https://doi.org/10.37955/cs.v7i3.319
Received June 04, 2022 / Approved October, 22 2021 Pages: 45-75
eISSN: 2600-5743
Leverage and business profitability
in SMEs in the industrial sector of
Ecuador from 2017 to 2021
Apalancamiento y rentabilidad empresarial en las pymes
sector industrial del ecuador periodo 2017 al 2021
Miller Sáenz Romero
Ec. UPSE, saenzrmiller@gmail.com
https://orcid.org/0000-0003-0272-0012
Antonio Poveda Guevara
PhD. Universidad Del Pacífico
Antonio.poveda@upacifico.edu.ec
https://orcid.org/0000-0002-3908-3099
ABSTRACT
The present research aims to evaluate the leverage and profitability of
small and medium-sized enterprises (SMEs) in the industrial sector in
Ecuador. To achieve this, a documentary analysis of the financial
statements issued by the Superintendence of Companies was carried
out in order to identify trends and patterns of behavior in the period
between 2017 and 2021. In addition, a correlation analysis was
performed using Pearson's correlation test in SPSS, with the purpose
of determining the existing relationship between financial leverage
and profitability of SMEs. The study population consisted of the 5915
SMEs in the industrial sector that filed their financial statements with
the Superintendency of Companies during the aforementioned period.
The results obtained revealed a varied distribution of companies with
different levels of profitability, expressed through the return on equity
(ROE) indicator. In general, a concentration of companies with ROE
below 0.1 was observed, indicating difficulties in generating profits
and low efficiency in the use of financial resources. Over the years
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analyzed, a slight improvement was detected in some ROE intervals.
However, the proportion of companies with high levels of profitability
was limited. These findings suggest the existence of a positive
relationship between leverage and corporate profitability in the period
studied.
RESUMEN
La presente investigación tiene como objetivo evaluar el
apalancamiento y la rentabilidad de las pequeñas y medianas
empresas (PYMES) del sector industrial en Ecuador. Para lograr esto,
se llevó a cabo un análisis documental de los estados financieros
emitidos por la Superintendencia de Compañías, con el fin de
identificar tendencias y patrones de comportamiento en el periodo
comprendido entre 2017 y 2021. Además, se realizó un análisis de
correlación utilizando la prueba de correlación de Pearson en SPSS,
con el propósito de determinar la relación existente entre el
apalancamiento financiero y la rentabilidad de las PYMES. La
población de estudio esta conformada por las 5915 PYMES del sector
industrial que presentaron sus estados financieros ante la
Superintendencia de Compañías durante el periodo mencionado. Los
resultados obtenidos revelaron una distribución variada de empresas
con diferentes niveles de rentabilidad, expresados a través del
indicador de retorno sobre el patrimonio (ROE). En general, se
observó una concentración de empresas con un ROE inferior a 0.1, lo
cual indica dificultades en la generación de utilidades y una baja
eficiencia en la utilización de los recursos financieros. A lo largo de los
años analizados, se detectó una ligera mejora en algunos intervalos de
ROE. Sin embargo, la proporción de empresas con niveles altos de
rentabilidad fue limitada. Estos hallazgos sugieren la existencia de una
relación positiva entre el apalancamiento y la rentabilidad empresarial
en el periodo estudiado.
Keywords / Palabras clave
Financial leverage, corporate profitability, manufacturing.
Apalancamiento financiero, rentabilidad empresarial, manufactura.
Introduction
The SME industrial sector in Ecuador is crucial to the country's
economic development. However, these companies face challenges in
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terms of profitability and growth, including managing financial
leverage in an uncertain economic environment.
According to the study conducted by Gil et al. (2018), a relationship
has been observed between liquidity problems in companies and a
high level of debt, also known as leverage. In these situations, it has
been found that leverage can decrease the economic profitability of the
firm. This suggests that financial uncertainty can lead to an increase in
the level of leverage and an accumulation of financial risk in such
organizations.
