THE IMPLICATION OF FOREIGN EXCHANGE ON PROFITABILITY OF FIRMS
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Study Level: BTech, BSc, BEng, BA, HND, ND or NCE
This study examines forex (FER & INR) and profitability (ROA & ROE).
This study employed post-event planning, which was used to explore possible effect-cause relationships by examining existing situations and looking back in time for acceptable random factors. Due to the nature of the study, the sample size is Nestle Plc in Nigeria and Switzerland, and the financial statements covered are from 1986 to 2915.
Both descriptive and inferential statistics were used in this study. Descriptive statistics collect the mean and standard deviation of a variable. Regression analysis was used to examine the effect of exchange rate (description) on profitability variables.
The study concluded that exchange rates had a positive impact on Nestlé Nigeria’s profitability. The research here recommends this. Governments should ensure that imports of goods are restricted to a certain level. Governments need to ensure higher performance that boosts the country’s GDP and thereby increases economic value. Business conditions related to the balance of payments are favorable, which allows for fair exchange rates. Governments should ensure favorable interest rate levels for investment in order to have a positive impact on currency supply and demand.
1.1 Research background
The importance of foreign exchange trading in relation to the global economy cannot be overemphasized. Profitability can be positively or negatively impacted by exchange rates. The risks and returns of various assets affect international capital flows. The main focus of policy makers, the public and of course the media is the exchange rate. Nigeria today faces enormous challenges as a country to minimize its reliance on imports and maximize its export-oriented growth policies.
Globally, the daily volume of foreign exchange trading in all currencies increased from about $600 billion in 1998 to about $1.4 trillion ($1.4 trillion) in 1998, and then in 2001 decreased to about $1.2 trillion. The main reason for the decline was the forex market consolidation of players. Unlike in the rest of the world, the impact of exchange rate fluctuations in developing countries such as Nigeria has attracted a great deal of attention and caused a lot of discussion. It focuses on the magnitude of change.National exchange rates play an important role in international economic transactions as no country can remain self-sufficient due to various factors.
Onotaniyohuwo & Oladipupo (2011) found that changes in exchange rates have spillover effects on other economic variables such as interest rates, inflation, unemployment and money supply. These facts highlight the importance of exchange rates to the economic well-being of countries that open their doors to international trade in goods and services. The importance of exchange rates stems from the fact that they bind the pricing systems of two different countries together and allow international trade to directly compare traded goods. In other words, it links domestic prices to international prices. (Opaluwa, 2010) believes that the issue of exchange rate changes in Nigeria came to the fore following the naira change, a policy facilitated by the 1986 Structural Adjustment Program (SAP).
Nestle plc is a multinational manufacturing company specializing in the production, marketing and distribution of cereals, beverages, confectionery and bottled water. Nestlé plc is a respected and trusted nutrition, health and wellness company known worldwide for quality products.
The exchange rate experience is in many ways different from what was expected in 1973, when highly industrialized countries gave up the struggle to hold onto their currencies.Exchange rates are now more volatile than expected. , and there is a widespread sense that it is more unstable than it should be and probably should be (Frankel 1995). The dynamism of the stock market presents a type of risk (currency risk) that poses a particular problem for international business activities (exports and imports). High exchange rate risk changes make trading more difficult when trades are organized into the future (Evans, Taylor & Holzman, 1985). These exchange rate changes will undoubtedly have a negative or positive impact on a company’s profitability and performance.
The increased emphasis on exchange rate issues is undoubtedly due to the trend in the current business environment where globalization is making domestic companies, both large and small, unable to operate. That said, the exchange rate is an important technical tool that allows companies to survive and make a profit. Copeland (2005): “The growing importance of exchange rates is due to the internationalization of the economy, the continued growth of world trade relative to domestic economies, the trend toward economic integration, and the rapid changes in remittance technology. It is also a large consequence of the fact that exchange rates are not only volatile, but highly volatile.
