Determinants of companies' growth

Abstract

The growth and development of companies is determined by many factors. Some of them are factors from the external nature such as the macroeconomic environment, the level of the development and structure of the financial markets, companies’ access to capital, etc. But the growth of companies also depends on a number of factors from the companies’ internal economy, such as operational and financial policies, corporate governance, etc. In this paper we investigate firm-specific determinants of corporate growth in the case of 831 companies from ten Southeast European countries (Bosnia and Herzegovina, Bulgaria, Montenegro, Croatia, Greece, Romania, North Macedonia, Slovenia, Serbia and Turkey). Based on the data from their financial statements for the period 2011-2019, we defined a wide range of ratios as independent variables against which we regressed the company’s growth. Company growth can be measured in different ways, through sales growth, assets growth, growth in the number of employees, value growth, business volume growth, and so on. The most commonly used measure is sales growth, which we take in this paper as a definition of company growth. Companies in SEE achieved a moderate average annual growth rate of 7.1%, for the analysed period, which is lower than the satisfactory for corporate managers. This insufficient growth was mostly due to the low volume of capital investments, which amounted to only 0.78% of the total assets. The ability of companies in SEE to invest primarily depends on their profitability, which in turn is low given the low operating performances measured according to the low asset utilization and low net profit margin. Ineffective and inefficient working capital management has an additional impact on low profitability. The growth of SEE companies is positively related to capital investments, financial leverage, operating cash flow, ROA, ROE, firm size, net profit margin, and assets turnover. But it is negatively related to non-debt tax shield, tangibility, account receivable collection period, inventory conversion period, and cash conversion cycle.