Chapter III

RESEARCH METHODOLOGY

This chapter deals with the methods used by the researchers in conducting

this study. This includes the research design, population and respondents, data

gathering procedure, and data analysis.

Research Design

The main objective of this research is to determine the financial leverage

and profitability of San Miguel Corporation. In view of this objective the researchers

will use the correlational research design.

Correlational research design is a quantitative method of research in which

they have are 2 or more quantitative variables from the same group of subjects,

and they are trying to determine if there is a relationship (or covariation) between

the 2 variables. (Waters, n.d.) .This is used to estimate the extent to which the

variables are related to one another. This research design is useful in testing

hypotheses about the relationship of two or more variables. Through the study,

they ascertained how much variation is caused by another variable (Sevilla, n.d.).

Assumptions of the Study

San Miguel Corporation is the respondent of the study. The researchers

obtained the quarterly reports of SMC from year 2011 up to 2016. The financial

statements were uploaded on the company’s website. The researchers were

allowed to use the financial reports for the purpose of the study. This was

supported by a letter of permission from San Miguel Corporation signed by the

company’s chief financing officer.

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Data Gathering Procedure

The subject of the study is San Miguel Corporation, a conglomerate in the

Philippines. Their financial statements were used as the data for the study. The

researchers obtained these from the website of San Miguel Corporation. They

secured a letter of request to use the financial reports for the purpose of the study

signed by their thesis adviser and college dean. After series of personal calls and

emails, SMC in return sent a letter of permission, making this study possible. The

financial statements used consists of quarterly reports from year 2011 to 2016.

The financial statements provided the data that helped the researchers in the

computation of financial ratios and those other relevant information needed in the

study.

The researchers used secondary data that were taken from books,

unpublished thesis, and online articles coming from Batangas State University’s

library and other libraries such as De La Salle University and De La Salle Lipa.

After gathering the data from different sources mentioned in the study, the

researchers used the data of each variable to be able to run the regression. In this

research paper, Pearson Correlation Analysis will be utilized.

Data Analysis

To answer the objectives of the study, the researchers used the following

ratios and statistical treatment.

Financial Leverage. Financial leverage is commonly explained as the use of

borrowed money to make an investment and return on that investment.

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Debt to Equity. The debt to equity ratio measures the riskiness if the firm’s

capital structure in terms of relationship between the funds supplied by creditors

(debt) and investors (equity).

𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑦
𝐷𝑒𝑏𝑡 𝑡𝑜 𝐸𝑞𝑢𝑖𝑡𝑦 =
𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦

Debt to Asset. Debt ratio measures the proportion of a firm’s total asset that

is financed with the creditors’ funds.

𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑦
𝐷𝑒𝑏𝑡 𝑡𝑜 𝐴𝑠𝑠𝑒𝑡 =
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

Times Interest Earned. This ratio serves as one measure of the firm’s ability

to meet its interest payments and thus avoid bankruptcy.

𝐸𝐵𝐼𝑇
𝑇𝑖𝑚𝑒𝑠 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑎𝑟𝑛𝑒𝑑 =
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒

Profitability Ratios. Profitability ratios are those which measure management’s

effectiveness as shown by the returns generated on sales and investment.

Net Margin. The return on sales ratio sometimes called margin, operating

margin, or profit margin ratio is a profitability ratio that measures the amount of net

income earned with each dollar of sales generated by comparing the net income

and net sales of a company.

𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
𝑁𝑒𝑡 𝑀𝑎𝑟𝑔𝑖𝑛 =
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠
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Return on Equity. Return on Stockholder’s equity ratio measures the rate of

return that the firm earns on stockholders’ equity.

𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝐸𝑞𝑢𝑖𝑡𝑦 =
𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦

Return on Assets. The return on assets (ROA) ratio expresses income as a

percentage of the average total assets available to generate that income.

𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝐴𝑠𝑠𝑒𝑡 =
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

Earnings per Share. It is the ratio defined as the company’s profit allocated

to each outstanding equity share.

𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 =
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑆ℎ𝑎𝑟𝑒𝑠 𝑂𝑢𝑡𝑠𝑎𝑡𝑛𝑑𝑖𝑛𝑔

Trend Analysis. To evaluate hypothesized linear and non - linear relationship

between two quantitative variables, Trend Analysis was performed. It is commonly

used in situations when data have been collected over time at different levels of a

variable; especially when a single independent variable or factor has been

manipulated to observe its effects on a dependent variable.

Pearson Correlation Analysis. To determine significant relationships, Pearson

Correlation Analysis was performed. It measure and test the relationship of

financial leverage to profitability.

Pearson R was used as a basis to establish the strength and direction of

correlation between two variables. Correlation coefficients can range from -1.00 to
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+1.00. The value of -1.00 represents a perfect negative correlation while a value

of +1.00 represents a perfect positive correlation. A value of 0.00 represents a lack

of correlation. Correlation research design was used in the study. This is the most

appropriate research design because it is with association in the objective of the

study.

Hence, a table was used in interpreting the r-value of the correlation

obtained from the data which are utilized in the study.

Table 3
Interpretation of R- Value: Pearson Correlation Analysis
R value Interpretation

0.00 No correlation; no relationship

±0.01 to ±0.20 Very low correlation; almost negligible

±0.21 to ±0.40 Definite but small relationship

±0.41 to ±0.70 Moderate correlation; substantial

relationship

±0.71 to ± 0.90 High correlation; marked relationship

±0.91 to ±0.99 Very high correlation; very dependable

relationship

1.00 Perfect correlation; perfect relationship

Source: Introduction to Business Statistics: A Comprehensive Approach by

Wintson S. Sirug (2016)