However, it is important to note that the results of Borja et al. (2022),
failed to identify a statistically significant relationship between the
level of leverage and economic profitability in the study period
covering the years 2018 and 2020. These findings suggest that other
factors may be influencing firm profitability during that specific
period, and that financial leverage alone may not be the primary
determinant of profitability in that time context.
In contrast, Rivera et al. (2018)mentioned that financial leverage can
be a key factor for the success of a company. These authors found
evidence of positive financial profitability in companies over a four-
year period, which is attributed to positive financial leverage. In
addition, they noted that companies that maintain an adequate level
of financial leverage have greater opportunities to invest in new
projects, which in turn can increase their profitability and long-term
growth capacity.
According to the study conducted by Rivera (2020)it is noted that
companies that managed to maintain an adequate balance in their
financial leverage were able to take advantage of investment and
growth opportunities that arose in their sector. Adequate management
of leverage allowed them to access additional resources to finance
projects, expand their productive capacity and improve their
competitiveness in the market. As a result, they experienced stronger
financial performance and a sustained ability to generate profits over
time.
Therefore, it is essential to extend the study period in order to obtain
more solid conclusions and advance knowledge in this area. The
proper management of financial leverage can improve the profitability
of companies and avoid insolvency situations, which guarantees the
success in the operation of the company (Bonmatí, 2016).
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Small and medium-sized enterprises are an essential component of
any country's economy, and the industrial sector is no exception. SMEs
in the industrial sector are companies engaged in the production and
manufacturing of goods and services, which represent an important
source of employment and wealth for the economic development of
any nation. (Economic Commission for Latin America and the
Caribbean, 2022).. However, the industrial sector faces unique
challenges and opportunities in today's business environment.
Although these companies have fewer financial and human resources
compared to large companies, they have the ability to be agile and
flexible, allowing them to adapt quickly to market demands.
In this sense, proper management is vital to ensure the survival and
growth of a company, especially in a highly competitive business
environment. Strategic planning and effective resource management
are fundamental in the business management of SMEs in the
industrial sector. According to Moreno, Cevallos, and Balseca. (2018),
strategic planning allows companies to set clear objectives and define
a direction for the business in the long term, while human resource
management is important to have qualified and committed employees
to help achieve the company's objectives. Despite the above, access to
financing is one of the biggest challenges facing SMEs in the industrial
sector. Many of these companies do not have access to traditional
financing, which can hinder business growth. To address this
challenge, SMEs in the industrial sector can seek financing
alternatives, such as venture capital or crowdfunding.
Another important aspect in the business management of SMEs in the
industrial sector is risk management. These companies face various
risks, such as those associated with investment in new assets, exposure
to changes in markets, and economic and political uncertainty (Brito,
2018). In this sense, risk management involves the identification and
assessment of risks, and the implementation of strategies to mitigate
them.
It is an essential tool for business management, allowing companies to
measure their financial performance and make informed decisions.
These indicators provide information on the financial health of the
company. According to Correa, Gómez, and Londoño. (2018), the
analysis and measurement of financial indicators are fundamental in
business management, as they allow managers to evaluate financial
performance, identify areas for improvement and make informed
decisions.
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Financial indicators are widely used in the business context to assess
the company's ability to meet its financial obligations and make
strategic decisions regarding investment and financing. There is a wide
variety of financial indicators available, each with its own function and
relevance in business management.
It is important to keep in mind that the selection of appropriate
financial indicators depends on several factors, such as the size and
complexity of the company and the industry in which it operates.
Therefore, managers should carefully choose the most relevant
financial indicators for their company in order to effectively measure
financial performance and make informed decisions (Solano, 2016).
It should be noted that financial indicators should not be analyzed in
isolation, but as a whole. According to Carchi, Crespo, et al, (2020)the
analysis of financial indicators should consider the interrelationship
between them and evaluate the coherence of the results in the context
of the business. A positive financial indicator in one area does not
always imply a healthy financial performance as a whole. Therefore,
financial analysis should take into account the performance of the
company as a whole, evaluating the results of financial indicators in
relation to the company's strategic objectives.
