Running head: SAUDI TELECOM COMPANY (STC) 1

The Impact of Current Ratio, Debt Ratio, Sales, and Return on Equity on A Company’s

Return on Assets: The Case of Saudi Telecom Company (STC)

Quantitative finance-412

Turki Aldosari 2180001155

Ahmad Alsalloum 2180003578

Abdulaziz Almulhim 2180001135

Yousef mohaimeed 2180005117

Omar alghanmi 2180004286

Dr. Elhachemi Gherbi

SAUDI TELECOM COMPANY (STC) 2

Executive Summary

Saudi Telecom Company is a renowned international corporation. With its

headquarters in Saudi Arabia, the company operations and inclusion in the Saudi Arabia

Stock Market makes it appealing to both foreign and local investors. However, the prospects

of a company is hardly on the size, but also in the financial might. According to the financial

reports of this company, annual sales have shown an upward and downward trend between

2006 and 2009 before remaining on an increasing trend. An almost identical trend was

exhibited by other study variables namely debt ratio, current ratio, return on assets and return

on assets. However, examining the relationship between these variables was important.

The study used an ARDL model with a lag length of 2. However, the optimal lag

length according to the lag selection criteria was 0. It had the least values for SIC and AIC.

The optimal lag structure implied that, an ARDL model was not suitable for data analysis and

a simple linear regression model should have been used. Using the ARDL model, the short

run model showed evidence of serial correlation but it was stable. According to the model,

both sales and debt ratio had a negative and significant relationship with the company’s

return on assets. However, a positive and significant relationship existed between return on

equity, current ratio and ROA. The null hypothesis showed that the variables had no long run

relationships.
SAUDI TELECOM COMPANY (STC) 3

Introduction

Background of the Company

Saudi Telecom Company (stc) was founded in 1998 as a Saudi Joint Stock Company.

The decree establishing the company approved the transfer of the Telegraph and Telephone

Division of the Ministry of Post Telegraph and Telephone with its numerous constituents and

technical and administrative facilities to the company. At the ratification of Company’s

Articles of Association, the firm was wholly owned by the Kingdom of Saudi Arabia

government. In September 2002, the government offloaded 30 percent of its shares. The

company is headquartered in Riyadh, with two other subsidiaries in Kuwait and Bahrain.

The digital company offers telecommunication services, landline, mobile, internet

services, enterprise digital solutions, fintech, computer networks, and entertainment. Stc lost

its monopoly in Saudi Arabia on mobile services after Etihad Etisalat was assigned a second

license in the country. The company further lost its monopoly on landline telephone services

after a coalition led by Bahrain Batelco was awarded a license in 2007.

The purpose of the company is to create and bring greater dimension and richness to

people’s personal and professional lives. The vision of the company is to provide innovative

services and platforms for its customers and enable the digital transformation of the MENA

region. To facilitate the realization of its objectives and mission, the company acquired Bravo

Telecom in October 2013. In December 2016, Stc invested in Careem at a cost of $350

million. The firm operates the Jawal and Hatif networks. Through the Arab Submarine

Cables Company, the firm operates a submarine communications cable system that connect

the kingdom to Sudan. The majority of the company’s sales is generated domestically. In an
SAUDI TELECOM COMPANY (STC) 4

effort to increase its revenue, the company has added financial technology, cybersecurity, and

other advanced digital solutions to its portfolio.

The acquisition of 25 percent of the Axis Group (Malaysia) saw the company expand

to countries beyond the Gulf region. The company has also been buying shares in different

organizations both locally and internationally, including Arabsat Satellite Communications

Corporation that broadcasts through satellite. Stc signed an agreement with Etihad Atheeb

Telecommunications in February 2021 regarding debt and balances settlement. With the

company expanding regionally, it is anticipated that its revenue will increase alongside its

customer reach and asset accumulation.

The General Overview of the Saudi Telecommunication Sector

The Saudi Arabia telecommunications industry comprise of three essential sectors.

These are the communications services sector, the communications equipment sector, and the

wireless communications sector. The sectors are further divided into six subdivisions. The

industry is viewed as having a very promising future considering the fast-growing rate, with a

wide innovation base. The kingdom is the most populous of the Gulf countries. The youths

under the age of 40 years constitute 69% of the population (Mordor Intelligence, 2021). With

such a demographic, it is anticipated that there will be a growth in demand for information

and communication technology. According to Mordor Intelligence (2021), the country’s

telecom market is projected to reach a compound annual growth rate (CAGR) of more than

10 percent over the forecast period 2021-2026. As at 2019, the Saudi ICT market was the

largest in the Middle East, with a mobile subscription of 43.8 million (Aljazira Capital,

2020). The penetration level is on the rise, increasing from 124 percent in 2018 to 129

percent in 2019.

The market is changing in terms of technological developments, service expansion,

competition, and service delivery. Currently, 93 percent of the residents have access to the
SAUDI TELECOM COMPANY (STC) 5

internet. The percentage of people using smartphones is increasing alongside technological

infrastructure upgrades, and service quality offered by operators. In terms of industry

according to the revenue generated, the kingdom’s industry is about $40 billion as at

November 2021 (Statista, 2021). The Covid-19 pandemic had implication on the industry as

it led to the disruptions in 5G service deliveries, negatively affecting capital expenditures and

consequently the revenues.

