The Determinants of Return on Equity: Evidence from the Manufacturing Sector in Czech Republic

An analysis of economic performance and growth in a business or company is one of the pertinent aspects that must be met to ensure that the business is run properly. The accountant, investor, IT specialists, economists as well as the shareholders have to assess these indicators to make sound adjustments and models accordingly. Return on equity is one of the measures that is used in measuring the profitability of a business in relation to the book value of shareholder equity. Therefore, it is a parameter that is considered essential in decision making processes as companies and shareholders make appropriate decisions that are related to an entitys model. The manufacturing industry is one of the most competitive and highly invested industries in the market. The initial outlay that is required is very high making an analysis of the different models and aspects in the market critical towards giving the analysts a chance to make critical decisions on the best models that are to be adopted by the company. Depending on the products that are deemed necessary in the market, there are different figures that can be appropriated and developed to highlight the important aspects that are needed in the market. This paper assesses the importance or different determinants of return on equity in the Czech Republic. This means that there needs to be an analysis of the differentiated aspects in the European market and how the external and internal conditions affect the manufacturing sector in the country accordingly. Literature review on these aspects will have to be assessed and differences in the models that are given will also be appropriated to have a proper perspective of the determinants that are critical to ROE.

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Literature Review

Return on equity is equal to the net income that a company or business makes after there has been payment of preferred stock before the common stock dividend has been paid divided by the total equity. It is defined as the measure of return for the investments from equity that has been placed in the company by the shareholders (Portes and Rey, 2005). Businesses have to assess the market opportunities and models before making a decision on an industry to invest in since the industry in the market where the company invests determines the level of return on equity that the company stands to gain due to the market forces. The manufacturing sector in Czech Republic is affected by the external forces and market models in the EU. Damodaran (2015) asserts that, the EU has a significant influence in the market since the Czech Republic is part of the EU and is affected by the same models and aspects of the market. Since the manufacturing sector requires coordination and interaction between different countries it is important to assess the market conditions in the area (Wagner, 2005). The level of income is affected by how well a company does in the market, with the international controls and models being important in highlighting the different models that are appropriated and created in these markets.

Pasioras and Kosmidou, (2007) observe that, the performance of a company in the manufacturing sector in Czech Republic is similar in other countries and determines the level of ROE in the market. The cost of production of products is critical since it determines the level of income that can be appropriated and created in the same market. The cost of production affects the level of profits and income that is important in creating a proper model for the company (Damodaran, 2015). Depending on the availability and cost of raw materials therefore, it is important to ensure that the economic indicators and models that are needed in the market have been ascertained and create a working prospect that can help in differentiating the position of the companies in the industry (Wagner et al, 2002).

The ratio of equity that has been raised to support the company in the manufacturing sector is also a major aspect that determines ROE (Dunning, 2012). Depending on the level of control that has been supported by equity and the level driven by debt it is important to ensure that the two aspects are critically evaluated before coming up with a single structure that is meant to ensure that the market models are supported. The level of competition in the market is also a major determinant of ROE in the manufacturing sector. Although most companies do not face stiff competition due to the level of investment required in the manufacturing sector, competition is also a major determinant of ROE in the market (Carner et al, 2004). Competition determines the profits that companies stand to make and the level of creativity and modelling that is appropriated in the market. There are differences that can be cited and models that need to be addressed since the market models are appropriately controlled. It is, therefore, critical to establish the position of a company in the market in comparison to other companies and derive the best models and strategies that can be used in giving the entity a competitive edge in the larger industry (Goddard et al, 2005). This helps the company in gaining a higher level of income and in turn ROE (Caves, 1974).

There are companies within the manufacturing sector that are critical in giving the people the best models and aspects that are significantly addressed. Depending on individual models, there are differentiated aspects that can be assessed and cases where ROE is not a measure of how well, or how bad a company has done in the market (Jerman, 1998). According to Arnold and others (2012) a company may control a large ROE in respect to another entity but this does not represent the best models for change accordingly. Since the Czech Republic is perfectly poised to take advantage of the larger market, there are different models and critical controls that are significantly poised. Beck (2002), reiterates that the manufacturing sector in the country is therefore, affected by the regions advancement in technology and economic indicators respectively. The EU affects and reflects on all the countries that are member states, making manufacturing in the region advanced, therefore increasing the changes that are poised in the market as a result accordingly (Lyn and Zychowicz, 2003). It is important to ensure that the market indicators are perfectly developed and with a country that is in the EU it is easier to control the market forces and indicators to the companys advantage (Antoniou et al, 2002).

The manufacturing in the Czech Republic has all the ingredients for success, making the ROE in the region to increase as a result. Therefore, it is important to ensure that the market models and attributes that are derived are created in a way to ensure that all the controls are poised to take advantage of the market. The different determinants of ROE are measured before important decisions are made and companies need to have better approaches to take advantage of these market models.

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