1.2 Problem definition
Exchange rates can fundamentally have a negative or positive impact on profitability.
Many studies investigating internal factors under the control of firms take a micro approach. However, the current state of globalization raises concerns about competitiveness, so a detailed study of macro variables is needed.
These exchange rate movements became a major concern for Nigerian businesses and policy makers in the wake of the global financial crisis of 2007-2008. Any significant devaluation of the national currency would seem to affect the entire economy. The question is how do these exchange rates affect a company’s profitability? Even for firms that derive most of their revenues within the economy, do exchange rates affect firm profitability, perhaps through return on capital and return on equity, which are key components of profits? Can you figure out the relationship between exchange rates and profitability when you consider minutes? For Nestle Plc. Return on Assets and Return on Equity. We needed to monitor it over time, and when we compared earnings volatility with exchange rate volatility, we found an important link between exchange rate and profitability.
Listed above are just some of the problems companies and businesses can face as a result of growing debt. A thorough understanding of the impact of these issues was the primary objective of this study and is covered in the next section of this chapter.
1.3 Purpose of the survey
The main purpose of this study is to gain insight into the impact of exchange rates and profitability on companies.
To determine the impact of exchange rates on the return on assets.
Determine the effect of exchange rates and interest rates on the return on assets.
Find out how exchange rates affect return on equity
Find out how exchange rates and interest rates affect return on equity.
1.4 Research question
The basic research questions that this study is intended to provide answers to the questions listed below are derived from the stated goals.
How much do exchange rates affect return on assets?
How much do exchange rates and interest rates affect return on assets? How do exchange rates affect return on equity?
How do exchange rates and interest rates affect return on equity?
1.5 Research hypothesis
This study tests two of his suggestions:
Exchange rates do not affect Nestlé Plc’s return on assets.
Exchange rates affect Nestlé Plc’s return on assets.
Exchange rates and interest rates do not affect Nestle Plc’s return on assets. H1:
Exchange rates and interest rates affect Nestle Plc’s return on assets.
Exchange rates do not affect Nestlé Plc’s return on equity.
Exchange rates affect Nestlé Plc’s return on equity.
Exchange rates and interest rates do not affect Nestle Plc’s return on equity.
Exchange rates and interest rates affect Nestle Plc’s return on equity.
1.6 Importance of research
The advantages of this study are:
- To identify and manage various risks associated with exchange rate appreciation and depreciation.
- Identify and address some potential issues related to exchange rates.
III. provide a range of tools for manufacturers to curb imports
IV. To provide a basis for further research and to provide imaginative material for other researchers
V. Provide knowledge on how to maintain and improve profitability.
1.7 Scope of investigation
The focus of this study is to identify the impact of foreign exchange on corporate profitability in terms of return on equity and return on equity. The case studies in this study are Nestlé Nigeria and Switzerland within a 30-year time frame (1986-2015).
The dependent variable in this study is profitability, the independent variable is exchange rate, and the control variable is interest rate. Proxies for the dependent variables are Return on Assets and Return on Equity from 1986 to 2015, and independent variables are measured using prevailing exchange rates for the individual years considered.
1.8 Operationalization of variables
Variables can be manipulated as follows:
Y= Profitability (PT)
X = exchange rate (FER)
x1= exchange rate (FER)
x2= interest rate (INR)
Y= (y1,y2) and X=(x1,x2)
Y1= return on investment (ROA)
Y2 = return on equity (ROE)
ROA = f(FER)
ROA = f(FER,INR)
ROE = f(FER)
ROE = f(FER,INR)
To facilitate a proper understanding of this project work, it is necessary to define certain terms so that they are fully understood by users of this work.
Return on equity: Shareholder profitability is expressed as a percentage of the company’s net worth.
interest rate: Percentage of the amount charged for that usage, often per year
Return on investment: This is the operating income expressed as a percentage of operating assets
Foreign exchange rate: This is the rate at which currencies can be converted together
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