In recent years, the Saudi Arabia telecommunications industry has reported increasing

competition occasioned by the emergence of new entrants. The major competitors include

Saudi Telecom Company with a market share of 43.2 percent, Mobily at 40 percent, and Zain

at 16.4 percent. Stc’s had a revenue of $3 billion in 2020. The company utilizes a strategic

approach to costs, exploiting its international and local investments in strengthening its

balance sheet and cash flow. Mobily invests heavily in infrastructure and human resources.

The company is future-oriented, planning for future market positioning and competition. Zain

focuses on providing world-class services, committing to its role in corporate social and

cultural responsibilities.

The Significance of the Research

The telecommunication sector plays an important role in the economic growth of a

country. When assessing the financial strength of a company, studies often focus on capital

structures and specific financial ratios. The ratios include return on assets (RAO) and return

on equity (ROE). These ratios are important for investors when making decisions regarding

which firm to invest in for optimal benefits. Such individuals are interested in gaining wealth

from passive income as investment options of their money. Among the passive income

sources is capital gains and dividends. Dividend is derived from a firm’s profit while capital

gain is the yield between selling price and buying price. These parameters are affected by
SAUDI TELECOM COMPANY (STC) 6

current ratio, debt ratio, sales, and return on equity. In deciding the company in which to

invest and the amount to invest, these ratios play a significant role.

The current study investigates the impact of current ratio, debt ratio, sales, and return

on equity on a company’s return on assets. In assessing these ratios, Saudi Telecom Company

(STC) is used as the case study. In addition to the information the ratios reveal to the

investors, they help in analyzing the financial position and the performance of the company

in terms of the profitability and viability of the services the company offers. Studying the

impact of the ratios to the company’s return on assets will help assess the efficiency of the

ratios and profitability they disclose of the company. By understanding the impact of the

ratios on a company’s return on assets, it will be possible to make recommendations on how

to improve performance where crucial changes are required to make the firm a force to

reckon with in the short and long-term.

Research objectives and questions

The purpose of the research is to analyze the impact of the mentioned ratios on the

return on assets of Saudi Telecom Company. To help achieve the objectives of the research,

the study will seek to answer the following research questions:

a. How do current ratio, debt ratio, sales, and return on equity affect a firm’s return on

assets?

b. Do specific financial ratios indicate the financial strength of a company?

c. Are financial ratios important determinants of the decision to invest in a company?

Literature Review

Pandey and Diaz (2019) in their study focused on factors that affected the ROA of the

US financial and technology companies. Eight firm specific factors were examined to

establish their impact on the corporations’ profitability that utilizes ROA. A number of

multiple linear panel regression equations such as the random effects, fixed effects, and
SAUDI TELECOM COMPANY (STC) 7

ordinary least squares model were used to accomplish the study objectives. According to the

study outcomes, profitability was positively affected by the return on sales ratio, but ROA

was negatively impacted by the ROE. Besides, in the technology company, current ratio

negatively affected ROA whereas in the financial corporations, a positive effect was reported.

The profitability of technology companies was affected by the size. The researchers conclude

that, to control factors that maximize the return on assets for such corporations, suitable

financial strategies must be created and adopted.

Almehdawe, Khan and Lamsal (2020) investigate factors affecting the financial

performance of the Canadian credit unions. The researchers conducted a literature review on

the probable factors causing effects on the credit unions’ performance metrics. The sample

size was 189 credit unions. A random effect panel and fixed effect panel data regression

models were then developed and used in data analysis. The research found that credit unions

in provinces had worse financial performances compared with those in prairies. The fixed

effect panel data models’ findings were confirmed using a cross sectional analysis. That is,

interest rates, provincial gross domestic product, inflation rate, income diversification, market

penetration, capital adequacy ratio, the size of total assets for a credit union, as well as the

size of membership significantly affect the financial performance of credit unions.

Zandi et al. (2019) conducted a study aimed at examining the lending behaviours of

banks in ASEAN economies. Secondary data on bank and macroeconomic factors were

gathered from different reliable sources. Primary data was collected from five banking firms

between 2011 and 2017. From the regression equation, it was found that the lending

behaviour of banks is defined by inflation and GDP growth. The bank’s lending behaviours

was gauged using unused commitments and net loans. The study concluded that, the return on

equity, ROA, risks, and liquidity ratio, which are bank-related variables significantly

determined the lending behaviours of banks.

SAUDI TELECOM COMPANY (STC) 8

A study by Youn and Gu (2007) investigated factors, which influenced ROA in a

lodging industry found in Korea. The return on assets was used in measuring the performance

of the firms. From the publicly trading lodging companies based in Korea, the 2005 financial

data was used to draw a sample size of 112 firms. The researchers applied a stepwise

regression model and found that ROA was significantly determined by EBITDA (earnings

before interest, taxes, depreciation, and amortization) as well as debt ratio and total liabilities.

As such, raising the profit margin while lowering the operating costs improves or increases

ROA.

