Theoretical Framework

This study aims to determine the effects of liquidity and capital structure on the financial

performance among publicly listed manufacturing companies in the Philippines. Liquidity and

capital structure have a vital role in the growth and profitability of a firm. Liquidity measures the

ability of an organization to meet immediate and short-term obligations with cash; on the other

hand, capital structure reflects the efficiency of a firm in terms of its assets in use. The quick

ratio is a way to measure liquidity and how well a company can meet its obligations without

having to liquidate or depend too heavily on its inventory. This can help a business assess

whether it has enough liquid assets that are capable of being converted into cash for the purposes

of paying its bills (Bragg, 2022). Meanwhile, to assess the capital structure, debt and equity

ratios are used to measure the amount of risk associated with the way in which the company’s

capital structure is built (Ohio University, 2022), and debt ratios are used to determine how much

an organization relies on debt to fund its operations (Bragg, 2023) and the extent of the

company’s leverage (Hayes, 2023).

However, the effects of liquidity and capital structure on manufacturing firms’ financial

performance are still being debated. According to the study of Zeb, Khan, and Iqbal (2016),

capital structure has a negative correlation with the financial performance wherein debts to

equity ratio and debt ratio has a negative significant impact on the financial performance of

cement sector firms. Meanwhile, liquidity has a positive correlation with financial performance

in which both quick ratio and current ratio has a positive significant impact on the financial

performance of the cement sector firms. However, based on the study of Nirajini & Priya (2013),

there is a positive relationship between capital structure and financial performance. Also, capital

structure has a significant impact on financial performance of the firm. On the other hand,
according to Mugetha (2019), liquidity has a positive and significant effect on financial

performance of listed firms in Nairobi Securities Exchange.

In the study of Zeb, Khan, and Iqbal (2016), they developed a model which measures the

effect of liquidity and capital structure on financial performance of cement firms. It used

financial performance as a dependent variable and liquidity and capital structure as independent

variables.

Figure 1. Theoretical Framework

Zeb, Khan, and Iqbal Model (2016)

The sub variables used in the current study based on the shown model were return on

asset, return on equity, earnings per share, net income, quick ratio, debt to equity ratio, and debt

ratio. Return on asset was obtained through net income and total assets, return on equity was

derived from net income and shareholder’s equity, earnings per share was attained from net

income, preferred dividends, and weighted average outstanding shares, and net income came by

total revenue and total expenses. In addition, quick ratio was achieved by current assets,

inventory and current liabilities, debt ratio was obtained by total liabilities and total equity, and

debt ratio was attained from total debts and total assets.
Sources of Data

The study utilizes secondary data obtained from the annual reports of manufacturing

companies in the Philippines. The 20 respondents was chosen among publicly listed

manufacturing companies with available data for 10 years from 2013 to 2022. In particular, the

financial statements of Alliance Global Group, Inc., Agrinurture, Inc., Apex Mining Co., Inc.,

Benguet Corporation, Emperador Inc., Euro-Med Laboratories Phil., Inc., San Miguel Food and

Beverage, Inc., Ginebra San Miguel, Inc., Holcim Philippines, Inc., Jollibee Foods Corporation,

JG Summit Holdings, Inc., Petron Corporation, Phinma Corporation, RFM Corporation, Shell

Pilipinas Corporation, San Miguel Corporation, D&L Industries, In., A. Soriano Corporation,

APC Group, Inc., and Concrete Agregate Corporation. The data are gathered from their

respective websites.

The data needed based on the sub variables were gathered according to each formula.

Return on asset was obtained through net income and total assets, return on equity was derived

from net income and shareholder’s equity, earnings per share was attained from net income,

preferred dividends, and weighted average outstanding shares, and net income came by total

revenue and total expenses. In addition, quick ratio was achieved by current assets, inventory and

current liabilities, debt ratio was obtained by total liabilities and total equity, and debt ratio was

attained from total debts and total assets.

Chapter 4

Figure 4 demonstrates the financial performance of the manufacturing companies in the

Philippines in terms of return on equity.

Figure 4. Return on Equity of Manufacturing Companies in the Philippines

Return on Equity
0.15

0.1195
0.103 0.1055 0.1065
0.1 0.0945
0.0855

0.05 0.045
0.025
0.0155
0
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

-0.05

-0.0755

-0.1

The figure shows the shifting of ROE every year. Over a ten-year period, the lowest ROE

occurred in 2014 due to the net loss attained by some companies such as AgriNurture, Inc., Apex

Mining Co., Inc., Ginebra San Miguel, Inc., and Shell Pilipinas Corporation. The failure of the

manufacturing companies to gain profit was due to the strong typhoon occurred in previous

month. The destruction caused by the typhoon led to disruptions in manufacturing operations,

supply chain disturbances, and delays in delivery of raw materials and finished goods. Also,

manufacturing companies faced challenges in meeting production targets and fulfilling orders.

