Open access peer-reviewed chapter

Looking beyond the Numbers: Determinants of Financial Performance of Portuguese Wine Firms

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Carmem Leal, Bernando Cardoso, Rogério Bessa, José Vale, Rúben Nunes and Rui Silva

Submitted: 22 January 2022 Reviewed: 09 February 2022 Published: 31 August 2022

DOI: 10.5772/intechopen.103141

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Banking and Accounting Issues

Edited by Nizar Mohammad Alsharari

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This chapter focuses on the analysis of the determinants of financial performance (FP) of Portuguese wine firms. Unbalanced panel data were analyzed using fixed-effects regression. The sample consisted of 386 Portuguese wine firms, for the period 2014–2017. FP is the dependent variable of this study, having been measured through return on assets (ROA) using as explanatory variables debt-to-equity, net working capital, current ratio, days payable out-standing (DPO), and days receivables outstanding (DRO). The results show: (1) DRO, debt-to-equity and net working capital are the variables that best explain the FP measured by ROA; (2) Debt-to-equity and DRO have a negative relationship with ROA, whereas current ratio, working capital, and DPO have a positive relationship with profitability measured by ROA. The findings suggest that there are other qualitative elements in the wine sector, beyond numbers, that support the explanation of its performance. The way this industry is heavily controlled affects its success. Furthermore, factors such as the style of corporate governance and the lengthy production cycle can have a significant impact on its FP. it is strongly advised that qualitative approaches be employed in conjunction with quantitative research in future studies to obtain the most comprehensive and accurate results.


  • financial performance
  • wine firms
  • liquidity
  • profitability
  • panel data
  • R software

1. Introduction

Winemaking is one of the most representative economic activities in a number of countries, owing to the wide range of fine products available and the convergence of producers’ know-how, craftsmanship, and traditions.

The wine industry has been studied from a variety of perspectives. In recent years, the culture of quality wine has been bolstered by significant investments made by both large corporations and medium-and-small-sized businesses. This study focuses on the factors that influence winemakers’ economic and financial performance.

The evolution of the wine firm’s level of exports in Portugal can be used to assess its importance. As shown in Figure 1, the value of exports in thousands of euros nearly doubled from 2009 to 2020.

Figure 1.

Evolution of Portuguese wine exports from 2009 to 2020. Source: Instituto do Vinho e da Vinha, in

In 2019, the overall value of exported food commodities will be around 7.4 million euros, with wine exports accounting for roughly 15% of the total [1]. These figures alone can indicate the importance of this industry for Portugal, in addition to the quality of the products and their international renown. As a result, it appeared appropriate to investigate this sector’s financial performance.

Over the last four decades, little attention has been paid to the area of short-term finance, specifically working capital management (WCM). This can happen for a number of reasons, the first of which is that decisions about working capital are made on a daily basis. As a result, their individual impact is negligible. Second, unlike capital investment decisions, these routine decisions are reversible over time. However, many research studies, such as see Refs. [1, 2], have shown that WCM has a significant impact on a firm’s profitability. Talha et al. [3] observed that aggressive liquidity management improves operating performance and is typically associated with higher corporate values.

The economic recovery has increased managers’ awareness of short-term financial management and associated flows. Firms were forced to manage their short-term financing policies more efficiently during a recession and with a decrease in investment strength on the part of the banking sector.

As a result, issues concerning working capital management have become as important as capital structure, financial autonomy, and liabilities. This paradigm shift was accelerated by the economic downturn, during which efficient working capital management contributes exponentially to increased business performance [1].

Not only in the context of crisis but also on a daily basis, the possibility of acquiring a level of debt that might compromise shareholders’ wealth is a very real problem. Thus, it is up to managers to align the financial structure with the organization’s resources to ensure corporate sustainability, always safeguarding the obligations of the commitments assumed.

Financial management and short-term decision-making must, therefore, be understood as important tools for medium and long-term business objectives that can guarantee them a successive improvement of processes and, consequently, an efficient business.

The efficient allocation of resources allows the increase of business gains, but only when there is continuous fulfillment of obligations toward the others. Thus, to ensure this financial balance, the proper management of short-term resources using the analysis of ratios is one of the main factors for maintaining the organization’s health [2].

One of the main objectives of short-term management is to ensure the existence of liquidity in firms since this is one of the most important assumptions for organizational success. Without efficient liquidity management, the guarantee of compliance with business obligations can be compromised due to a lack of cash, which can enhance decision-making that entails an increased risk for the company’s sustainability.