In the financial reports of insurance companies and banks listed in the Vietnam’s

stock market, the return on equity and return on assets have definite predictors. Pointer and

Khoi (2019) used quantitative technique to come up with an OLS regression model for

investing the alleged determinants of ROE and ROA. The predictors or independent variables

included in the study were earnings per share, years in business, return on equity, book value,

and the size of the firm. The results established a negatives and significant relationship

between ROE and capital structure. However, the ratios did not show any direction in

causality. Further results indicated that insurance corporations earned lower returns on equity

but higher return on assets compared to banks.

Dianita and Phety (2021) investigated the effects of ROE and ROA on share price

variations. The study sample was drawn from six pharmaceutical firms, but the research

population included all firms listed in the pharmaceutical industry. The sampling period was

between 2015 and 2019. Based on the study findings, it was established that the share prices

are not partially affected by ROA. Similarly, the return on assets does not impact share prices

partially. The researchers concluded that the return on assets and return on equity hardly

affected the share prices of pharmaceutical firms listed in IDX between the fiscal 2105 and

2019.
SAUDI TELECOM COMPANY (STC) 9

Dharmayatri and Wiratmaja (2021) studied tax avoidance, company size, leverage,

and return on assets. Specifically, the researchers aimed at establishing the impact of ROA,

size of company, and leverage on tax avoidance. The sample was drawn for the period 2017

to 2019 from firms in the mining sector, which are listed in IDX. A purposive sampling was

used to collect data from 33 observations from 11 firms. Conversely, a multiple linear

regression technique was applied to analyse the data. In their conclusion, the researchers

established that leverage had a positive impact on tax avoidance whereas the size of the

company and ROA had a negative effect of the same dependent variable, tax avoidance.

In a study by Rusdiyanto, et al. (2020), the aim was to establish the influence of EPS

(earnings per share), ROA, and debt to equity ratio on the Indonesian manufacturing firms’

stock prices. A descriptive research method was used to accomplish the objectives of the

quantitative study. However, the sampled data came from the Indonesian manufacturing

firms for the financial period 2015 to 2017. The researchers used a multiple linear regression

analysis in determining the simultaneous or partial association between the study variables.

From the study findings, it was found that stock prices are not affected by ROA and debt to

equity ratio, but the EPS positively affected the prices of stock. Nonetheless, it was

concluded that the stock prices were affected by ROA, debt to equity ratio, and EPS.

Nugroho et al. (2021) analysed and compared factor affecting the ROA of Islamic

business unit and Islamic commercial banks. A multiple linear regression model was used to

analyse the data collected. The found that in the case of the Islamic business units, the non-

performing finances had a significant and negative effect on the BUS return on assets. On the

other hand, the financing to deposit ratio had a significant and positive effect on the return on

assets of the Islamic business units. The ROA for the BUS was also negatively impacted by

the MSMEs part of the distributed loans. For the UUS, ROA was positively and significantly

affected by both the loan distribution and MSMEs’, but negatively impacted by the NPF.
SAUDI TELECOM COMPANY (STC) 10

Zamanpour and Bozorgmehrian (2012) investigated the impact of liquidity on ROA,

and the return on the shareholders rights. The researchers used a sample of 92 firms listed on

Tehran SE to examine the correlation between ROA and liquidity management. Yearly

information for the period between 1382 and 1388 was used to run the OLS regression test.

From the study results, it was established that a positive and significant association existed

between ROA, return on the shareholders rights and liquidity management.

Rajindra et al. (2021) conducted a research aimed at examining the impact of loan to

deposit ratio and income and operating costs on the ROA of private and public Forex trading

banks listed in the IDX between the financial years 2015 and 2018. The financial statements

of 25 such banks were collected and analysed using descriptive statistics and multiple linear

regression model. The results showed that loan to deposit ratio, operating income, and free

operating expenses had significant effects on ROA. However, operating income and

operational costs negatively affected ROA while a positive relationship existed between ROA

and loan to deposit ratio.

From the study literature, it is apparent that correlations exists between current ratio,

debt ratio, sales, return on equity and return on assets. However, whether such relationships

exists only in the short run or extend to the long run period is yet to be proved or established.

As a result, an ARDL model will be used establish the short run and long run relationship

between these variables.

Research Methodology

The study is apparently quantitative in nature and uses secondary financial

information from the Saudi Telecom Company’s annual reports. Quantitative analysis will be

conducted using the reported financial figures and statistical processing. In this case,

quantitative study techniques tend to underline the numerical, mathematical, or statistical

analysis and objective measurements of the collected information via surveys, questionnaires,
SAUDI TELECOM COMPANY (STC) 11

and polls or using computational methods to manipulate the pre-existing statistical

information. The statistical data to be used in this research include data on return on equity,

sales, debt ratio, current ratio and return on assets for the Saudi Telecom Company.

Data Collection and Study Sample

A purposive sampling technique will be used to compile the required financial

information for STC. The sampling period will be from the financial year 2006 to 2021.

