Determinants of Financial Performance in Albanian Economic Entities,
Case of Construction Industry in Albania
ALBANA GJONI (KARAMETA)
Department of Finance and Accounting
Agricultural University of Tirana
Rr. Dritan Hoxha, Laprakë, Tiranë
ALBANIA
SHPRESA ÇELA
Department of Finance and Accounting
Agricultural University of Tirana
Rr. Elbasanit, Tiranë
ALBANIA
AHMAD MLOUK
Department of Finance and Accounting
Staffordshire University
Room LW123, Ashley 2 Building
UNITED KINGDOM
GRISELDA MARKU
Department of Finance and Accounting
Agricultural University of Tirana
Kodër Kamëz, Tiranë
ALBANIA
Abstract: - Financial performance mainly reflects the overall financial health of the business sector over a
period of time. It shows how well an entity is using its resources to maximize shareholder’s wealth. Although a
thorough assessment of a firm's financial performance takes into account many other measures, the most
common performance measurement used in the area of finance are financial ratios. This paper provides a
comprehensive study of the financial performance measurement literature related to the construction sector in
Albania. The literature covers studies from Albania, Iran, India and Pakistan, but some international evidence
has also been presented. The construction sector is chosen because of its impact on economic growth in
Albania, it represents the second main sector according to its share effect on Albanian GDP. The financial ratios
used to measure the financial performance of the construction sector are the debt ratio, the liquidity ratio and the
profitability ratio from the period 2018-2020 for 100 construction companies in Albania. Return on Assets
(ROA) is taken as the predictor variable and three financial ratios are taken as the predictive variables. This
research reveals that the financial ratios have positive correlation with the dependent variable whereas the
leverage ratio has negative correlation. To overcome the limitations of the forthcoming studies, the considered
number of years need to be increased and other models such as Market Value Added, Capital Asset Pricing
Model and Economic Value Added can be used to be tested for research to analyze other factors that may affect
financial performance.
Key-Words: - Financial Performance, Financial Ratio, Construction Company, Financial Statements,
Profitability.
Received: June 15, 2021. Revised: December 10, 2021. Accepted: January 18, 2022. Published: January 20, 2022.
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Albana Gjoni (Karameta),
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1
Introduction
The financial performance of a business reflects the
result of its core activities in relation to the market
and competitors. Measuring and analyzing the
financial performance of a business in the right way
and with the right techniques always remains a
challenge and a main objective for the economic
entities. The financial performance of economic
entities in the construction sector is very important
for investors, shareholders, customers, suppliers,
employees, government controlling agencies and
other parties that judge and make decisions based on
this performance. The construction sector represents
the second largest sector in Albania based on the
contribution on GDP, 13-15% of GDP according to
INSTAT (2020). Therefore, it was considered very
important to be analyzed through this study.
Financial performance is measured through
quantitative indicators such as financial ratios, but
also through comparative horizontal and vertical
analysis. However, recording and interpreting
financial ratios in different reporting periods for
different companies in the same sector of the
economy is a good method of measuring and
interpreting financial performance. This can be done
periodically by entities using information derived
from periodically reported financial statements.
Measuring these ratios, interpreting them, and
finding correlations and relationships between them
is also a breakthrough in assessing the financial
performance of a particular sector in a country.
2
Literature Review
The overall financial performance of the economic
entities is used as a tool that measures the
improvement of a modern-day business enterprise
and its periodic success. Although there are many
symptoms and techniques that show financial
performance, the preference of up to date financial
ratios relies on the quick method to compare and
analyze figures of different economic entities in a
short period of time. In many studies, return on
Equity (ROE) and Return on Sales (ROS) are two of
the most broadly used ratios to measure economic
performance [45]. For example, some authors chose
Return on Assets (ROA), ROE, and ROS as main
ratios to measure corporation financial performance
[44], while others selected ROE, ROS, and the
percentage of increase in sales to learn about
financial performance determinants [33]. Another
author has measured economic performance based
on ROA, ROE and ROS in order to find out about
the relationship between corporate social
responsibility and the economic entity’s turnover.
[24]. Other authors used ROE to evaluate the
financial performance in different periods of time
for the same economic entity or for a selected group
of economic entities in a specific accounting period.
[23] Many researchers agree using these financial
ratios to generate very important records about the
firm's financial performance and its financial health.