Short-term management is critical for the wine sector and allows the guarantee of business continuity in a sector where the competition is fierce.

The wine sector is vulnerable to the costs of raw materials and external supplies and services that predominate in frequency during a production cycle, given the activities that will attract income. In this way, it is necessary to understand how short-term management can contribute to the maintenance of good yields, such as those related to a firm’s assets.

The main objective of this investigation is to understand the impact of liquidity measures on the financial performance of wine firms. Thus, the relationship between ROA, days payable outstanding (DPO), days receivables outstanding (DRO), net working capital (NWC), debt-to-equity ratio, and current ratio (CR) will be analyzed. The goals of this research are to determine whether the DRO and debt-to-equity ratio have a negative relationship with the ROA and whether this has a significant relationship with the indicators of DPO, working capital, and current ratio. The current study will be conducted for a sample of 303 wine firms over a four-year period. The remainder of this study is organized as follows. Section 2 reviews the related literature and develops our hypotheses. Section 3 explains how we measure our key variables and specifies the empirical model used for hypothesis testing. Section 4 describes our data and summary statistics. Section 5 discusses our main empirical findings and reports the results of our robustness checks, Section 6 concludes and sets out some final reflections.


2. Literature review and hypothesis development

2.1 Liquidity and working capital

Liquidity represents the ability of an asset to convert to cash, and it is regarded as a precondition to ensure that firms are able to meet their short-term obligations [3, 4].

The current ratio is used as a liquidity criterion and measures the capacity of firms to meet their current obligations, typically due in 1 year. Excessive liquidity indicates accumulated idle funds, and inadequate liquidity not only adversely affects the creditworthiness of the firm but also interrupts the production process and hampers its earning capacity to a great extent. Keeping this indicator at an optimum level implies ensuring an adequate level of current assets, which must be above that of short-term liabilities [5].

Following this reasoning, we can anticipate that an increase in the current liquidity will lead to an increase in profitability as some literature has proved [6, 7, 8, 9]. However, a high level of this indicator can be a sign of over liquidity, with possible adverse effects on the profitability as is indicated by research findings of [10, 11, 12, 13].

In a study conducted in the Republic of Serbia, the authors analyzed the impact of traditional liquidity indicators on the profitability in the meat processing industry using data from official financial reports of the firms for the period from 2016 to 2019 and concluded that liquidity has no effects on profitability of those firms [14]. Similar results were obtained by Pervan and Višić in the Croatian manufacturing industry for the period from 2002 to 2010 [15].

As evidence, there is no consensus on the existence and quality of the relationship between liquidity and profitability. Thus, the first hypothesis of this study can be stated as follows:

Hypothesis 1: There is a possible impact of liquidity on the profitability of Portuguese wine firms.

Working capital (WC) is an approach to improving a company’s liquidity, profitability, and value [4, 16]. Working capital management provides enough cash to meet the short-term obligations and operating costs of a firm [17, 18], and its main purpose is to free up capital that has been locked up in day-to-day operations to boost liquidity. Even for companies with promising long-term prospects, working capital integrates short-term financial management with strategic decisions, impacting profitability, risk, and so value [19]. Academicians, managers, and policymakers have recognized the importance of effective WCM in a firm’s survival in the aftermath of the global financial crisis [20].

“WC can be viewed as a statically, as a ‘stock’ value, or dynamically as a ‘flow’ value” [4]. In the first case, WC is defined as a company’s current assets minus its current liabilities and is referred to as net working capital in this scenario. In the latter case, working capital requirements are inextricably linked to the process of earning and spending money, and they are a part of the cycle of activities that this process entails.

The most common measure of working capital management is the cash conversion cycle (CCC) [21, 22]. CCC is defined as the time lag between the collection of revenue from the sales of finished goods or services and the payment to the suppliers for the purchase of raw materials. The cash conversion cycle comprises of days receivables outstanding (DRO), days inventory outstanding (DIO), and days payable outstanding (DPO). A shorter CCC could be driven by a shorter DRO, a shorter DIO, or a longer DPO [23, 24]. The aim is to reduce the length of the CCC to a reasonable minimum, the shorter the CCC, the lower the capital requirements, improving the firm’s profitability [16, 25].

The relationship between firm profitability and WCM has become exceedingly popular among academics [26, 27].

