's

industrial

policy

includes

encouraging investment in industries in which it believes

Sri Lanka has a comparative advantage. The Board of

Investment (BOI) offers various incentives for investment

in five industry segments: electronics and components for

electronic assembling, industrial and machine tools (a

new emphasis), ceramics and glassware, rubber-based

industries, and light and heavy engineering. Another key

policy element is deregulation, and in 2001 a committed

on deregulation was formed to study regulatory

impediments to Sri Lanka's industrial development.

Statement of problem

Research problem focused here is risk of the manufacturing

Premkanth. 79

sector affect the return and efficiency of portfolio

management of manufacturing firms return will vary

according to the risk return of manufacturing firms will

determine the efficiency of portfolio management. This

research aimed in whether risk of the manufacturing

sector affects the return and efficiency of portfolio

management.

Objective of research

The manufacturing system and Product play an important

role in the daily life of the general public. Therefore it is

important system in details. The followings are the

objectives of this study.

1.

The compare the desired relationship between

investment risk and return.

2.

Portfolio management is an important feature in the

activities of manufacturing sector. The manage the

various risk of the manufacturing companies.

This survey will attempt to identify how the risk of the

manufacturing sector investment attests on the return

and efficiency of the portfolio management of the

manufacturing sector. Finding of this research may help

manufacturing sector to make suitable, manage the

various risk and lead of efficient portfolio management.

This result also helps to companies or individuals identify

the best way of their investment to get maximum profit.

Literature Review

P. David, T. Yoshikawa, M.D.R Chari and A.A. Rashed

argue the effect of foreign ownership on strategic

investment in Japanese corporations by developing and

testing two competing perspectives, they found that

foreign ownership is move positively associated with

strategic investments for form with growth opportunities

than those lacking such opportunities. The relationship is

robust across both types of strategic investments studies.

R and D capital intensity.

Porter(1992) explain the effect of combing banking and

non bank. Financial activities on banking organizations

risk and return. In general, securities activities, insurance

agency, and insurance underwriting are all risker and

more profitable than banking activities. They also have

the potential to provide diversification benefits to banking

organizations. While real estate operations are more

profitable than banking. Real estate development may

not be real estate activities in general and their

diversification benefits for banking organization are less

clear.

The Economist (2002) examines risk, return and the

painting and financial markets over the period 1976-2001.

The art markets examined are contemporary masters,

franch impressionists, Morden European, lath century

th

European, old master, surrealists,20 century English

and modern us paintings. The financial markets comprise

us treasury bills. Corporate and government bonds and

small and large company stocks in common with the

literature in this area, the study finds that the returns on

paintings are much lowers and the risk much higher than

conventional investment markets, move over, while low

correlation of returns suggest that opportunities for

portfolio diversification in art works also and in

conjunction with equity markets exist, the construction of

Markowitz mean-variance efficient portfolios indicates

that no diversification gains are provide by art in financial

assets portfolios. However

diversification benefits in

portfolios comprised solely of art works are possible, with

th

contemporary masters, 19 century European, old

th

masters and 20 century English paintings dominating

the efficient frontier during the period in question.

Zebras and Cabman (1984) presented a set of

summary statistics of returns and risks for asset classes

that may be used as benchmarks for establishing

allocation levels, a subsequent article comments on how

customized benchmarks may provide a more appropriate

basis of comparison than generic indexes (McIntosh,

1997).

Harein investigate the risk and return characteristics of

risk arbitrage for a sample of 187 stock swap offers in the

form of collars for the 1994-2003 periods. Using cross

sectional analysis, they find that initial arbitrage spread is

significantly positively correlated with acquirers stock

volatility and the deal duration. using time series analysis,

we identify a significant non-linear relationship in risk

return profile for risk arbitrage portfolio: both strategy 1

(long the target for the fixed value collar offers; long the

target and short the acquirer for the fixed ratio collar

offers) and strategy 2.(delta hedging) produce returns

that are strongly positively correlated with the market

return in a severely declining market and are not

significantly correlated with the market return in a flat or

rising market.

