Effect of Inflation on Financial Ratios: A Research in the Manufacturing Sector Traded in Borsa Istanbul
Erdem SaçanInflation is defined as a continuous and significant increase in the general price level, and it has profound effects on economic processes. Although this definition might seem like a superficial explanation of the phenomenon, a deeper examination reveals that the effects of inflation are quite complex and extensive. Inflation decreases the real values of assets and liabilities on the balance sheet, whereas changes in nominal values on the income statement prevent an accurate reflection of actual performance. In particular, during periods of high inflation, financial performance and business stability can be severely jeopardised. However, it is important to remember that the effects of inflation can vary depending on the sector, individual business, and economic conditions. Presenting financial statements adjusted for the effects of inflation ensures that the information is more consistent and reliable, which is crucial for users of financial statements to make more accurate decisions. To mitigate the adverse effects of inflation on financial statements, two approaches are employed: “partial adjustment methods” and “permanent adjustment methods.” This study discusses the practises used against the effects of inflation and offers suggestions on the subject. In this research, the financial ratios of companies in the manufacturing sector that traded on Borsa Istanbul (BIST) for a total of 30 periods in three-month quarters between the 2016Q2 and 2023Q3 periods were examined, and the effects of inflation on liquidity, financial structure, turnover rate, and profitability were examined. Their effects on rates were analysed. It was found that inflation has statistically significant effects on some financial ratios. These findings can help in understanding and analysing the effects of inflation on financial ratios, assisting businesses in making informed decisions and better evaluating their financial positions.
Enflasyonun Mali Rasyolar Üzerindeki Etkisi: Borsa İstanbul’da İşlem Gören İmalat Sektöründe Bir Araştırma
Erdem SaçanEnflasyon, fiyatlar genel düzeyinin sürekli ve önemli artışı olarak tanımlanır ve ekonomik süreçler üzerinde büyük etkilere sahiptir. Bu tanım, olayın sadece yüzeysel bir açıklaması gibi görünse de aslında derinlemesine incelendiğinde, enflasyonun etkileri oldukça karmaşık ve geniş kapsamlıdır. Enflasyon, işletme bilançosundaki varlık ve kaynakların reel değerlerinde azalmaya neden olurken, gelir tablosundaki nominal değerler üzerindeki değişiklikler gerçek performansın doğru bir şekilde yansıtılmasını engeller. Özellikle yüksek enflasyon dönemlerinde, işletmelerin finansal performansı ve istikrarı ciddi şekilde tehlikeye girebilir. Ancak unutmamak gerekir ki, enflasyonun etkileri sektöre, işletmeye ve ekonomik koşullara göre değişkenlik gösterebilir. Finansal tabloların enflasyonun etkisinden arındırılarak sunulması bilgilerin daha tutarlı ve güvenilir olmasını sağlar, bu da finansal tablo kullanıcılarının daha doğru kararlar almaları açısından önemlidir. Enflasyonun finansal tablolar üzerindeki olumsuz etkilerini gidermek için “kısmi düzeltme yöntemleri” ve “kalıcı düzeltme yöntemleri” olmak üzere iki uygulama kullanılmaktadır. Bu çalışma, enflasyonun etkilerine karşı kullanılan uygulamaları ele almakta ve konuyla ilgili birtakım öneriler sunmaktadır . Araştırmada, 2016 Q2 - 2023 Q3 dönemleri arasındaki 3’er aylık çeyrek dönemler halinde toplam 30 döneme ait Borsa İstanbul’da (BIST) işlem gören imalat sektöründeki işletmelerin mali rasyoları incelenerek, enflasyonun likidite, finansal yapı, devir hızı ve kârlılık oranları üzerindeki etkileri analiz edilmiştir. Enflasyonun bazı mali rasyolar üzerinde istatistiksel olarak anlamlı etkileri olduğu tespit edilmiştir. Bu bulgular, enflasyonun mali rasyolar üzerindeki etkilerini anlamak ve analiz etmek, işletmelerin doğru kararlar almasına ve finansal durumlarını daha iyi değerlendirmelerine yardımcı olabilir.
Inflation, a continuous and significant increase in the general price level, emerges as an economic reality. It is a crucial issue globally and is also felt in Turkey economically, socially, and morally. The resurgence of high inflation in Turkey has brought the issue of inflation accounting to the forefront. The impacts on financial statements become more pronounced as the inflation rate rises. This heightened impact necessitates that businesses and financial analysts pay closer attention to the distortions caused by inflation in their financial reporting. Historical cost accounting, which records assets and liabilities at their original purchase prices, becomes less relevant as the real value of money changes over time.
Financial statements provide critical information for decision makers; However, during the preparation of these statements, inflation is a significant obstacle to accurate and relevant financial reporting. To accurately evaluate real results, financial statements must be cleared of the negative effects of inflation. Because the information in financial statements based on historical cost loses its understandability as the nominal value of the local currency used as the unit of measurement changes, that is, the purchasing power of money varies on various dates. It is difficult to make comparisons between previous periods and different financial statements. This creates uncertainty about whether financial statements have the necessary qualitative characteristics. Therefore, correcting the financial statements of companies operating in countries affected by high inflation is of great importance to eliminate these negative effects. The methods applied in the literature and in practise to reduce the effects of inflation on financial statements are examined under two main categories: partial adjustment methods” and “permanent adjustment methods”. These methods offer different approaches to evaluating the effects of inflation on financial statements.
Financial ratios are based on important measures used to evaluate a business’ financial performance. The impact of inflation on these ratios can have serious consequences on the financial soundness of businesses and their decision-making processes. As inflation distorts the true value of financial statement items, it can lead to inaccurate financial ratios. For instance, profitability ratios may appear inflated due to nominal increases in revenue and profits; however, in reality, the real purchasing power of these returns might decrease. Similarly, real assets and liabilities may be affected by inflation. To address these issues, financial analysts and decision makers must adjust financial ratios for inflation to reflect more accurate and consistent measures of financial performance. This can involve using inflation-adjusted figures for revenues, expenses, assets, and liabilities to recalculate financial ratios. Overall, understanding and adjusting for the effects of inflation is essential for accurate financial analysis, sound business decision-making, and maintaining the financial health of businesses in an inflationary environment.
In this study, the sector average of liquidity, financial structure, turnover rate, and profitability rates of companies in the production sector operating in Borsa Istanbul are examined in three-month quarters between the 2016 and 2023 periods. Time series analysis was used to test the research hypotheses. ADF (Augmented Dickey Fuller) analysis was performed to check the stationarity of the series, and the research hypotheses were tested using ARDL (Automatic Distributed Lag) modelling. The effects of PPI rates, which represent inflation, on financial ratios are discussed and interpreted in detail. Many studies in the literature discuss inflation accounting theoretically. However, empirical studies on inflation accounting are limited. This study aims to fill an important gap in this field and make a significant contribution to the literature by examining the effects of inflation on financial statements in detail. In this research, it was concluded that the financial structure ratios, borrowing capacities and profitability of companies are directly affected by changes in PPI. Additionally, some suggestions have been made on the subject.