Despite major variances in working capital practices throughout businesses and even within industries over time, there is widespread agreement on the negative association between shorter DRO and DIO, and hence shorter CCC, and greater profitability [7, 13, 25, 28, 29]. The role of DPO in WCM is unclear and unexplored. In empirical studies, DPO is often negatively correlated to profitability [10]. Since the negative effect was also sometimes found to be insignificant, this relation remains unclear. In this regard, we formally state our second and third hypotheses as follows:

Hypothesis 2.1: The DRO is negatively related to the profitability of Portuguese wine firms.

Hypothesis 2.2: The DPO is related to the profitability of Portuguese wine firms.

Net working capital (NWC) is a measure of a firm’s liquidity that is intended to be positive since it is defined as the difference between a firm’s current assets and current liabilities [10, 30]. NWC is predicted to have a favorable impact on a company’s profitability; nevertheless, the importance of NWC in a specific company is decided by macroeconomic conditions, which have a substantial impact on the company’s investments and financing. Managing NWC effectively means maximizing shareholder profit while minimizing the risk of a firm’s failure [13]. There is an enormous amount of studies about the possible relationship between NWC and profitability, but there is no consensus. A significant number of studies suggest the existence of a negative impact of working capital management on a company’s profitability [7, 8, 10, 13, 25, 28, 31], supporting the premise that an aggressive strategy of WCM positively influences a company’s profitability. Nonetheless, the results of some studies show otherwise [11, 32, 33, 34]. These authors point out the positive impact of WCM on companies’ profitability and success, thus supporting a conservative strategy (e.g., positive impact of NWC). These discrepancies could be attributed to the inconsistency and volatility of economic (and other) conditions in the various countries and environments where the studies were conducted, the analysis of various industries, differences in the distribution of company types within samples, different methods and approaches used in the analysis, and so on [11]. This leads to the following hypothesis:

Hypothesis 3: There is a possible impact of NWC on the profitability of Portuguese wine firms.

2.2 Leverage and profitability

Many empirical researches have been conducted on the relationship between leverage and profitability; nevertheless, the results of these investigations are inconclusive. This indicates that the impact of leverage on performance is greatly dependent on the circumstances, and theories such as pecking order, capital structure, and agency theory can help explain the discrepancies [35].

Various studies in developed countries such as the United States, France, Belgium, the United Kingdom, Italy, and Germany demonstrate a positive association between debt and profitability [36, 37, 38]. Others, on the other hand, show that a company’s leverage is inversely associated with its profitability, suggesting that a larger debt ratio leads to lower profitability [39, 40, 41]. There are also authors who argue that there is no connection between the two concepts [42].

In general, more evidence in developing countries supports the concept that leverage and profitability are negatively linked than the other way around [43, 44, 45]. Other research shows mixed or nonlinear outcomes when it comes to the impact of financial leverage on performance [46, 47]. Following existing literature, we present the fourth hypothesis:

Hypothesis 4: There is a possible impact of leverage on the profitability of Portuguese wine firms.


3. Research methodology

3.1 Data and sample selection

The sample of the study is composed of 412 wine firms operating in Portugal from 2014 to 2017. After eliminating the firms with missing values, insufficient and extreme data, an unbalanced panel 9,264 firms firm-year observations on 386 firms is finally obtained.

Because of its benefits, the panel data approach is used. First, the panel data technique may account for unobservable heterogeneity. Second, it removes or minimizes estimation bias and data multicollinearity concerns [48].

R software was used to collect and analyze panel data. The ideal starting point for the analysis was to generate summary descriptive statistics to provide an overview of the panel data set under investigation. The sample minimum, sample maximum, mean, and standard deviation were thus the basic summary statistics. The intensity and direction of the relationship between the study variables were determined using correlation analysis. Univariate plotting was done before estimating panel data models. Because panel or time series stochastic features might be trending, random walk (drift), or both trend and drift, this aided in displaying data and summarizing its distribution [49]. Finally, diagnostic tests were performed, and the hypotheses were tested using a panel regression analysis approach.

3.2 Study variables

In this study accounting metrics were given primacy over market measures, following previous literature, while evaluating the wine business, which has extremely distinctive characteristics [50, 51]. Inspired from these arguments, as dependent variables in this study, return on assets (ROA) was used as a proxy for firm profitability in line with some of the prior studies [14, 39, 50, 51]. Please see Table 1 for the variable definition.

DSO (days)Accounts ReceivableTotal Credit Salesx365
DPO (days)Accounts payableCost of Goods soldx365
Current ratioCurrent AssetsCurrent Liabilities
Debt to equity ratio (%)Total LiabilitiesTotal ShareholdersEquity
Net working capital (€)Total Current Assets − Total Current Liabilities
Return on assets (€)NetincomeTotal Assets

Table 1.

