Slide 1

Impact of Intellectual Capital Efficiency on Profitability Muhammad Abdul Majid Makki, Suleman Aziz Lodhi(A Case Study of LSE 25 Companies)

Presented By:

Zahra Batool(11022720-059)Mehvish Rubab(11022720-023)Shakeela Naz (11022720-039)Sundas Yaqoob(11022720-036)Sadia Shaheen(11022720-053)

Presented By:

Zahra Batool(11022720-059)Mehvish Rubab(11022720-023)Shakeela Naz(11022720-039)Sundas Yaqoob(11022720-036)Sadia Shaheen(11022720-053)

Zahra Batool(11022720-059)The value of a companys employee knowledge, business training, & any proprietary information that may provide a company with a competitive advantage. It includes: Human Capital Structural Capital Capital Employed Efficiency INTELLECTUAL CAPITAL

4

ABSTRACT To examine the relationship between intellectual capital efficiency and firm's profitability. Examines the role of IC efficiency in firms net profit using value added intellectual coefficient (VAIC). Investigates its correlation with firms profitability, using regression models. A five-year data set for LSE Index (LSE-25) was obtained from financial reports

Now, World economies are moving from manufacturing towards knowledge-based economic activity Business resources comprise 20% tangible assets and 80% that are intangible IC is an influential intangible strategic asset capable of transforming a national company into a multinational INTRODUCTION

IC management become very important due to service sectors This research focuses on firms net profit, Is it changes with a change in IC efficiency using the VAIC? Provides standardized measure of calculating and comparing IC performance across various sectorsCONTI.........

Presented By:

Zahra Batool(11022720-059)Mehvish Rubab(11022720-023)Shakeela Naz(11022720-039)Sundas Yaqoob(11022720-036)Sadia Shaheen(11022720-053)

Mehvish Rubab(11022720-023)

MEASUREMENT OF INTELLECTUAL CAPITALFIRST APPROACHFocuses on costcompute IC through the difference between market and book value.SECOND APPROACHProfit or value-oriented Focuses on measuring IC efficiency

LITERATURE REVIEW

90% researchers conclude +ve correlation between VAIC, profitability and market valuation

10% researchers conclude -ve correlation between VAIC, profitability and market valuation

WHY PIONEERThe first 100 years of our countrys history were about who could build the biggest, most efficient farm.

The second 100 years were about the race to build efficient factories.

The third 100 years are about ideas.

RESEARCH GAP Extending the IC approach to all the listed companies in Pakistan

While focusing on the impact of IC efficiency on future financial performance and total capitalization of companies.

Focus on Intangible Assets

Presented By:

Zahra Batool(11022720-059)Mehvish Rubab(11022720-023)Shakeela Naz(11022720-039)Sundas Yaqoob(11022720-036)Sadia Shaheen(11022720-053)

Shakeela Naz(11022720-039)

THEORATICAL FRAMEWORKIC Efficiency (VAIC) CEE(X1)HCE(X2)SCE(X3)Profitability (NP)

METHODOLOGY MODELS VAIC indicates corporate value creation efficiency & regression used to check dependency of firm profitability. 1) VAIC VAIC = CEE + HCE + SCE 2) RegressionYi = 0 + 1(CEE) + 2(HCE) + 3(SCE) + i

VA = OUT IN (sales-cost of materials & services) CEE = VA/CE (capital employed= net book value of total assets). HCE = VA/HC (Human Capital = total salaries and wage )SCE = ST/VA (Structural Capital = VA HC. )

CALCULATION OF VARIABLES

HYPOTHESISH0 : There is no relatinship between IC and firm profibilityH1 : There is relationship between IC and firm profibility

The study is based on financial data of the top 25 companies of LSE (volume wise) from 2002-2006.

VAIC does not provide money value of IC, It simply adds IC efficiency factors

Efficiency index

SAMPLE

Presented By:

Zahra Batool(11022720-059)Mehvish Rubab(11022720-023)Shakeela Naz(11022720-039)Sundas Yaqoob(11022720-036)Sadia Shaheen(11022720-053)

Sundas Yaqoob(11022720-036)

ANALYSIS AND RESULTSTable illustrates mean of human capital efficiency is 6.5368 with a range from -3.221 to 21.9286.

This means that LSE-25 companies produced Rs.6.54 for every 1 rupee spent on human capital.

The average VAIC and ICE remained 7.6008 and 7.2927, respectively.VariablesNMinMaxMeanS.DValue Added(Rs. In million)25-39706041297417511Human Capital(Rs. In million)25121470027263689Capital Employed (Rs. In million)2542481588403942037734Structural Capital (Rs. In million)25-5097673841024815516Cap. Emp. Efficiency25-0.00270.74500.30810.2097Hum. Cap Efficiency25-3.222121.92866.53685.1534Structural. Capital Efficiency25-0.95911.31040.75590.3847Net Profit(Rs. In million)25-1276345970522810733EPS (Rs.)25-6.8043.908.2110.66ICE25-1.911722.88297.29275.2865VAIC25-1.914423.62797.60085.3994

REGRESSION ASSUMPTIONS Regression model is appropriate because D-W Test value is closer to 2

Data is normal because value is between 0.2 to 0.6

Variance inflationary factor (VIF) of less than 1.50 in all cases, indicating no multicolinearity

Variances at each level of independent variables were found homogeneous indicating no hetroscedasticity.

Conti. CEE has a significantly positive effect on net profitability as R= 42.5%

That all three components of VAIC have a strong impact on net profit

Firm with greater IC efficiency would fare better in terms of profitability.

Sadia Shaheen(11022720-053)24

USEFULNESS OF STUDY Paper is good source of reference for future research in Pakistani corporate sector The data by qualified accountants and audited by statutory auditors increasing reliability.

VAIC components show a significant explanatory power for firms traditional financial performance

More than 90% of investors and portfolio managers will benefit from this study while developing a portfolio.

VAIC can be used by regulatory authorities to identify weaknesses and strengths of industries

To help determine which industrial sectors should be subsidized Conti.LIMITATIONS OF THE STUDY

This research is limited to LSE-25 index companies.

Cannot be generalized to apply to whole stock market

Human and structural capital efficiency is not comparable among different sectors within LSE-25

FUTURE RESEARCH IC efficiency on future financial performance and total capitalization of companies The impact of IC in the intellectual- intensive pharmaceutical sector .

CONCLUDING REMARKS Contribution Of Research Academic Researchers: deciding potential role of IC efficiency in a firms performance Business Professionals: allocating their precious resources to support IC firms financial performance.

TO TAKE INITIATIVESupervisory bodyThe SECP and its technical advisors The Institute Of Chartered Accountants Of PakistanThe Institute Of Cost And Management Accountants Of Pakistan

Any Query??????