Proper interpretation of financial indicators is key to making informed
business management decisions. Financial analysis can help managers
identify areas of the business that require attention, either in terms of
improving financial performance or in terms of a need for investment
or financing (Valle, 2020). Similarly, they can be used in financial
reporting for investors, shareholders and other stakeholders in the
company. The objective leverage theory is an approach that argues that
companies seek to achieve an optimal level of indebtedness, which
allows them to minimize their capital costs. According to Mongrut et
al. (2010)this optimal level is determined by the firm itself, depending
on a number of factors such as the firm's risk, the availability of
financing and market conditions.
The fundamental idea is that companies can improve their profitability
through the use of debt, but only up to a certain point, beyond which
the cost of debt exceeds profits. In this sense, the objective leverage
theory suggests that firms should seek a balance between the benefits
and costs of debt, in order to maximize the value of the firm for its
shareholders (Vargas, 2014).
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It should be noted that the objective leverage theory has been the
subject of numerous studies and debates in the financial literature. For
example, authors such as Álvarez and Hernández (2017), have
proposed that the choice of the optimal level of indebtedness may
depend on the economic cycle, and that firms may have incentives to
vary their level of indebtedness depending on macroeconomic
conditions. Other authors have questioned the validity of the objective
leverage theory in situations of uncertainty and volatility in financial
markets, in such situations, firms may choose to maintain a lower level
of indebtedness to avoid greater financial risks and not rely so much
on leverage to maximize profitability.
Myers (1984)indicates that companies may choose to maintain a
conservative level of indebtedness in times of instability in the
financial markets to ensure their long-term solvency. In any case, it is
important to consider the different factors and circumstances that may
influence the relationship between indebtedness and corporate
profitability. However, the objective leverage theory remains a
relevant theoretical framework for understanding the relationship
between capital structure and corporate profitability.
Myers (2013)indicates that leverage is a financial tool that allows
companies to use debt to finance their operations and investment
projects. (p. 277). By doing so, companies can increase their
profitability through the use of financial resources that they do not
possess in the form of equity capital. However, leverage also implies
greater financial risk, since the company assumes financial obligations
that must be fulfilled in the future.
In corporate governance, leverage is used to increase the profitability
of the company, as the interest paid on debt is tax deductible, which
reduces the company's tax burden and increases its net profits
(Brealey, 2017, p. 224).. In addition, the use of leverage can enable the
firm to undertake investment projects that would otherwise not be
possible with limited equity.
However, leverage also entails risks. If the company is not able to
generate sufficient profits to cover its financial obligations, it may go
bankrupt or have to resort to debt refinancing, which would increase
its financial burden in the future (Ross, 2016). Therefore, it is
important for companies to carefully assess their ability to meet their
financial obligations before making leverage decisions.
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In corporate governance, the choice of the appropriate level of leverage
depends on several factors, such as the expected profitability of the
investment project, the company's ability to meet its financial
obligations, the cost of debt, and the availability of equity funds
(Brigham & Houston, 2015). It is important for companies to carefully
evaluate these factors and make informed decisions about the level of
leverage that is appropriate for them.
Borja et. al (2022)mentions that "Financial leverage is a strategy used
by companies in the industrial sector in Ecuador to increase their
profitability through the use of debt". However, it is crucial to keep in
mind that this strategy also carries a higher risk. Any decrease in
revenues can negatively impact the company's ability to meet its
financial obligations.
In this sense, it is essential for SMEs in the Ecuadorian industrial
sector to carefully evaluate the optimal level of leverage that will allow
them to improve their profitability. As mentioned by Gitman and
Zutter (2013)an adequate level of leverage can be beneficial, but an
excess of debt can increase the financial vulnerability of companies (p.
22). Therefore, it is crucial to find a balance between leverage and
ability to pay, considering the risks associated with the use of debt.
In addition, according to Gaytán (2021)the appropriate use of financial
leverage can generate a multiplier effect on the profitability of
companies in the industrial sector in the period analyzed. However, it
is necessary to carefully evaluate the costs associated with debt and
ensure that the company has the capacity to meet its financial
commitments. In this way, the benefits of financial leverage are
maximized and the potential risks are minimized.