Variables definition.

3.3 Data analyses

The main justification for using a fixed-effects panel model is to eliminate the influence of serially correlated errors [52]. The main difference between the fixed-effects and the random-effects models is that the variation between entities is believed to be random and uncorrelated with the independent variables [53]. The advantage of fixed- and random-effects models over the OLS method is that they allow researchers to adjust for all stable characteristics of each company included in the sample over the study period.

After obtaining the results of the OLS, fixed-effects, and random-effects, the F-test is used to select between the fixed-effects and the OLS. Furthermore, the Lagrange Multiplier (LM) test of Breusch and Pagan [54] is used in the selection of the random-effects and the OLS. Because the F test is significant in all of the models, it reveals that the Fixed-effects method outperforms the OLS method. The Hausman (1978) test is then used to determine whether the fixed-effects or random-effects method is superior. Because the Hausman test is significant, the results favor the fixed-effects method [55].

The model tested was:


4. Empirical results

Table 2 reports summary statistics (mean) for the main variables used in this study. The mean for ROA is 3% in 2014 and 4.75% in 2017. The mean days receivable outstanding is 163 in 2014 going down to 158 days in 2017. The mean days payable outstanding is 231 in 2014 going up to 246 days in 2017. The mean of debt-to-equity and current ratio are approximately 0.98 and 7, respectively, going down in 2017 to 0.81 and 5,39, respectively. Finally, the net working capital presents in 2014 the mean value of 1,448,068 €, going up to 1,802,862 € in 2017.

ROA %3863.073.843.834.75
DRO (days)386163156166158
DPO (days)386231393293246
Current ratio3867.054.725.905.39
Net working capital3861,448,068 €1,641,146 €1,759,999 €1,802,862 €
Return on Assets (€)3860,04 €0,05 €0,04 €0,05 €

Table 2.

Wine firms – descriptive statistics (mean).

All these values evolve in a positive direction, as well as expected according to theory.

Table 3 presents the results obtained. The regression coefficients show that DRO (−7.7958e-05) and DTE (−1.1657e-04) have a negative influence on ROA and are significant at the 1% level. As can be seen in Table 2, both DPO (3.9019e-06) and CR (1.9768e-04) have a positive influence on ROA. However, the positive influence of DPO and CR on ROA is not statistically significant. Finally, NWC (2.4266e-09) has a statistically significant positive influence on ROA and is significant at the 5% level. Apart from these results, the F value in fixed-effects is highly significant, meaning that the model has appropriate fit measures (Table 2).

ROAt,i = αt + β1DSOi,t + β2DPOi,t + β3DTEi,t + β4CRi,t + β5NWCi,t + ηi
Independent variablesβStd. Errorp-value
Debt to equity (DTE)−1.1657e−04***4.6579e−050.01
Current ratio (CR)1.9768e−041.9845e−040.32
Net working capital (NWC)2.4266e−09**1.3339e−090.04
F test for individual effects
F = 5,2814df1 = 301df2 = 878p-value ˂ 2.2e-16
alternative hypothesis: significant effects

Table 3.

Model estimation – (fixed effects-dependent variable – ROA).

Represents significance at 5% level.

Represents significance at 1% level.

R2 = 0.0935.

The computed R2 was approximately 10% showing that there are some other variables that can explain the profitability of Portuguese wine firms. The liquidity measures can explain 10% of their ROA during the period of 2014 to 2017.


5. Discussion

The higher the ROA, the more efficient the firm’s performance in relation to its assets. The amount of efficiency in a firm’s performance might be an alternative in encouraging stockholders to invest in a firm. According to the results presented the Portuguese wine firms show an upward in terms of ROA for the period analyzed.

When it comes to the independent variables, it is clear that DRO has a negative and considerable impact on ROA. This suggests that the firms with the longest wait time for payment from their customers are the least profitable. To properly manage their CCC, they should work to close this gap. The outcome is comparable to the findings of [7, 13, 25] which, consequently, leads to the acceptance of hypothesis 2.1. Following the findings reported by [39, 56], the coefficient for accounts payable management, measured with DPO, is positive but not significant, giving evidence to reject hypothesis 2.2. The work of Yazdanfar and Öhman [38] that looked at the evolution of working capital management and its impact on profitability and shareholder value of 115 German companies, discovered that DPO has a positive but not significant association with ROA and they have discussed the importance of DPO has a positive sign [56], on the purpose of CCC theory, and not negative as some others authors defend [7, 13, 25, 28, 31]. Moodley et al. [56] proposed another dependent variable in place of ROA to capture the true effects of CCC and follow the theory.

