FACTORS INFLUENCING THE PROFITABILITY OF SELECT FMCG COMPANIES IN INDIA DURING PRE-COVID PERIOD: A PANEL DATA ANALYSIS

Abstract

India’s FMCG industry establishes itself as the fourth largest sector in the economy by contributing about 20 per cent to the GDP. The profitability or earning capability of a company is greatly influenced by its liquidity as well as the skillful utilization of its assets. The present paper makes an empirical assessment of the factors influencing profitability of fifteen selected FMCG companies in India for the period 2004-05 to 2018-19. This study presents the findings of panel data analysis using fixed and random effects models to explore the relationship between key financial ratios and profitability, as measured by Return on Capital Employed (ROCE), in selected FMCG companies in India from 2004–05 to 2018–19. The analysis reveals that while the coefficients of Current Turnover Ratio (CTR), Total Receivables Turnover Ratio (TRTR), and Fixed Asset Turnover Ratio (FATR) were statistically insignificant, the Inventory Turnover Ratio (ITR) showed a positive and statistically significant relationship with ROCE at the 10% level. Cash and Cash Equivalents to Current Assets Ratio (CECAR) exhibited a strong positive impact on profitability, being significant at the 1% level under both models. Conversely, liquidity indicators like Quick Ratio (QR), Current Ratio (CR), Debt to Income Ratio (DIR), and Total Receivables to Current Assets Ratio (TRCAR) negatively influenced profitability and were statistically significant. The Hausman test validated the use of the random effects model. Overall, the study underscores that effective inventory and cash management positively affect profitability, while excessive liquidity can diminish it due to inefficient fund utilization.