Perez and Titelman (2018)emphasize that it is crucial for companies
to carefully consider their payment capacity and evaluate the risks
associated with the use of debt. In this way, they will be able to make
informed financial decisions and avoid situations that compromise
their financial stability.
In addition, Temprano (2015)states that financial leverage can amplify
both positive and negative returns for a company. SMEs in the
industrial sector should be aware of the benefits and risks associated
with leverage to make informed financial decisions.
It is calculated as follows:
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!"#$#%&#'()%*+,-(%#%&().+ /,
!"#$#%&%'&(")*'%)'#+,-)*".*
/&"0#+.(#.
!"#$#%&%'&(")*'%)'#+,-)*".*')'1(")0))*
23"#4.'5."&$
The effect of leverage in SMEs is a major factor in understanding how
the use of debt can influence both the profitability and financial
stability of these firms. Pulgarin et al. (2021)argue that "an optimal
level of leverage can allow them to take advantage of growth
opportunities and increase their profitability by providing them with
the ability to finance projects and operations with external funds". This
highlights the relevance of prudent and strategic management of
leverage to drive growth and profitability in the context of SMEs.
Furthermore, the effect of leverage on SMEs is closely related to their
ability to generate profits and returns for investors and owners. Maejo
(2022)states that "financial leverage can be used in any type of
business to increase its capital instantly and be able to invest more in
the short term". This highlights the importance of proper management
of leverage, where generating profits in excess of the associated costs
becomes a key objective for SMEs.
Leverage in SMEs also affects their ability to access additional sources
of financing. According to Gómez (2012)indicates that companies that
demonstrate a positive track record of responsible debt management
and maintain good debt coverage indicators can increase their
credibility and become more attractive to both lenders and investors.
This underscores the importance of maintaining sound financial
management and demonstrating a reliable ability to meet debt
obligations, which facilitates access to additional financing for SMEs.
The choice of capital structure and financial decisions are also affected
by the effect of leverage in SMEs. Sanchez (2014)mentions that the
choice between financing operations and projects through debt or
equity can impact financial flexibility and adaptability. This highlights
the need to carefully evaluate financing options and consider the long-
term effects on the financial flexibility and adaptability of SMEs when
making leverage decisions.
Finally, the effect of leverage in SMEs has significant implications for
financial risk management. Carella, et al. (2003)(2003), stresses that
companies should carefully evaluate the risks associated with leverage,
such as exposure to changes in interest rates, debt repayment capacity
and possible impacts on corporate image and reputation. This
emphasizes the importance of proper risk management and the
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adoption of mitigation strategies to ensure the financial stability of
SMEs in a changing economic environment.
Corporate profitability plays a key role in assessing the financial
success of companies. According to Gaytán (2018), he indicates it as
the capacity of a company to generate profits in relation to the
resources invested. This key indicator reflects the efficiency in the use
of resources and the creation of value for owners, being essential to
ensure the survival and growth of companies.
The measurement of corporate profitability is carried out through the
use of various financial ratios and metrics. According to Bejar and
Jijón (2017), Roe is the most common indicator used to evaluate
Financial Profitability. These measures provide a clear view of the
company's ability to generate profits in relation to the resources
invested, allowing an accurate assessment of its financial performance.
It is important to keep in mind that corporate profitability can vary
significantly depending on the industry and economic cycle in which a
company operates. According to Duarte (2004)companies often face
specific challenges that can affect their profitability, such as intense
competition, changes in market demand and production costs.
Therefore, understanding the particularities of the industry and
adopting appropriate strategies are key elements to maximize
profitability in a dynamic business environment.
Strategic decision making also plays a crucial role in corporate
profitability. Rice (2013)(2013) point out that companies that manage
to gain a competitive advantage in terms of prices and costs can
improve their profitability. In addition, product diversification can
enable them to access new markets and increase their profits.