Sampling design

Table 1 below indicates clearly the sample of this

research. Manufacturing sector is producing products and

services, in Sri Lanka. There are 32 companies are

available but researcher selected the 12 companies for

this study as sample.

Data Collection

Primary and secondary data will be used for the study

.primary data collected form questionnaire and secondary

Table 1. Sampling design

Country

Sri Lanka

Type of sector

Manufacturing

No. of companies

available

32

No of companies

selected

12

Table 2. Operationalization

Concept

Risk

Variable

Overall

Risk

Indicator

CAPM Equation

Measurement

Market risk

Dividend cover

Rc =Rf + (Rm - Rf )

Earning yield

Return

Earning

Profit

Dividend per share

ratio

Price earning ratio

ROE

ROCE

annual report ect. Researchers are use to secondary

data method. Collected data from secondary sources will

be analysed. For this purpose, researchers use the

following analysis method.

1. Ratio analysis

2. Risk analysis (CAPM Model)

3. Graphic analysis

Market value

Profit after tax and preference share dividend

Number of equity shares(ordinary share)

Market price per share

Earning per share

P A IT and preference share dividend*100

Equity share holders fund

Profit before interest and tax * 100

Capital employed

Conceptual model

See figure 1 above

Operationalization

See table 2 above

Premkanth. 81

Dependent variable

Year

2005

2006

2007

2008

2009

Return

2.73

69.59

146.12

203.17

233.07

Risk

6986.72

8795.74

13256.37

19721.37

23226.22

Table 4. Correlations

a

Coefficients

Model

1

(Constant)

Risk

Unstandardized

Standardized

Coefficients

Coefficients

B

Std. Error

Beta

-59.356

30.562

.013

.002

.969

t

-1.942

6.784

Sig.

.147

.007

Hypotheses

The following hypotheses are formulated for the purpose

of this study.

H1:- Manufacturing companies portfolio management is

efficiency.

H2:- High degree of risk lead to high degree of return.

Correlation coefficient analysis

In this study, which is undertaken to find out the

relationship between the risk and return of manufacturing

firms. Correlation analysis is carried out in order to find

out the nature of relationship between the variable based

on the value of correlation coefficient, Here, Table 3 and

4.

According to the coefficient correlation, there is positive

moderate relationship between risk and return during the

2005-2009. So conclusion may be made, that there is

positive relationship between the risk and return.

Through this finding, manufacturing firms can derive the

2

Coefficient of determination (R )

A more useful indicator will be the coefficient of

determination, which is defined at the squared value of

Pearlmans moment correlation coefficient. The

coefficient of determination of the Manufacturing firms

during last 5 years as showing the following table 4.10.

Table 5.

2

The coefficient of determination rp is 0.969. It means

that 96.9% of variability of risk can be accounted. For by

its liner strong relationship with return it follow that 4.1%

of variability of risk is not explained by the return.

By using the correlation analyzes it can be found that

how the relationship is between the variables and but the

nature of the relationship is between the variables. It is

not a proper way to describe the relationship exactly

between the variables by using the correlation analyzes.

Therefore regression analyses are the most suitable way

in order to find out the exact relationship between the

variables.

Table 6. Coefficient

a

Coefficients

Model

1

(Constant)

Risk

Unstandardized

Standardized

Coefficients

Coefficients

B

Std. Error

Beta

-59.356

30.562

.013

.002

t

-1.942

Sig.

.147

6.784

.007

.969

Table 7. Null Hypothesis of the Manufacturing

firms during the last 05 years (2005-2009) on

the basic of risk weighted

Multiple R

R Square

Adjusted R Square

Value of F

Significance F

Regression analysis

Regression analysis made to find out the equation, which

describes the relationship between the variable. From

this analysis the dependent variable can be forecasted

through the independent variable, regression line was Y=

a+bx. Here the regression summary output is obtained

through the statistical analysis. This output is given in the

table 6.