While ROE demonstrates capital efficiency, ROS
shows the profit margin achieved on sales. In other
words, one report refers to the ability to use capital,
the other refers to the capacity to change the level of
operating sales. Therefore, the use of these two
ratios will help the researcher to have concrete
picture and complete conclusions regarding the
economic performance of enterprises. According to
some other authors, liquidity measurement reports
are a technique to assist analysts decide over
company’s capability to meet short and long term
obligations [42]. In a study in 2012 an author
suggests that "liquidity" has an indispensable
position in the success of a firm, because failure to
meet its duty in a timely manner can lead to a low
credit rating through creditors, a limit in the value of
market growth and subsequently a limit in the
capacity to raise more capital in the future [29].
Meanwhile, capital is the core of an exact economic
performance. Therefore, the liquidity issue plays a
vital role in working capital management [35], and
its affect must be cautiously considered. Many
studies such as [1], [11], [18], [47], observed the
tremendous impact of liquidity on financial
performance. There is a range of financial reviews
to measure corporate liquidity and the preference of
the suitable ratio depends on the characteristics of
the subject studied. For corporations that have a
large amount of short term debt such as meals
processing firms, quick ratio (QR) is normally used.
In their study [37] showed that if there is an increase
in QR the liquidity performance is affected.
According to other authors, Stephen et al. (2010),
this statement helps managers understand how
environmentally friendly they are at using corporate
assets to generate sales. A very high level increase
in sales might suggest an increase in company’s
market share, and finally, an improved economic
performance. [37] assesses company overall
performance by the efficient use of total assets,
long-term asset turnover and short-term asset
turnover. The authors point out that low turnover is
a signal of inefficient use of actual resources and
that the business enterprise has not efficiently
utilized its potential or assets. Analysts conclude
that the higher the efficiency of asset use, the higher
the efficiency of the company. The leverage ratio
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suggests the degree of debt and its effect on overall
financial performance of the company. It is directly
related to the efficiency of use of capital in a
company, so it is a very important tool for decision-
making for managers, shareholders, investors, and
creditors. Therefore, research has been carried out to
discover the effect of that variable on a company's
overall financial performance, but there is no
definitive conclusion about this relationship. Some
researchers [4] found that leverage is negatively
related to economic performance; the motive is that
high debt requires extra resources to pay off debt.
However, others like [7], [19] argue that additional
debt can be applied to a good investment, which will
amplify economic performance. Profitability has a
tendency to concretely accomplish a strategic goal,
which is claimed to determine the level of success of
an economic entity. A profitability level might be
set as a strategic goal for an economic entity.
Managers think that earnings are dictated by efforts
to coordinate income versus expenses associated
with other operating enterprise objectives, which
need to be achieved in order for it to cross into a
generally dynamic market. Although profit is
described as a measure of success, price range
determination alludes to the relative extent of
receiving this success. At the end of the day,
economic performance is assessed by the ability of
an economic entity to achieve its planned level of
profit. Profitability is a measure to assess strategic
objectives of an economic entity. It is an essential
aspect of an economic entity's performance.
Productivity is also an important ratio that measures
the efficiency of a specific level of input on
generating a desired level of outputs. Financial
performance is affected by productivity and the
methods of managing product export. Another
author argues [46], that a very important method to
improve financial performance is to improve
productivity. One other very important component
to improve financial performance is the level of
income. By improving the level of income,
improving the level of actual input to produce actual
output, the economic entity can achieve higher
financial performance goals. Achieving the desired
level of productivity is one step forward to
improving financial performance of economic
entities. Through managing the levels of actual costs
of capital and labor, on producing actual levels of
output, economic entities can improve efficiency
and achieve higher levels of productivity. Economic
entities plan the level of cost for materials, labor,
overheads, and at the end of the period they
compare the actual level of costs with the planned
level. The variances of cost are later on analyzed,
interpreted and managers make decisions to improve
productivity by managing better those cost levels.
Managers make efforts to minimize the variable
costs and if it is possible they eliminate fixed costs
to achieve the desired levels of productivity and
profitability, and through this way they affect
financial performance of their economic entities.