Appropriate pricing and efficient cost management are key factors in
optimizing profitability and ensuring long-term sustainability.
In addition to asset management and strategic decisions, the
appropriate use of debt can also influence corporate profitability.
Lopéz (2014)argue that companies that manage to optimize the use of
their assets and maintain a balanced level of debt can improve their
profitability by maximizing returns and minimizing financial costs.
Maintaining a balance between the use of debt and profit generation is
essential to ensure long-term sustainable profitability.
In this context, the ROE formula is a key indicator for measuring a
company's financial profitability.
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The following is the ROE formula:
0)%*#1($(2#2,-(%#%&().#
/,
3)%*#4
!&*(5+
6
7!$$
3)%*#4
6
!&*(5+
8#*.('+%(+
6
7!$
7!$$
6
7*($(2#2,9)*#
7!:
Where:
Assets: All tangible and intangible resources belonging to the
company.
Equity: Set of tangible and intangible assets that make up the
company's capital.
Sales: Revenue generated by the company from the sale of its products
or services.
UAll: Earnings before interest and taxes, i.e., income generated by the
company before deducting these expenses.
UAl: Profit before taxes, i.e. the income generated by the company
before deducting taxes.
Net Profit: Final profit of the company after deducting interest and
taxes from gross profit.
Understanding business risks is crucial to assess their impact on the
achievement of a company's objectives (Martinez & Blanco, 2017).
These risks, both internal and external, may arise in the form of
uncertain events or circumstances that may hinder the organization's
progress. Therefore, appropriate management is required to minimize
their negative impact and protect the company's interests.
Rodriguez et. al (2013)indicates that the classification of business risks
into specific categories provides a solid basis for their identification
and evaluation. Operational, financial, legal and strategic risks are just
some of the categories into which they can be grouped. Each category
has its own characteristics and consequences, which highlights the
importance of identifying and assessing the relevant risks for the
company in question.
Effective enterprise risk management involves a comprehensive
process that includes the identification, assessment and mitigation of
risks (Giler, 2016). This management is not limited to the
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identification of potential risks, but also involves the implementation
of preventive and control measures to protect the company's interests.
Anticipation and mitigation of risks are essential to ensure that
business objectives are achieved safely and efficiently.
Although business risks are commonly associated with threats, they
can also represent opportunities (Mejía, 2011). A company's ability to
identify and take advantage of emerging opportunities, while
anticipating and mitigating risks, is a crucial factor for its success and
survival in a constantly changing business environment. Risk
management thus becomes a strategic tool for a company's growth and
adaptability.
Business risks can not only affect a company's operational
performance, but can also have significant financial consequences.
(Nava, 2009). These consequences can include financial losses,
reputational damage and a decrease in the value of the company.
Therefore, it is essential that companies implement appropriate risk
management measures to safeguard their assets and ensure their long-
term sustainability.
Materials and Methods
In the present study, a quantitative approach research was carried out,
specifically a panel data study, in which the evolution of leverage and
profitability of small and medium-sized industrial companies in
Ecuador during the period 2017-2021 was analyzed. The main
objective of the study was to systematically evaluate the effect of
financial leverage on the profitability of these companies, for which
relevant financial data were collected from the Superintendence of
Companies, selected through the "C" classification corresponding to
the industrial sector according to ISIC. The analysis of the evolution of
the financial indicators made it possible to identify the relationship
between leverage and the profitability of the companies studied, which
contributed to a better understanding of the factors that influence the
business success of small and medium-sized companies in the
industrial sector in Ecuador.
The study was framed in a causal analytical type of research. The main
objective of this study was to establish causal relationships between
the level of financial leverage and the profitability of companies
belonging to industrial SMEs in Ecuador. We sought to analyze in
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depth the effects of leverage on the profitability of these companies
during the period 2017-2021, through the study of relevant financial
indicators. Through a rigorous and systematic analysis, we sought to
determine the influence of leverage on profit generation and the ability
of companies to maintain a sustainable financial performance over
time. Likewise, a correlational approach was used to analyze the
relationship between both variables, without manipulating any of
them. Specifically, the objective was to establish whether there was a
significant relationship between the level of financial leverage and the
profitability of these companies in the period 2017-2021. The
correlational research provided valuable information on the nature
and degree of relationship between the variables studied, which was
essential for a thorough understanding of the country's business sector
and for making informed economic decisions.