In this period, Coefficient of regression is 0.013, it

indicates that for every year increase of the independent

variable return, will increase by 0.013(Rs 000) that is Rs

13. On the basis of risk-weighted base, the coefficient of

regression is 0.013. It indicates that for every year

increase of the dependent variable return will increase by

0.013 that is Rs 1.3. Hence these analyses provide the

hypothesis of high degree of risk lead to high degree of

2

2

return.This fitness is shown by the rp in the rp summary

2

output. This value rp is 96.9% (based on risk weight)

therefore only 96.9% of can be explained through this

regression equation. That is the return affects the risk the

risk only 96.9%. Rest of 4.1% denotes the other factors,

which determines the return. However the rp2 subjective

therefore f-test examine the fitness of regression

equation.

0.969

0.939

0.918

46.021

0.007

alternative hypothesis is accepted. Therefore the

regression formula is accepted. Thus regression formula

helps to explain the change of return by the effect of risk.

The following are identified based on the analysis of the

Risk and return of the of the manufacturing firms.

When analysis of the relationship between the risk and

return, Return was calculated through ratio analysis and

Risk was estimated to use CAPM model. The correlations

between risk and return have a positive strong relation

(0.9744). Therefore, when risk of investment increase,

the return from the investment also increase. As a same

way when risk decreases, the income also decreases.

Finally the relationship between manufacturing sector risk

and return could be conformed by its regression analysis.

During research since null hypothesis rejected other

hypothesis has been recognized and it is able to reveal

the fact that there is direct liner relationship between risk

and return.

Hypotheses Testing

Null Hypothesis

Here null hypothesis means no relationship presumes to

risk and return. Now researcher can take the null

hypothesis by the regression output. The following output

show below. (On the basic of risk weighted) Table7.

Regression equation could be accepted at 5% of

significant level through the probability related to the

value of F. The null hypothesis can be rejected because

of the probability of significance level is less than 0.05 is

forward in this research compared to the findings of the

research, got from the data. In this view.

H1- Manufacturing firms, portfolio management is

efficiency

This is rejected on basis of findings got the ratio analysis.

Because researcher can observe the trend of ROCE,

ROE and (ROCE/ ROE) ratio for past 5 year of the

manufacturing firms is not sufficient level. Hence

portfolio management of the manufacturing firms is

Premkanth. 83

inefficiency.

H2- High degree of risk lead to high degree of return

This is accepted on the basis of finding got from the

correlation analysis and regression analysis. According to

this analysis, this hypothesis is accepted. Hence this

research, the positive linear relationship between risk and

return could be proved. Therefore when risk of

investment increases, the return from investment also

increase

holding diversified in the beneficial resources to reduce

the risk of the manufacturing firms. The diversification of

portfolio of investment is an important concept in financial

management.

In this survey, Risk and Return of the manufacturing

companies is analysis. Capital of manufacturing firms is

said as inefficient. The following researcher identified as

main causes for the inefficient. Companies were not

earned return according capital. Many companies were

not achieved return according faced the risk.

CONCLUSION

REFERENCES

collection of different investments that make up investors

total holding. A portfolio management might be the

investment in stocks and shares of investors or

investment in capital projects of company finance is very

important to every organization to play their activities

successfully. In Sri Lanka, Manufacturing companies are

play a very important role in economy of country. Many

customers and investors believe these companies

activities. Therefore Firms must manage their portfolio

Ahthur WC, Michael lS, Peter CY (1995). Risk and Return and

Insurance 7th edition, (Mc Graw Hill Inc)

Chales PJ (1994). Investment analysis Management 4th edition,

(JOHN) Wiley and sons, Inc

Harry M (1950) Modern portfolio management page no674-684

Jack CF (1991). Investment analysis Management 5 edition, (Mc Graw

Hill Inc)

Jack CF, Stephen HA (1979). Portfolio Analysis 2th edition,(PreticeHall,Inc)

Lawrence DS, Charles WH (1991). Intrudction to Fiancial

Management 6th edition, (New yorl:Mc Graw Hill Inc)

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