The ways managers use to examine performance by
developing a relationship between the declared
profitability and the reportd value of profit and loss
are also known as methods of evaluating
performance for economic entities [30]. [17] in 1973
also determines that a method to measure economic
entity’s performance is to develop a relationship
between profitability and the financial position.
Measuring financial performance can involve a
process of identifying, developing relationships
between elements of different financial statements,
evaluating and interpreting the results, and finally
generating reports. These reports can be an essential
database for decision-making for managers, stock-
holders, potential investors, creditors, contractors
and all other third parties interested in the economic
entity’s performance. [31] The economic entity’s
financial performance is determined for decision-
making by each potential investor and every
financing institution that is contracted, and also each
stock-holder evaluates his investment future through
this information. All the interested parties evaluate
financial performance to identify future problems of
the economic entity, future potential cash inflows
and potential negative effects. All these evaluation
processes are made possible by interpreting figures
taken from published reports. [16]. As a result of
these interpretation and analyses of reports,
manufacturers manage to reduce levels of cost [36].
Other researchers also used similar evaluation
techniques to measure performance of the industry
and also compare it with other industries in different
countries of the world. In their studies they
identified many different determinants such as
productivity ratio, liquidity ratio, profitability ratio,
working capital, asset turnover ratio, and other
financial ratios calculated through published
financial information, but still not all determinants
of financial performance of economic entities have
been distinguished. As [46] argues, [15], [39], [9],
[6], [2] in their recent studies discussed the
relationship between profitability and return on asset
as key components to the evaluation of financial
performance. [12] studied the importance of
financial reporting in small medium enterprises in
Albania by assessing the relations between
qualitative reporting with specific qualitative
characteristics of financial information. [26] also
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studied possible methods to increase productivity in
electricity industry in UK. [13] discussed
relationship between indicators of financial
performance in cement industry in India. This study
was really important because of the large share of
total turnover on their GDP. [14] also developed a
relationship between productivity ratio and the
profitability ratio in cement industry, and linked this
relationship to the overall business performance. [5]
also studied the relationship between managing
input and output levels, and the profitability ratios
[34], [28], [3], [43] selected profit margin ratio to
determine the financial performance of economic
entities listed in cement industry. This industry is
largely selected for evaluation of performance
because of importance to other important related
industries all over the world. [22] developed a study
with 5 selected ratios to determine economic
entities’ financial performance in textile industry, he
also developed different relationships between
selected ratios and identified them as significant or
not. Later on [38] continued this study in the cement
industry in India. [20] studied through more than a
decade, from 1991-2004 the relationship between
different financial ratios in terms of measuring
financial performance. Through capital budgeting
the economic entities can manage to improve their
financial performance [25]. Liquidity ratio can be
also crucial for determining an economic entity’s
financial performance [10], and this is related to the
capacity of the economic entity to meet short-term
obligations by using its short-term resources. [32]
and [48] identified profitability and liquidity ratios
as the most important components to determine the
financial performance of economic entities in
different industries of a country selected for
research. Referring to [21], the nature of current
assets also determines the capacity to settle short-
term liabilities in a timely manner, determining the
financial health of the economic entity. This
relationship is directly linked to the working capital
as a key determinant to the business performance
improvement. The desired level of working capital
vary in different industries and in different
economic entities, depending also on its specific
individual financial goals [8]. [27] studied the cash
cycle and its main effects on financial performance
of economic entities. Cash cycle management by
economic entities can become a key to success in
improving financial performance as well as
providing the right energy to the company's business
operations [41].
3 Methodology
We used secondary data available from financial
statements officially published by the selected
companies in the period selected for this study. Our
research is underpinned by the above literature
review. The data relates to the following indicators:
Return on Asset, liquidity ratio, debt ratio,
profitability indicator are as a result of the
processing of data from the financial statements of
100 entities of the construction sector under
consideration, officially taken from the National
Centre of Registered Businesses in Albania. The
data covers the period 2018-2020. We used the
multifactorial econometric panel model using the
Gretl econometric program to detect the existence of
a relationship between the independent variables
(liquidity, debt and profitability ratios) and the
dependent variable ROA. The form of the function
is of the type:
Formula 1. Multifactorial Panel Model
ROA=β0+β1*debt-ratio+β2*liquidity-
ratio+β3*profitability ratio+ε
Main Hypothesis:
H0: There is no statistically significant economic
factor that affects the financial performance of the
construction industry in Albania.
