Determinants of Profitability: A Study on Flour Manufacturing Companies in Hosanna Town

In Ethiopia the contribution of manufacturing companies to economic growth is so minimal as comparedto agriculture and services sectors. They are experiencing low return which is an indicator of poorfinancial performance. However, to remain competitive in the globalized economy, having goodfinancial performance is highly imperative. Therefore, this study is to identify the determinants of flourmanufacturing companies’ profitability in Hosanna town. The explanatory variables used in this studywere firm size, leverage, liquidity, fixed asset turnover, operating expense and sales growth rate. Thedependent variables were ROA and ROE. The data was collected from ۶ companies for period of ۷ yearsfrom audited financial statements of the companies. Purposive sampling technique was used to select thesampled companies from the period of ۲۰۱۲-۲۰۱۸, consisting of ۶ companies with ۴۲ observations.Quantitative research approach was adopted. The panel regression was used to observe relationshipsamong the dependent and independent variables. The data were analyzed using descriptive statistics,correlation analysis and multiple linear regression analysis. The results of panel least square regressionanalysis showed that all independent variables explain ۷۴% and ۸۰% of the variance on ROA and ROErespectively where significant at ۵% levels. Further, firm size, liquidity and sales growth rate havestatistically significant and positive impact on ROA and ROE. On the other hand, operating expense hasa negative and statistically significant impact on ROA and ROE. However, the relationship for leverageand fixed asset turnover is found to be statistically insignificant. Based on the findings, the studyrecommends that flour manufacturing companies must work towards improving their liquidity ratio.Therefore, the manager should ensure that their firms have adequate liquidity levels and increase theirsize of firm. Firms should strive to reduce their operating expenses and improving sales growth ratebecause they have much influence in profit generation on both return on equity (ROE) and return onasset (ROA) as indicated by the regression results. Finally, further studies should incorporate externalfactors such as government tax regulation, GDP and inflation.