This study is based on the financial information provided by all the
small and medium-sized companies in the industrial sector in Ecuador
that submitted their financial statements to their regulatory body, the
Superintendency of Companies (SuperCIAS, 2021). (SuperCIAS,
2021) during the period between 2017 and 2021. The data collected
from these companies constitute the main source of information to
carry out the evaluation of leverage and profitability of the 5915 small
and medium-sized companies in the industrial sector, identified in the
International Standard Code of Economic Activities (ISIC), in category
"C", and that have provided information from 2017 to 2021.
To perform the analysis, the existing population is used with a high
significance level, and it is considered as a finite sample. The following
is the calculation of the sample:
Data for the calculation of the finite sample:
;
= Population size = 5915
<
= Confidence level for 95% = 1.96
,,,,,,,,,,,=
= Probability of failure = 50% = 50% = Probability of failure =
50% = Probability of failure = 50% = Probability of failure = 50%
>
= Probability of success = 50% = 50% = Probability of success = 50%
= Probability of success = 50% = Probability of success = 50%
?
= Maximum permissible error = 5%.
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Finite sample formula:
@ /
A
;BCB>B=
?
𝟐
B
D
;EF
G
H<
𝟐
B>B=
I
@ /
A
JKFJBFLKJBMLJBMLJ
J
𝟐
B
D
JKFJEF
G
HFLKN
𝟐
BMLJBMLJ
I
@ / ONF
As a result of the sample size calculation with a confidence level of
95%, it was determined that the sample should be composed of 361
small and medium-sized companies in the industrial sector that
submitted financial information during the study period (2017-2021).
This sample size will allow obtaining accurate and representative
results of the population under study.
Results
The calculation of financial leverage and corporate profitability is
performed using the database provided by the Superintendence of
Companies Securities and Insurance, covering the period from 2017 to
2021. Below is a table of descriptive statistics that provides a
quantitative summary of the data analyzed. These statistics provide an
overview of the distribution, central tendency and dispersion of the
variables under study, providing relevant information about the data.
Table 1. Principal statistics of financial leverage
Year
Minimum
Maximum
Media
Median
Est. dev.
2017
2018
2019
2020
2021
0,1021
0,00759
0,05681
0,03406
0,2954
4,583
4,126
4,333
4,052
3,763
1,941
1,841
1,790
1,729
1,825
1,749
1,696
1,606
1,597
1,682
0,8076
0,7555
0,7367
0,7244
0,6389
Note. The table shows information on the minimum, maximum, mean,
median and standard deviation of financial leverage during the period
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from 2017 to 2021. Taken from Statistical Package for Social Sciences,
2023, The Author.
During the analysis period, there has been minimal variation in the
average financial leverage, remaining stable at around 1.6. This
indicates a constant trend in the average level of leverage in the sector
studied. Likewise, a similar trend has been found in the median
financial leverage, with relatively stable values around 1.6. This
suggests that half of the values are above this point and half below.
Regarding the variability of the data, a wide dispersion has been
identified in the extreme values of financial leverage over the years
analyzed. The minimum values range between 0.05680 and 0.2954,
while the maximum values vary between 3.555 and 4.348. This
variability at the extremes indicates the presence of exceptional cases
in terms of financial leverage as shown in Figure 1.
Figure 1 . Cash and Whisker Diagram Leverage 2017-2021
Note. The figure shows information on the distribution and variability
of financial leverage during the period from 2017 to 2021. Taken from
Statistical Package for Social Sciences, 2023, The Author.
These findings highlight the general stability of the average level of
financial leverage in the sector studied during the analysis period.