H1: At least one of the economic factors taken into
consideration is statistically significant and affects
the financial performance of the construction
industry in Albania.
Based on this main hypothesis we have raised three
secondary hypotheses. The first hypothesis is about
the relationship between ROA and the debt ratio, the
second hypothesis is about the relationship between
ROA and the liquidity ratio, the third is about the
relationship between ROA and the profitability
ratio.
The first hypothesis:
H0: The relationship between ROA and debt ratio
is not significant.
H1: The relationship between ROA and debt ratio
is significant.
The second hypothesis:
H0: The relationship between ROA and liquidity
ratio is not significant.
H1: The relationship between ROA and liquidity
ratio is significant.
The third hypothesis:
H0: The relationship between ROA and
profitability indicator is not significant.
H1: The relationship between ROA and
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profitability indicator is significant.
The null hypothesis is rejected if the correlation is of
a significance above 95% and the econometric
model turns out to be significant after the tests are
performed and consequently the alternative
hypothesis is accepted. Return on Assets (ROA) is
an indicator that indicates how well a company is
using its assets to generate desired profit. ROA
gives to all stakeholders, such as managers,
investors or analysts an idea of how efficient the
management of a company is in using its assets to
generate profits. Quick ratio here refers to the
liquidity ratio, and it measures a company's ability
to pay short-term liabilities or those payable within
a year. Debt ratio measures the amount of leverage
used by a company in terms of total debt to total
assets. Debt ratio greater than 1.0 (100%) means
that a company has more debt than assets.
Profitability ratios are used to assess a business's
ability to generate profits, relative to its revenue,
operating costs, balance sheet assets or equity over
time, using data from a specific period. In this study,
profitability is expressed through margin such as
gross profit margin and net profit margin in relation
to overall sales.
4 Results
To measure the financial performance of the
construction sector in Albania for the period 2018-
2020, it is important at first to study the descriptive
statistics of financial reports which are used as
explanatory variables to measure the main impact on
the ROA (predictor variable) obtained in the study.
Table 1. Descriptive Statistics 2020
Table 2. Descriptive Statistics 2019
Table 3. Descriptive Statistics 2018
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Table 1 reveals the descriptive statistics of all
study variables in 2020, the mean value of return
on assets (ROA) is 3% with maximum value of
55%, and it concludes that performance of listed
industrial companies’ shows positive financial
health during the study period. Besides, the debt
ratio shows positive result to support it with mean
value of 62%. The mean value of liquidity is 4.92.
The mean value of profitability (PR) is -20% with
1.54 value of standard deviation.
Table 2 reveals the descriptive statistics of all
study variables in 2019, the mean value of return
on assets (ROA) is 7% with maximum value of
58%. The debt ratio has mean value of 62%. The
mean value of liquidity is 4.85. The mean value of
profitability (PR) is 8% with 1.54 value of standard
deviation.
Table 3 reveals the descriptive statistics of all study
variables in 2018, the mean value of return on assets
(ROA) is 4% with maximum value of 70%.
The debt ratio has mean value of 65%. The mean
value of liquidity is 26.12. The mean value of
profitability (PR) is -478.34 but with a high value of
standard error.
From this descriptive analysis of the data under
consideration we can see that the ROA indicator
marks the highest value in 2019, and decreases by
3% in 2020.
The coefficient 0.104 indicates that if all the
independent variables remain constant, the ROA
will increase by 0.104 times. The coefficient 0.091
indicates that if the debt ratio increases by 1 unit and
the other variables remain constant, the ROA will
decrease by 0.091 times. This is explained by the
contribution of debt expense in reducing profits
because of an increase in level of expenses. An
increase in debt levels will reduce company’s
performance because of an increase in fixed costs.
ROA = 0.104-0.091*debt ratio+4.945*liquidity
ratio+7.595*profitability ratio+ε
Table 4. The Weighted Mean
Table 5. Result based on weighted data
Table 6. Result based on initial data:
After testing the model in the GRETL statistical
program, we came to the conclusion that the
independent variables taken into study are
statistically significant, confirming their importance
in analyzing the financial performance of the
business in the construction industry in Albania.
This is clearly seen from the model, where these
variables are each presented in the significance star.
