Firm Life Cycle Determination Using Financial Ratios

Document Type : Research Paper

Authors

1 . Faculty and PhD student campus cult of Tehran University

2 PhD Financial Management University of Tehran

3 M.A. Campus University of Tehran

Abstract

Tehran stock exchange is a symbol of local capital investment for stock brokers and traders to trade stocks and bonds. One of the main factors for investor is to know about the firm life cycle stage, because the growth potential and future profitability of the firms are greatly dependent on the firm life cycle. The life cycle of a firm can generally be categorized into four common stages, which are start-up, growth, maturity and decline. The aim of this study is to investigate the ability of determination of firm life cycle stages using financial ratios. Leverage ratio, profitability and current ratio were chosen as financial ratios in this study. Three main significance hypothesis between current ratio and life cycle stage, leverage ratio and life cycle stage and profitability and life cycle stage were investigated using ordinary least square regression methods based on gathered data of 30 active firms in Tehran stock exchange during 1385 to 1390. The results showed that the first and second hypothesis can be accepted and the last one (significance relation between profitability and life cycle stage) was rejected. Briefly, it was concluded that there is a inverse relation between current ratio and life cycle stage and a direct relation between leverage ratio and life cycle stage. It means that the firms have higher current ratio and lower leverage ratio at the beginning of the life cycle  and have lower current ratio and higher leverage ratio at the decline stage.

Keywords

References

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