The results also show that the Portuguese wine firms have high levels of debt (but in a downward trend) and the relationship of debt-to-equity on ROA is significantly negative, implying that a higher debt ratio results in lower profitability, as previously found by Čavlin et al.; Dawar; and Balakrishnan and Fox [14, 43, 45], leading to the acceptance of hypothesis 4. The result obtained contradicts the works of Wald; Margaritis and Psillaki; Yazdanfar and Öhman [36, 37, 38] that stated that developed countries tend to find a positive relationship between debt and profitability. Despite its status as a developed country, Portugal’s industry is more comparable to that of developing countries, where managers use debt to pay the previous debt (even having idle funds) relying heavily on short-term debt, demonstrating no strategy for correct debt use, financing, for example, long-term investments recurring to short-term debt.

The liquidity, measured by the current ratio, was found positively linked to profitability, but the influence was not significant. The estimated sign is consistent with past research, but the model revealed that liquidity had no impact on the profitability of Portuguese wine firms, as Čavlin et al. [14] presented in their study about meat processing activity in the Republic of Serbia. In this sense, it is not possible to accept the first hypothesis of this study.

In terms of NTW’s potential impact on ROA, the calculated model revealed a positive and significant effect, verifying our third hypothesis. This result follows [11, 31, 32, 33] showing a conservative approach to working capital management by Portuguese wine firms. They appear to prefer longer CCC cycles to pursue an aggressive strategy.


6. Conclusion, implications, and limitations

Winemaking is one of the most representative economic activities in several countries as a result of the variety of fine products and the convergence of know-how, craftsmanship, and traditions of producers and Portugal is a respected country of producers with excellent and well-known products.

The wine sector has been studied from various aspects. In recent years, the culture of quality wine has been enhanced also through sizeable investments by both large corporations and medium- and small-sized companies.

However, the most relevant research databases (Web of Science, Scopus, Google Scholars, and EBSCO) indicate a scarcity of research on the economic and financial performance of these types of businesses.

Taking this into account, it is feasible to conclude that this study contributes to the literature on financial analysis of the wine business by addressing a gap in the literature on financial indicators of liquidity and performance.

In this sense, the purpose of this research is to demonstrate the importance of short-term financial indicators on the profitability of Portuguese wine firms.

The profit position of a firm is influenced by numerous factors and in this study, the authors wanted to additionally explore the impact of some liquidity indicators in the Portuguese wine firms in the period 2014–2017.

It was found that an increase in the level of net working capital increases profitability of the company and leverage was negatively related to ROA. Firms policies promoting the decrease of DRO result in increased profitability. In this sense, the guarantee of low levels of general indebtedness helps wine firms increase their profitability.

The above speaks in favor of a conservative strategy of working capital management of Portuguese wine firms and this position is in line with the type of firms. Mostly of Portuguese wine firms are family firms and their management strategy tends to be more conservative than non-family firms [51].

The estimation model emphasized that the profitability of Portuguese wine firms, measured by ROA, is less explained by liquidity variables than by other qualitative variables, such as management style (whereas the family is on the Board, or not) and financing policies.

The poor adjustment might be also associated with the specificities of the wine sector, the fact that it is a regulated market, which is largely geared toward exports (variable not included in the estimation model), usually with more traditional or less professional management and which have a specific production cycle (with long periods of the operating cycle).

In terms of practical implications, we were able to show that, on average, the Portuguese wine sector manages its cash cycle conservatively, likely because it is a family-run business with few naturally aggressive managers or risk-takers, and that, based on the findings, they are not properly concerned with liquidity measures in their daily management. It is critical to enlarge and update this sample to more firmly establish these conclusions.

To better explain the performance of these organizations, and overcome some limitations, future developments must include:

  • An updated sample, divided into family firms and non-family firms, with internationalization level included;

  • Inclusion of other dependent variables, such as EBITDA or ROE, as well as independent variables, such as firm size;

  • A comparative analysis of firms from other wine-producing countries and.

  • Inclusion of qualitative variables such as governance and/or reward systems.



This work is supported by national funds, through the FCT – Portuguese Foundation for Science and Technology under the project UIDB/04011/2020.


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Written By

Carmem Leal, Bernando Cardoso, Rogério Bessa, José Vale, Rúben Nunes and Rui Silva

Submitted: 22 January 2022 Reviewed: 09 February 2022 Published: 31 August 2022