Quarterly financial reports will be used, but the annual year ends on 31st December every

year. From the selected years, a total of 60 observations will used to accomplish the study

objective. The researchers aim to establish the correlation or effect of the return on equity,

sales, debt ratio and current ration on STC’s return on assets. As such, the study has four

independent variables and one dependent variable.

Bound or Dependent Variable

The study intends to investigate the performance of STC through gauging the level of

its profitability. This measurement will be assessed using the computed return on assets,

which will be the dependent variable of the study. ROA is calculated by dividing net profit by

total assets.

Independent Variables

The profitability of a company can be measured using different financial, functional,

and operational variables. However, in case of Saudi Telecom Company, the profitability will

be assessed using different financial ratios namely sales, current ratios, debt ratio and return

on equity will be the independent variables. The company reports these study variables in its

annual financial reports.

Research Scope

Generally, the profitability of a company can be measured using three different

techniques or operational variables. The measures of profitability include return of equity

SAUDI TELECOM COMPANY (STC) 12

(ROE), return on assets, and net profit margin. In financial accounting, the net profit margin

of a firm is computed by dividing net income by net sales. On the other hand, return on assets

is given by dividing net income by total assets. Finally, return on equity is the firm’s ration

obtained when net income is divided by common shareholders equity. Thus, compared to

other profitability ratios, the return on assets makes comparison between total assets and

bottom line profits. Hence, ROA measures the return on total investments. The return on

assets will take into account Saudi Telecom Company’s total assets and net income, which

makes it the best metric for assessing the financial performance of this corporation.

Using DuPont analysis, the return on assets, which is a performance metric of Saudi

Telecom Company, can split into two different components such as efficiency and

profitability. The key merit of applying the return on assets as performance metric is that

offers a platform for the researchers to conduct an analysis on the efficiency and profitability

of the company at the same time. As such, gauged in terms of the net profit margin, a

company’s profitability level tends to interrelate with the total asset turnover in determining

the return on assets. The correlation between the selected independent variables and

dependent variables can be illustrated using the following equation.

Return on Assets (ROA) = Net Income ÷ Total Assets = (Net Income ÷Sales) * (Sales ÷ Total

Assets) = Net profit margin * Total Assets Turnover

Current ratio measures a company’s efficiency. When current ratio, sales, and return

on equity are high, the return on assets is also expected to increase. From the equation above,

when sales is increased while other variables are held constant, ROA will increase. Since

ROA measures the efficiency and profitability of a firm, it was selected to investigate the

correlation or effect between the factors that contribute towards STC performance.

Research Hypothesis
SAUDI TELECOM COMPANY (STC) 13

The study aims at establishing both the long run and short run effect of current ratio,

sales, debt ratio, and return to equity ratio on STC’ return on assets. As such, a number of

study hypothesis will be tested to establish if a long run and short run relationship exists

between these variables. Using the ARDL model, the short run and long run hypotheses will

be developed and checked. For the short run model, the following hypothesis will be tested:

Null hypothesis (Ho): A short run effect exists between current ration debt ratio, sales, and

return on equity on the STC’s return on assets.

Alternative Hypothesis (Ha): No short run effects exists between current ration debt ratio,

sales, and return on equity on the STC’s return on assets.

On the other hand, the long run hypothesis will be tested based on the coefficients of

the dependent and independents variable with the error correction term included. As such, the

long run hypothesis will be of the form:

C1 = C 2 = C 3 = C 4 = C 5 = 0

When the terms are not equal to zero, then a long run relation exists between the study

variables.

Additional hypotheses to be tested for both the short run and long run include stability test

and serial correlation tests.

Thus, the null hypothesis will be as follows:

For serial correlation,

The null hypothesis (Ho): No serial correlation

For stability,

Null hypothesis (Ho): The ARDL model is stable

Research Analysis Techniques

The collected data will be analyzed using E-views. The software has in-built functions

or models for testing the short run and long run effects between the dependent and
SAUDI TELECOM COMPANY (STC) 14

independent variables. In this case, an autoregressive distributed lag (ARDL) model will be

used in analyzing the dynamic correlation between our time series data in a single model

framework. First, a suitable or optimal lag structure will be determined using the AIC and

SIC criteria. Second, a short run model will be run to check the type and nature of

relationship between the variables. The existence of serial correlation will be checked. A

CUSUM test will also be run to ascertain if the model is stable. Third, the error correction

term will be incorporated in the long run ARDL model and the coefficients test used in

checking if any long run relationship exists between current ratio, debt ratio, return on equity

and sales on ROA.

ARDL Model

The short run ARDL model will be of the form:

ROA = c + A1Sales + A2ROE + A3Debt-Ratio + A4Current-Ratio

The long run ARDL model will as follows

ROA = c + A1Sales + A2ROE + A3Debt-Ratio + A4Current-Ratio + ECT

Analysis and Discussion

In this section, different techniques will used in data analysis. The tests will be for

both the long run and short run ARDL model.