However, the wide dispersion in the extreme values suggests the
existence of companies with significantly higher or lower leverage
levels, which is evident when generating the corresponding frequency
distribution for each year. It is relevant to analyze the frequency
0
0,5
1
1,5
2
2,5
3
3,5
4
4,5
Apal2017 Apal2018 Apal2019 Apal2020 Apal2021
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distribution of financial leverage in the companies studied. This
distribution provides detailed information on the frequency with
which different levels of leverage are present within the sample.
In addition, by examining the distribution of frequencies over time, it
is possible to identify possible variations in leverage patterns. This may
reveal changes in the financial strategies adopted by companies as the
economic environment and market conditions evolve.
Table 2. Frequency distribution for Leverage 2017
Interval
Midpoint
Freq.
Rel.
Accum.
< 0,5307
0,5307 - 1,0614
1,0614 - 1,5922
1,5922 - 2,1229
2,1229 - 2,6536
2,6536 - 3,1843
3,1843 - 3,7151
3,7151 - 4,2458
>= 4,2458
0,26536
0,79608
1,3268
1,8575
2,3883
2,919
3,4497
3,9804
4,5111
8
29
130
101
48
24
9
8
1
2,23%
8,10%
36,31%
28,21%
13,41%
6,70%
2,51%
2,23%
0,28%
2,23%
10,34%
46,65%
74,86%
88,27%
94,97%
97,49%
99,72%
100,00%
Note. This frequency distribution allows us to analyze the
concentration or dispersion of the values of financial leverage in 2017
and to obtain an overview of how these values are distributed in the
sample studied. Taken from Statistical Package for Social Sciences,
2023, The Author.
Business Profitability Analysis
The results obtained from a table of descriptive statistics that provides
a quantitative summary of the data analyzed are presented below.
These statistics provide an overview of the distribution, central
tendency and dispersion of the variables related to ROE, which is
relevant for understanding the profitability and financial performance
of SMEs in Ecuador.
Table 3. Key statistics of the ROE 2017-2021
Year
Minimum
Maximum
Media
Median
Est. dev.
2017
2018
2019
2020
0,1226
0,1027
0,0922
0,0880
0,09196
0,07996
0,07215
0,05932
0,1181
0,1004
0,1012
0,1068
-0,01552
-
0,02873
-0,03521
0,6883
0,6859
0,7133
0,8132
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2021
0,1014
0,07925
0,0918
-
0,03976
-
0,00924
0,6788
Note. The table shows information on the minimum, maximum, mean,
median and standard deviation of the ROE during the period from
2017 to 2021. Taken from Statistical Package for Social Sciences, 2023,
The Author.
During the analysis period from 2017 to 2021, a stability in the average
return on equity (ROE) has been observed in the companies studied,
remaining around 0.1. This indicates a constant trend in the average
level of profitability generated by shareholder investment. A similar
trend has also been found in the median ROE, with relatively stable
values around 0.09. This suggests that half of the values are above this
point and the other half below, which reflects a balanced distribution
in terms of the profitability of the companies. Regarding the variability
of the data, a wide dispersion in the extreme values of the ROE has
been identified throughout the years analyzed. The minimum values
range between 0.0568 and 0.1027, while the maximum values vary
between 0.6788 and 0.8132. This variability at the extremes indicates
the presence of companies with exceptionally high levels of
profitability compared to the average. These significant differences at
the extremes of ROE point to the existence of companies with
outstanding financial performance and many others that face
challenges in terms of profitability, as can be seen in Figure 2.
Figure 2. Box-and-Whisker Diagram ROE 2017-2021
0
0,1
0,2
0,3
0,4
0,5
0,6
0,7
0,8
ROE2017 ROE2018 ROE2019 ROE2020 ROE2021
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Note. The figure shows information on the distribution and variability
of the ROE during the period from 2017 to 2021. Taken from Statistical
Package for Social Sciences, 2023, The Author.
By analyzing the frequency distribution of ROE in the companies
studied, a more detailed view of the frequency with which different
levels of profitability are present in the sample is obtained, providing
more complete information on this business indicator, serving as an
aid in making informed financial decisions.
