Degree of Financial and Operating Leverage and Profitability of Insurance Firms in Ghana

Abstract

The profitability of any business entity for a particular time period can be conceptualized as the final outcome of its investing and operating activities. This paper investigated how profitability of insurance firms in Ghana, is influenced by working capital management and leverage using 18 firms. The current ratio was taken as representative of the result of working capital management policy and financial leverage and operating leverage as the bench mark for capital structure. Supplementary analysis was also undertaken to assess the impact of premium growth, GDP and firm size on profitability. Panel data methodology was used to determine whether profitability of insurance companies is related to selected indicators in accordance with the accepted finance theory. Furthermore, the research results found that, degree of financial leverage and liquidity are inversely related to profitability while operating leverage is positively related to profitability.
Key words: Profitability; Working capital management; Operating and financial Leverage