Assessing the relationship between integrated reporting and financial indicators of selected JSE companies
Abstract
The increasingly popular integrated report (IR) is becoming the norm of best practice for companies that are viewed as successful. An IR communicates the value-creation plans of a company for the future, while providing, in an integrated manner, any non-financial information. The International Integrated Reporting Council considers integrated reporting (IRG) necessary to answer to the corporative demands of the 21st century. Typically IRG seeks to create value in companies’ six capitals (financial, manufactured, intellectual, human, social and relationship, and natural), according to the International Integrated Reporting Framework. However, the present study focused on the financial capital. The reason is that financial indicators are crucial to various stakeholders, including investors, credit providers, employees and governments, to assess the financial health of a company. As the issuing of an IR is resource intensive, it is important to determine whether investing these resources add value to an orginasation. To date, limited research has been conducted on the relationship between IRG quality and financial indicators. Previous studies have not included the same financial indicators as this study. This study therefore strived to answer the research question: ‘How does IRG affect financial indicators of a company? All JSE listed companies were designated as the population for the research. The sample focused on the top 100 JSE-listed companies, eliminating the industrial metals and mining companies within the industries of basic materials industry and finances. The focus was on the relationship between the ratios selected as financial indicators, and the quality of an IR (determined by EY’s ‘Excellence in Integrated Reporting Awards’). This relationship was analysed empirically for the period 2014 – 2017. The data were analysed using three statistical methods, descriptive statistics, Spearman’s rank-order correlation and the repeated measures analysis of variance (ANOVA). This study delivered various findings. Regarding the descriptive statistics, it was observed that quality IRs may improve the earnings yield, net operating profit after tax, earnings before interest, taxes, depreciation, and amortisation (EBITDA) as well as gross profit % ratio. Other financial indicators weakened as the quality of IRG increased, these indicators were: inventory, average debtors collection period and dividend cover. By applying Spearman’s rank-order correlation technique, evidence was found that quality IRs may improve certain ratios, namely EBITDA, dividend yield, gross profit %, net profit %, EBITDA margin, net operating profit after tax, return on capital employed, return on equity and market capitalisation. Findings also showed that as the quality of IRG improved, the ratio of dividend cover deteriorated. The significant findings from the repeated measures ANOVA of the fixed-asset turnover indicated that the worst IRG rating emerged with the highest fixed-asset turnover ratios. For total asset turnover, the best quality IR was related to the lowest ratio. The earnings yield ratio indicated that different ratings provided the highest ratio figure over the four-year period of the research. The best quality IR provided the highest average debt to equity figures, which are not preferable, whereas the lowest quality delivered the best debt to equity ratio. Such inconsistent results made it challenging to conclude on the effect of the quality of IRG on the ratio figures.