Correlation table,

Data Descriptive Statistics

CURRENT... DEBT_RATIO SALES ROE ROA

Mean 1.163333 14.26267 11470.29 19.02400 10.73850
Median 1.310000 10.31000 12647.74 19.24500 10.30500
Maximum 1.940000 32.26000 15898.77 39.22000 28.93000
Minimum 0.000000 0.000000 -22816.48 0.000000 0.000000
Std. Dev. 0.478039 10.65162 6108.250 9.988628 6.382238
Skewness -0.728006 0.417602 -4.590520 -0.224125 0.526794
Kurtosis 3.095444 1.755079 24.44563 3.094424 3.938230

Jarque-Bera 5.322707 5.618492 1360.516 0.524608 4.975808

Probability 0.069854 0.060250 0.000000 0.769277 0.083084

Sum 69.80000 855.7600 688217.1 1141.440 644.3100

Sum Sq. Dev. 13.48273 6693.966 2.20E+09 5886.588 2403.245

Observations 60 60 60 60 60
SAUDI TELECOM COMPANY (STC) 15

Table 1: Data Descriptive Statistics

Table 1 shows the descriptive statistics for the current ratio, debt ratio, sales, ROE and

ROA for the Saudi Telecom Company. The descriptive statistics have measures of dispersion

namely standard deviation, skewness, and Kurtois. The measures of central tendencies are the

mean, and median.

Unit Root Test

Null Hypothesis: ROA has a unit root
Exogenous: Constant
Lag Length: 0 (Automatic - based on SIC, maxlag=10)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -3.046113 0.0364

Test critical values: 1% level -3.546099
5% level -2.911730
10% level -2.593551

*MacKinnon (1996) one-sided p-values.

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(ROA)
Method: Least Squares
Date: 12/03/21 Time: 17:10
Sample (adjusted): 2007Q1 2021Q3
Included observations: 59 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

ROA(-1) -0.140189 0.046022 -3.046113 0.0035

C 1.192307 0.575126 2.073124 0.0427

R-squared 0.139997 Mean dependent var -0.313898

Adjusted R-squared 0.124909 S.D. dependent var 2.411747
S.E. of regression 2.256100 Akaike info criterion 4.498463
Sum squared resid 290.1294 Schwarz criterion 4.568888
Log likelihood -130.7047 Hannan-Quinn criter. 4.525954
F-statistic 9.278803 Durbin-Watson stat 1.836490
Prob(F-statistic) 0.003508

Table 2: Unit Root Test

According to table 2, it is apparent that return on assets has a unit root.

CURRENT... DEBT_RATIO SALES ROA ROE

CUR... 1 -0.2971584... 0.13854635... 0.19786629... 0.09285571...
DEBT... -0.2971584... 1 -0.1754672... 0.14656375... 0.41706197...
SALES 0.13854635... -0.1754672... 1 -0.3483798... -0.3614257...
ROA 0.19786629... 0.14656375... -0.3483798... 1 0.95037793...
ROE 0.09285571... 0.41706197... -0.3614257... 0.95037793... 1

Table 3: Correlation Table

Table 3 shows the relationship between the different study variables namely current ratio,

debt ratio, sales, ROE and ROA. ROA has a positive and significant relationship with ROE,
SAUDI TELECOM COMPANY (STC) 16

but a positive and insignificant correlation with debt ratio and current ratio. However, the

negative relationship exists between ROA and Saudi Telecom Company’s sales.

Using the data collected, table 1 shows the VAR lag order selection criteria. 51

observations were included with the exogenous variables being sales, dent ratio, current ratio,

and return on equity. The return on asset was the only endogenous variable.

Lag LogL LR FPE AIC SC HQ

0 -14.38047 NA* 0.125277* 0.760018* 0.949413* 0.832392*

1 -14.30263 0.137374 0.129951 0.796181 1.023455 0.883029
2 -13.87750 0.733552 0.133000 0.818725 1.083878 0.920048
3 -13.86145 0.027068 0.138352 0.857312 1.160343 0.973109
4 -12.70958 1.897197 0.137685 0.851356 1.192266 0.981628
5 -11.82425 1.423474 0.138501 0.855853 1.234642 1.000599
6 -11.70458 0.187711 0.143615 0.890376 1.307044 1.049597
7 -11.48160 0.341034 0.148370 0.920847 1.375394 1.094543
8 -11.42884 0.078616 0.154372 0.957994 1.450420 1.146164

Table 4: Lag Structure

When we use the Akaike information criterion (AIC) and the Schwarz information

criterion (SIC), the optimal lag structure is zero (0). Based on the lowest SIC and AIC

criteria, this implies that the ARDL model will not have lags but just the intercepts. Since the

study variables will not explain the variances (while variance decomposition is small in this

case), we might not be able to get impulse response functions. This implies that, the research

does not involve time series, but it is a simple regression problem. However, for the purpose

of this study, we will set the preferred lag length to be 2. Using the chosen lag length, the lag

structure would be:

d(roa) c d(roa(-1)) d(roa(-2)) d(current_ratio(-1)) d(current_ratio(-2)) d(debt_ratio(-1))

d(debt_ratio(-2)) d(roe(-1)) d(roe(-2)) d(sales(-1)) d(sales(-2)) roa(-1) current_ratio(-1)

debt_ratio(-1) roe(-1) sales(-1)

Short Run ARDL Model

SAUDI TELECOM COMPANY (STC) 17

Variable Coefficient Std. Error t-Statistic Prob.