As a result, the H0 hypothesis is rejected and the H1
hypothesis is confirmed: At least one of the
economic factors taken into the study is statistically
significant and affects the financial performance of
the business. The result of this model proves the
relationships between the independent variable and
the dependent variables.
The coefficient 4.945 indicates that if the liquidity
ratio increases by 1 unit and the other variables
Coef.
Std. Dev.
t-Student
p. value
Const
0,104147
0,00558781
18,64
<0,0001
**
*
Debt Ratio
−0,0912428
0,00635828
−14,35
<0,0001
**
*
Liquidity Ratio
4,94463E-05
2,74672E-05
−1,800
0,0729
*
Profitability Ratio
7,59485E-06
3,51745E-07
21,59
<0,0001
**
*
Average variance.
0,049118
Dev. Std.Variance.
0,124104
Res Sum Square
3,858054
Reg. Std. Dev.
0,115741
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remain constant, the ROA will increase by 4.945
times. The coefficient 7.595 indicates that if the
profitability indicator increases by 1 unit and the
other variables remain constant, the ROA will
increase by 7.595 times.
The other indicators, such as correlation coefficient;
R2 = 99.24%, 99.24% of ROA variability, is
explained by the factors considered, respectively by
the liquidity, debt and profitability indicators.
The debt indicator has the highest value in 2018,
decreases by 3% in 2019 and in 2020 continues to
maintain the same level, the value 62%.
The liquidity indicator from 2019 to 2020 has
increased, thus showing an improvement in the
liquidity indicator for construction companies.
Econometric Model results: WLS (KVP), using 292
observations, Number of companies: 100.
Dependent Variable: Return on Assets (ROA).
Specifically, negative relationship between the
debt ratio and the ROA indicator and respectively
positive effect between the liquidity ratio and
profitability indicator with the ROA indicator have
been proved through this study. Finally, a more
advanced research study can be developed by
using a larger amount of data, a bigger sample size
and also data from other important industries.
5 Conclusion
Financial performance is a measure of the financial
health of an economic entity over a specified period
of time. Its main purpose is to provide useful
information to the stakeholders to help with their
decision making. Financial performance analysis
can be used as a unique technique to evaluate
similar economic entities from the same industry or
to compare group industries, or to analyse a specific
economic entity in a period of time by comparing
financial information between different periods. The
financial statements used in assessing overall
financial performance include the financial position
statement, performance statement and cash flow
statement. Financial performance indicators, also
known as key performance indicators are
quantitative measurements used to determine, track
and project the economic well-being of a business.
The construction sector has returned sharply in the
fourth quarter of 2021, compared to the same period
a year ago, as a result of the reconstruction after the
earthquake and new residential and hotel housing.
In 2021, construction shrank by 11.6% year-on-year
in the first quarter, most affected by the earthquake
post situation in Albania. Subsequently, the sector
recovered, expanding by 2.8% in the second quarter
and almost 17% in the third, becoming a key factor
in economic growth for this period. The Covid 19
pandemic period also had its effects on financial
performance of construction companies in Albania.
During the first 5 months of 2020, the construction
industry suffered a total slowdown in their daily
activities. They restarted only in the sixth month of
2020 and never stopped their activities again, this
was reflected in better performance ratios in 2021.
A positive effect from the reconstruction activities
after the earthquake is going on and will continue
until the end of 2022. Referring to the data taken
from our study, determinability coefficient; R2 =
99.24%, 99.24% of ROA variability, is explained by
the factors considered, respectively by the liquidity,
debt and profitability ratios. From testing the model
in the GRETL statistical program, we came to the
conclusion that the independent variables taken into
study are statistically significant, confirming their
importance in analysing the financial performance
of the economic entities in the selected industry. As
a result, the H0 hypothesis is rejected and the H1
hypothesis is confirmed: At least one of the
economic factors taken into consideration is
statistically significant and affects the financial
performance of the business. The selected
indicators are important to analyze and interpret
financial information and also to evaluate financial
performance of the economic entities. The
construction industry is very important for Albanian
economy, and still needs a lot of analyze and
interpretation of financial performance, in order to
provide the right information for decision making
for all stakeholders. We suggest other studies with
larger amount of statistical data by increasing the
number of companies taken in study and also by
studying companies of other important industries in
Albania.
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DOI: 10.37394/23207.2022.19.41
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