The impact of financial risks on profitability: The case of CBRT sector balance sheets

Firms are exposed to many risks throughout their activities. Among these risks, the importance of financial risks is increasing day by day. Studies on currency risk, interest risk, liquidity risk, credit risk and capital risk, which are considered as financial risks, have an important place in the literature. It is aimed to reveal the effects of financial risks on real sector firms in Turkey empirically by the study. The aim of the study is to search the effects of financial risks faced by real sector firm's on profitability, which is considered as a performance indicator. In the study, the data of Company Accounts, which is the largest data set in Turkey, was used. The Company Accounts study, jointly published by the CBRT and TURKSTAT, has been published since 1990 and covers a wider data set as of 2009. An important data set was created with the inclusion of administrative records. The detailed data of the sectors in the report also allows analysis on a sectoral basis. In the study, the data for the period of 2009-2021 were examined. Panel data analysis, in which time series and cross-sectional data are considered together, was applied as the analysis method. In the study, the effects of exchange rate, interest, liquidity, credit and capital risks on return on assets, return on equity and net profit margin were analyzed. In the analysis part company-based data was used instead of macroeconomic factors, financial risks are created from balance sheet data. In addition, instead of individual risks, financial risks were considered collectively and their effects on profitability were analyzed comprehensively. These issues differentiate the study from previous research and it is aimed to contribute to the literature in this context. As a result of the study, it was determined that exchange rate, liquidity and credit risk negatively affect the return on assets. The leverage ratio, which is considered as a capital risk indicator, has negative and positive effects on sectoral basis. This situation gives the result that profitability is affected differently according to the change in debt level.