The growth of Finnish software companies in 2008-2011 : empirical investigation of financial ratios as the determinants of growth

Abstract

The purpose of this study is to examine the relation of growth and the financial ratios of a company. The theoretical portion of the study focuses on the concept of growth in entrepreneurship theory. The empirical portion consists of examination of the financial ratios of 162 Finnish software companies in 2008-2011 by means of quantitative analysis methods. Statistical analysis methods, including analysis of variance, correlation and regression analysis, are used in the analysis. The objective of the study is to reveal how growth affects the financial ratios of a company and which ratios can be used to predict growth. The effects of companies’ age, geographical location and industrial classification on their financial ratios are also examined.

The findings of this study reveal that the Finnish software industry inhabits a considerably high amount of growth companies. Younger companies were found to exhibit higher growth rates and absolute profitability than older ones. The findings suggest that a heightened level of cash is tied to the operations of companies exhibiting an especially slow or fast rate of growth. Companies exhibiting high growth were found to produce high levels of return on investment, but high growth was also found to put a company’s short term profitability and liquidity at risk. Only weak correlations were found between growth and the financial ratios of a company. The regression analysis revealed that a model combining 10 financial ratios may be used to predict the net sales growth of a company. Implications and future research proposals are provided.