C 2.128546... 2.0495664... 1.0385348... 0.30510...

D(ROA(-1)) 0.617212... 0.8541094... 0.7226383... 0.47400...
D(ROA(-2)) 0.471954... 0.8137358... 0.5799853... 0.56509...
D(CURRENT_RATIO(-1)) -1.74020... 1.6522315... -1.053246... 0.29839...
D(CURRENT_RATIO(-2)) -1.51794... 1.4055242... -1.079985... 0.28646...
D(DEBT_RATIO(-1)) 0.188964... 0.1575812... 1.1991582... 0.23735...
D(DEBT_RATIO(-2)) 0.108485... 0.1450049... 0.7481525... 0.45863...
D(ROE(-1)) -0.26897... 0.5226571... -0.514631... 0.60957...
D(ROE(-2)) -0.20790... 0.5159744... -0.402928... 0.68909...
D(SALES(-1)) 2.931382... 8.9483073... 0.3275907... 0.74488...
D(SALES(-2)) 2.494203... 6.1818793... 0.4034701... 0.68869...
ROA(-1) -0.38618... 0.4094077... -0.943281... 0.35106...
CURRENT_RATIO(-1) 1.277751... 1.0450627... 1.2226550... 0.22844...
DEBT_RATIO(-1) 0.009407... 0.0855085... 0.1100228... 0.91292...
ROE(-1) 0.068828... 0.2772432... 0.2482593... 0.80517...
SALES(-1) -0.00010... 0.0001160... -0.926415... 0.35965...

Table 5: Short Run ARDL Model

In table 5, the coefficients of both the short run and long run ARDL model are

tabulated. However, before getting carried away with the ARDL model outputs, it is

important to do model diagnostics including checking for the existence of any serial

correlation and model stability

Model Diagnostics

Serial Correlation LM Test

Breusch-Godfrey Serial Correlation LM Test:

Null hypothesis: No serial correlation at up to 2 lags

F-statistic 2.963048 Prob. F(2,39) 0.0634

Obs*R-squared 7.518737 Prob. Chi-Square(2) 0.0233

Table 6: Serial Correlation Test

From table 6, the p-value associated with the chi-statistics is below 5%. Hence, the

null hypothesis that there is no serial correlation is rejected. Thus, the Breusch Godfrey serial

correlation LM test results of the ARDL model show evidence of serial correlation.

Model Stability: CUSUM Test

SAUDI TELECOM COMPANY (STC) 18

Figure 1: CUSUM Test

Figure 1 shows the stability of ARDL model. Based on the figure, we can conclude

that ARDL model is very stable since the blue trend lies within the boundaries.

Bounds Test

Using the short run ARDL model results in table 7, it is apparent that we have 16

coefficients for both the long run and short run terms. Therefore, using the last coefficients,

we can test if the long run coefficients are statistically significant. Hence, the null hypothesis

will be:

C12 = C13 = C14 = C15 = C16 = 0

The results for the Wald Test are in table 4 below.

W ald Test:
Equation: Untitled

Test Statistic Value df Probability

F-statistic 1.920575 (5, 41) 0.1117

Chi-square 9.602875 5 0.0873

Null Hypothesis: C(12)=C(13)=C(14)=C(15)=C(16)=0

Null Hypothesis Summary:

Normalized Restriction (= 0) Value Std. Err.

C(12) -0.386187 0.409408

C(13) 1.277751 1.045063
C(14) 0.009408 0.085509
C(15) 0.068828 0.277243
C(16) -0.000108 0.000116

Restrictions are linear in coefficients.

SAUDI TELECOM COMPANY (STC) 19

Table 7: Wald Test

For the bounds test, the statistical significance of the F-value is not based on the p-

value. In this cases, we use the Pesaran table to get the critical values. From the Pesaran table,

the applicable case unrestricted intercept and no trend. Thus, the critical boundaries are 2.86

(lower boundary) and 4.01 (upper boundary). Given that, the calculated F-value is 1.920575,

which is below 2.86, then the null hypothesis cannot be rejected. The conclusion would

therefore be that, there is no long run relationship between current ratio, debt ratio, sales,

return on equity and return on assets.

Long Run Model Output

Dependent Variable: ROA

Method: Least Squares
Date: 12/03/21 Time: 16:05
Sample: 2006Q4 2021Q3
Included observations: 60

Variable Coefficient Std. Error t-Statistic Prob.

C 0.312234 0.520609 0.599748 0.5511

CURRENT_RATIO 0.167627 0.286845 0.584381 0.5614
DEBT_RATIO -0.178432 0.013864 -12.86986 0.0000
SALES -1.73E-05 2.23E-05 -0.777916 0.4400
ROE 0.682027 0.015170 44.96024 0.0000

R-squared 0.979065 Mean dependent var 10.73850

Adjusted R-squared 0.977543 S.D. dependent var 6.382238
S.E. of regression 0.956424 Akaike info criterion 2.828424
Sum squared resid 50.31104 Schwarz criterion 3.002952
Log likelihood -79.85271 Hannan-Quinn criter. 2.896691
F-statistic 643.0564 Durbin-Watson stat 0.384467
Prob(F-statistic) 0.000000

Table 8: The Long Run Model Output (Without ECT)

Table 8 shows the long run ARDL model output without the error correction term.

