negative correlation between the decrease in market capitalization and profitability
Abstract
The study shows that there is a negative correlation between the decrease in market capitalization and profitability. Following these findings, the following recommendations are hence provided: Companies should increase the number of employees because raising the number of workers in a company is equivalent to expanding the company’s assets. There is potential in numbers, where additional employees increase knowledge source for a company, leading to improved decision making and broadening the company’s pool of skills. Managers should additionally concentrate on improving the working environment for employees because employees occupy a leading position in the marketing of a company’s brand and create a good impression on customers. Extensive research should be carried out to deduce further the relationship between these two variables in companies of varying sizes.
4.0 Discussion of Findings
The findings of this project show a negative consensus between a decrease in market capitalization and profitability. When a company’s market value plunges, investor confidence in the company also drops. Therefore, sales drop, resulting to a decline in share price. With less investors and poor sales, a company’s overall performance is negatively impacted, which results in to decrease in profitability. This poses as a key concern for the overall welfare of a company. A company’s market capitalization gives an account of the value of companies and therefore, it should be of vital consideration. An increase in market capitalization is directly related to potential customers, and hence anticipated sales in given markets. This finding supports the arguments of Forbes (2002), that even though market capitalization is influenced by other variables and has a little direct impact on profitability, depreciation in market capitalization can affect a company’s performance at various levels, which in turn affects the company’s net income. Hence, a decrease in market capitalization can negatively affect the performance of a company such as increasing borrowing costs, higher prices for imported inputs, and a decline in lending ability.
4.1 Limitations of Study
The main limitation for this project is that little research has been conducted on this topic, and hence there is a huge gap in literature. This makes data collection very complex and very extensive. Hence, more study should be dedicated to this field in order to bridge the existing gap in literature, in order to make future research projects less complex and to provide knowledge on how the two variables are linked.
4.0 Conclusion.
Market capitalization is the total value of a company’s shares of stock. A company’s market capitalization gives an account of the value of companies and therefore, it should be of vital consideration. An increase in market capitalization is directly related to potential customers, and hence anticipated sales in given markets. Additionally, increase in the number of customers and impressive sales is connected to the number of employees in a company. Decrease in market capitalization has a negative impact on a company’s profitability. When a company’s market value plunges down, investor confidence in the company also drops. Therefore, sales drop, resulting to a decline in share price. With less investors and poor sales, a company’s overall performance is negatively impacted, which results to a decrease in profitability. This poses as a key concern for the overall welfare of a company. Hence, this study was conducted with an aim to evaluate how decrease in market capitalization contributes to a decrease or increase in profitability. The study examines the relationship between market capitalization and profitability in a company. The findings of this analysis shows a negative impact on a company’s profitability. This study therefore concludes that extended research should be carried out in order to further deduce the relationship between these two variables in companies of varying sizes.
4.1 Recommendations.
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