Relationship between the level of financial leverage and corporate
profitability of industrial SMEs in Ecuador during the study period.
Table 4. Correlation Matrix
Correlation Coefficient (Leverage,
ROE)
0,22338333
Note. Taken from Statistical Package for Social Sciences, 2023, The
Author.
A correlation coefficient of 0.22 between financial leverage and ROE
of industrial SMEs in Ecuador indicates that there is a weak positive
connection between these two variables. This implies that, in general,
a high level of financial leverage is associated with a slight increase in
the financial performance of firms. However, it is important to note
that this relationship is not very strong, implying that there are other
factors that may have a more significant influence on the ROE of these
companies. In order to visualize more clearly the relationship between
financial leverage and ROE in industrial SMEs in Ecuador, a scatter
plot is presented below. This will allow us to analyze the strength and
direction of the relationship between these two key variables in the
financial performance of the companies.
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Figure 3. Leverage vs. ROE scatterplot
Note. Taken from Statistical Package for Social Sciences, 2023, The
Author.
The slope obtained in the analysis, with a value of 0.0368, indicates
that, for each additional unit in Financial Leverage, an average
increase of 0.0368 in Financial Profitability is expected. However, it is
important to keep in mind that this relationship is weak, which implies
that other factors may have a significant influence on the Financial
Profitability of the companies.
This graphical analysis provides us with an overview of the
relationship between Financial Leverage and Financial Profitability in
industrial SMEs in Ecuador. It is important to consider this link when
assessing the impact of leverage on the financial performance of
companies and to make informed decisions on capital structure and
financial management in general.
This study examines the relationship between financial leverage and
the profitability of companies in the industrial sector, with previous
research in different economic sectors.
Through a detailed analysis of financial data, case studies and
comparisons between companies in the industrial sector, this study
will provide a clearer picture of how financial leverage influences
profitability and financial management in this specific sector. It will
also provide insight into best practices in managing financial leverage,
strategies for minimizing the associated risks, and key considerations
y = 0,0368x + 0,0394
-0,1
0
0,1
0,2
0,3
0,4
0,5
0,6
0,7
0,8
0,9
0 1 2 3 4 5
Financial Profitability (Roe)
Financial Leverage
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that companies should take into account when making financing
decisions.
On the other hand, in the case of financial leverage, it was found that
it can have a positive impact, since, with an increase in leverage,
financial profitability increases by 0.22 These results contrast with the
results of the study by Segura (2021), where he examined the
relationship between financial leverage and profitability in companies
in the beverage sector in Ecuador. The objective was to evaluate the
incidence of different leverage indicators on financial profitability.
According to the results obtained, an increase in short-term
indebtedness decreases financial profitability by -1.35, while an
increase in financial leverage increases it by 1.78.
In Prado's research (2020), he found that the influence of
indebtedness on the financial performance of companies in the
agricultural sector, the incidence of indebtedness on the financial
profitability of these companies was evaluated. According to his
results, an increase in financial leverage is associated with a variation
of 0.39% in profitability.
Conclusions
During the period analyzed from 2017 to 2021 in the industrial SME
sector in Ecuador, different patterns and trends were observed in
relation to ROE and financial leverage. In terms of financial leverage,
a trend of moderate use of debt by industrial SMEs was detected. This
suggests that these companies did not rely heavily on external
financing for their operations and had a more cautious approach to
their capital structure.
In terms of ROE levels, there was a varied distribution of companies
with different levels of profitability. In general, there was a
concentration of companies with ROE below 0.1, indicating difficulties
in profit generation and low efficiency in the use of financial resources.
Over the years, a slight improvement was observed in some ROE
ranges, but the proportion of companies with high levels of
profitability was limited.
It is important to highlight that the economic context during these
years was marked by several factors, such as the economic slowdown,
the COVID-19 health crisis and the restrictive measures that affected
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companies in general. These events had a significant impact on the
financial performance of industrial SMEs, hindering their profitability
and generating additional challenges for their operation.
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