From the table, a positive but weak relationship exists between current ratio and ROA.

However, the relationship between ROE and ROA is positive and significant. On the other

hand, debt ratio and sales have a negative correlation with Saudi Telecom Company’s return

on assets.

Long Run Model (With ECT)

SAUDI TELECOM COMPANY (STC) 20

Variable Coefficient Std. Error t-Statistic Prob.

C 0.149702 2.293828 0.065263 0.9483

D(ROA(-1)) 0.857066 0.938567 0.913164 0.3668
D(ROA(-2)) 0.330015 0.857278 0.384956 0.7024
D(CURRENT_RATIO(-1)) -1.191752 1.768796 -0.673765 0.5044
D(CURRENT_RATIO(-2)) -0.887406 1.832158 -0.484350 0.6308
D(DEBT_RATIO(-1)) 0.253920 0.155976 1.627939 0.1116
D(DEBT_RATIO(-2)) -0.067766 0.201805 -0.335800 0.7388
D(ROE(-1)) 0.279411 0.567050 0.492744 0.6250
D(ROE(-2)) -0.199954 0.516788 -0.386917 0.7009
D(SALES(-1)) -3.66E-05 0.000101 -0.363173 0.7184
D(SALES(-2)) 1.98E-05 6.07E-05 0.326732 0.7456
ROA(-1) -0.309412 0.513241 -0.602858 0.5501
CURRENT_RATIO(-1) 1.031157 1.363022 0.756523 0.4539
DEBT_RATIO(-1) 0.031207 0.083505 0.373711 0.7106
ROE(-1) 0.124551 0.287683 0.432946 0.6674
SALES(-1) -7.74E-05 0.000120 -0.645154 0.5226
ECT(-1) -1.475091 0.875943 -1.684004 0.1002

R-squared 0.324874 Mean dependent var -0.219821

Adjusted R-squared 0.047899 S.D. dependent var 2.386248
S.E. of regression 2.328397 Akaike info criterion 4.773590
Sum squared resid 211.4359 Schwarz criterion 5.388429
Log likelihood -116.6605 Hannan-Quinn criter. 5.011962
F-statistic 1.172937 Durbin-Watson stat 1.882624
Prob(F-statistic) 0.330304

Table 9: Long Run ARDL Model with ECT

Table 9 shows the long run ARDL model with the inclusion of the error correction

term (ECT). The ECT is negative, but not statistically significant since the p-value of 0.100 is

greater than 5%. However, the speed of adjustment is 147.51%. That is, in case the operations

of company move away from equilibrium, it can be pulled back to the same state at a speed

of 147.51%.

L-R Model Diagnostics

Serial Correlation Test

Breusch-Godfrey Serial Correlation LM Test:

Null hypothesis: No serial correlation at up to 2 lags

F-statistic 0.717425 Prob. F(2,37) 0.4947

Obs*R-squared 2.090592 Prob. Chi-Square(2) 0.3516

Table 10: Serial Correlation (L-R Model)

Null hypothesis: No serial correlation

SAUDI TELECOM COMPANY (STC) 21

From table 10, the p-value linked to the chi-test statistics is above 5%. Thus, the null

hypothesis cannot be rejected because there is no evidence of serial correlation in the long

run ARDL model.

Stability Test (CUSUM Test)

Figure 2: CUSUM Test

Figure 2 represents the CUSUM test. The blue line trend lies within the boundaries. Hence,

the long run ARDL model dynamically stable.

From the analysis, it appears that the variables current ratio, sales, debt ratio, return on

equity, and return on assets have no long relationships. According to the lag structure, the

optimal lag length was 0. It had the least AIC and SIC. The lag length implied that the

regressors or the independent variables could hardly explain any variations on the dependent

variable, ROA. As such, a simple linear regression model was necessary to establish the

existing relationships. The results of a simple linear regression model are in table 11 below.
Dependent Variable: D(ROA)
Method: Least Squares
Date: 12/03/21 Time: 18:03
Sample (adjusted): 2007Q2 2021Q3
Included observations: 58 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

C -0.235440 0.323907 -0.726875 0.4705

D(CURRENT_RATIO(-1)) 0.296219 1.187852 0.249373 0.8040
D(DEBT_RATIO(-1)) -0.021233 0.089829 -0.236376 0.8141
D(ROE(-1)) 0.041829 0.096420 0.433827 0.6662
D(SALES(-1)) -4.46E-05 3.95E-05 -1.128993 0.2640

R-squared 0.029878 Mean dependent var -0.258448

Adjusted R-squared -0.043339 S.D. dependent var 2.394573
S.E. of regression 2.445911 Akaike info criterion 4.708975
Sum squared resid 317.0715 Schwarz criterion 4.886600
Log likelihood -131.5603 Hannan-Quinn criter. 4.778164
F-statistic 0.408076 Durbin-Watson stat 1.955699
Prob(F-statistic) 0.802010
SAUDI TELECOM COMPANY (STC) 22

Table 11: A Simple Linear Regression Model

Table 11 shows that a positive relationship exists between current ratio, return on equity, and

ROA. However, the relationship between sales, debt ratio and ROA is negative and

insignificant.