Meanwhile, the highest ROE was during 2021 due to the increase of net income by Ginebra San

Miguel, Inc., AgriNurture, Inc., and San Miguel Food and Beverages, Inc. Manufacturing
companies started to recover gradually from the pandemic happened during the past year 2020.

This highest ROE achieved during 2021 means that manufacturing companies uses their equity

and earnings to produce more income than the other years. According to Lalonde (2021), low

ROE indicates that a company may be mismanaged and could be reinvesting earnings into

unproductive assets. On the other hand, Lewis (2023), mentioned that a higher ROE means a

company efficiently uses its shareholder’s equity to generate income.

Table 2 presents the trends of financial performance of publicly listed manufacturing

companies in the Philippines for the past ten years in terms of ROE.

Table 2. Financial Performance Among Publicly Listed Manufacturing Companies in the

Philippines in terms of Return on Equity

N Minimum Maximum Mean Std. Deviation

2013 20 (0.3988) 0.2123 0.0250 0.16919
2014 20 (2.2160) 0.4060 (0.0755) 0.57170
2015 20 (0.6826) 0.3264 0.0450 0.19872
2016 20 (0.2380) 0.5558 0.1030 0.16445
2017 20 (0.2570) 0.3587 0.1055 0.11578
2018 20 (0.0685) 0.3486 0.0855 0.07037
2019 20 (0.0328) 0.2348 0.0945 0.06565
2020 20 (0.6848) 0.2916 0.0155 0.19471
2021 20 (0.0579) 0.3628 0.1195 0.09473
2022 20 (0.0580) 0.3149 0.1065 0.09298
OVERALL 200 (2.2160) 0.5558 0.0776 1.73827
ROE

It is indicated in table 2 that the overall mean and standard deviation of return on equity

was 0.6245 and 1.73827. The overall mean of 7.76% indicates a low ROE ratio as 5% was

considered as low based on the industry average. This implies that manufacturing companies

earn relatively little compared to its shareholder’s equity. Over a decade, ROE got the highest

ratio during 2016 by San Miguel Food and Beverage, Inc. This indicates that the company was
able to maximize its net income while minimizing the equity. Conversely, 2014 got the lowest

ratio by Shell Pilipinas Corporation due to its net loss of P8.488 billion. This shows that the

corporation had trouble in earning profits while its equity remained or increased.

Figure 5 demonstrates the financial performance of the manufacturing companies in the

Philippines in terms of return on equity.

Figure 5. Earnings per Share of Manufacturing Companies in the Philippines

Earning Per Share

2.5

2.05 2.1245
2
1.8665 1.8945
1.812
1.597 1.66
1.5
1.381

1
0.878

0.5

0
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
-0.3865
-0.5

-1

Figure 5 illustrates fluctuation on earnings per share (EPS) of manufacturing companies

in the Philippines from 2013 to 2022. During the 10 years, the lowest EPS occurred during 2020

with negative value. The substantial downturn in EPS experienced by the manufacturing

companies was due to the widespread disruptions caused by the COVID-19 pandemic.

Lockdowns led to supply chain interruptions and reduced consumer spending, impacting

production efficiency and sales. On the other hand, the highest EPS occurred in 2021 because

manufacturing companies was able to recover from the pandemic occurred from the previous

year. A falling earnings per share (EPS) number may be an indication that the company is experiencing a
loss of revenue. Meanwhile, A high EPS generally means that the company performed well during the

specified earning period, typically a quarter or a year, and investors are more likely to pay a higher price

for its shares (Public, 2022).

Table 3 presents the trends of financial performance of publicly listed manufacturing

companies in the Philippines for the past ten years in terms of EPS.

Table 3. Financial Performance Among Publicly Listed Manufacturing Companies in the

Philippines in terms of Earnings per Share

N Minimum Maximum Mean Std. Deviation

2013 20 (3.97) 17.38 1.8665 4.91355
2014 20 (12.28) 16.11 0.8780 4.94387
2015 20 (1.52) 21.38 2.0500 4.78110
2016 20 (0.27) 5.75 1.3810 1.72374
2017 20 (0.10) 8.78 1.8945 2.58614
2018 20 (0.03) 7.56 1.5970 2.20162
2019 20 (0.17) 6.68 1.8120 2.21584
2020 20 (10.45) 9.46 (0.3865) 4.02877
2021 20 (0.0011) 14.59 2.1245 3.29114
2022 20 (8.15) 15.88 1.6600 4.30166
OVERALL 200 (12.28) 21.38 1.4877 3.4987
EPS

Table 3 shows the financial performance of manufacturing company in terms of earnings

per share with overall mean and standard deviation of 1.4877 and 3.4987. This indicates that for

every share of company’s stock, there is a profit of 1.4877 pesos. Furthermore, the highest

earning per share of 21.38 occurred in 2015 by San Miguel Food and Beverage, Inc. This implies

that the net income attributable to common shareholders arose as the net income attributable to

equity holders increases while dividends on preferred shares decreases. Meanwhile, the lowest is

(12.28) during 2014 of Shell Pilipinas Corporation. This means that there was net losses

attributable to stockholders during the year.