Conclusion

The return on equity, return on assets, sales, debt ratio, and current ratio, are very vital

financial variables that companies and investors use in assessing the financial performance of

firms. The return on assets shows the manner in which a firm such as the Saudi Telecom

Company makes the assets in use. The return on equity on the other hand illustrates how a

company is capable of utilizing its equity in an effective manner. Both sales and current ratio

are key financial parameters, used is gauging the profitability and ability of company to

change or meet the debt obligations. On the other hand, debt ratio shows the amount of debts

a company has with respect to total assets of the company. It measures the amount of

leverages used by the corporation. From the research perspective, these variables are

important in assessing the financial health of a firm.

Based on the study results, it is apparent that the key predictors of the return on assets

are current ratio and the return on equity. The study outcomes have revealed the existence of

a positive and significant relationship between Saudi Telecom Company’s ROE and ROA.

This implies that, as the amount of the return on equity increases, there is a positive and

significant increase in the return on assets. As such, the ROA and ROE are amongst the

internal variables of STC that seem to be affecting this company’s financial management

decisions. However, in the case of the return on equity, the major predictor appears to be the

return on assets. This implies that these two variables have direct causal effects on each. A

change in one variable seemingly have a direct positive impact on the other.
SAUDI TELECOM COMPANY (STC) 23

On the other hand, current ratio also has a direct positive effect on the company’s

return on assets. The study findings indicate that, an increase in the current ration results into

0.296 increase corresponding increase on the return on assets. That is according to the short

run ARDL model. The same result are supported by the correlation findings whereby, an

increase in value of current by 1 resulted into the corresponding increase in the return on

assets by 0.198. As such, these two variables have a direct correlation with each other or

causal association between them in short run. Conversely, the relationship between current

ratio and the return on equity, as shown in the correlation table appears to be empirically

positive. An increase in either the return on equity results into an increase in current ratio.

The causal relationship shown by these variables is significant and has an impact on the key

financial decisions made by the Saudi Telecom Company’s management and shareholders.

The study findings also established a positive and significant relationship between the

company’s current ratio and the amount of sales STC generates annually. According to the

study results, an increase in total sales results into the corresponding increase in current

ration. Nonetheless, an inverse correlation is exhibited between the STC’s current ratio and

debt ratio. That is, an increase in total debts over the financial year gives rise to a higher debt

ratio. As result, the current ratio is also negatively impacted. The correlation table shows that,

any increase in debt ratio will give a negative and significant decrease in current ratio by

approximately -0.297.

According to the research outcomes, the relationship between the return on assets was

found to be negative according to the short run and long run ARDL model. Based on the

correlation output, the results showed a positive relationship between ROA, ROE and current

ratio. But, an inverse association between debt ratio, ROA, ROE, and Saudi Telecom

Company’s annual sales. The study results with respect to the total annual sales implies that,

any increase in annual sales of STC, gives to a significant decrease in the return on assets,
SAUDI TELECOM COMPANY (STC) 24

return on equity, and debt ratio. The results seem to contradict the documented study

literature most of which found a positive and significant relationship between sales turnover,

ROA, ROE, and debt ratio.

It was expected that the correlation between the company’s annual sales and current

ratio to be positive and significant. According to the study outcome, the two variables had a

causal relationship. Based on study literature, it was surprising to report that a positive

correlation exists between STC’s return on equity and debt ratio.

Despite the study findings, the lag length based on the lag structure showed that an

alternation test was supposed to be carried out other than using the ARDL model. Using the

AIC and SIC to determine the optimal lag length or structure, the results indicated that our

lag ought to have been 0 (zero). The lowest AIC and SIC criteria showed that the optimal lag

structure is 0 and this implied that the research variables namely debt ratio, current ratio,

sales, return on assets and return on equity could not have explained the resulting variances.

Using a simple linear regression model was proposed. The study outcome from the

regression model resulted into a positive short linear relationship between return on assets,

return on equity, and current ratio for the Saudi Telecom Company. On the other hand, the

correlation between the return on assets, sales, and debt ratio was negative.

The ARDL model for the short run model was found or showed evidence of

serial correlation, but very stable. The blue trend line was within the boundaries.

Nevertheless, when a long run ARDL model was developed based on the 2 lag structure or

length, the equation or model had no serial correlation and was equally stable. It should be

noted that, the bound tests results showed that there was hardly long run relationship between

current ratio, debt ratio, sales, return on equity and return on assets. That is, the variables did

not cause any predictive changes in the other variables. The speed of adjustment was found to

be 147.51%. The implications of the speed of adjustment was that, in case the operations of
SAUDI TELECOM COMPANY (STC) 25

Saudi Telecom Company moved away from equilibrium, they could be pulled back to the

equilibrium at a speed of 147.51%.

SAUDI TELECOM COMPANY (STC) 26

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