Theoretical Framework

Financial Economic Theory

The Financial Economic Theory in which according to the study conducted by

Muteti (2014), appropriate risk management could lead to the increase of firm’s value

in the presence of capital imperfections such as bankruptcy cost that cause by

several risk factors in operations, financial, and supply chain management. It is

usually done by harmonizing financing and investment policies, proper utilization and

safeguarding of resources and good relationship with suppliers. In our study, this

theory will be used in order to prove if proper risk management in operation, financial

and supply chain will greatly affect financial value of a company.

New Institutional Theory

The theory mentioned above is supported by New Institutional Theory in

which according to Williamson (1998), this theory view that risk management

techniques are established by the company or customary practice in a market or

sector. Moreover, the theory connects security to the acquisition of certain assets,

suggesting that risk management be crucial in agreements involving two parties that

forbid diversification, such as large financial agreement or close coordination among

supply chain participants. With this, this tells us how policies and practices of a

business in managing risk contributes to the financial stability of an entity.

http://erepository.uonbi.ac.ke/bitstream/handle/11295/75072/Muteti,Sammy

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%20financial%20performance%20of%20commercial%20banks%20in%20kenya.pdf?

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Net Income

Net income is the income of the business from operations after deducting all

its related expenses in order to run the business. According to Porter (2023), the

amount earned by an individual or business after costs, allowances, and taxes is

referred to as net income. Net income in company is the amount that remains after

all costs, such as salaries and wages, the cost of goods or raw materials, and taxes,

have been paid. For an individual, net income is the income after paying taxes,

health insurance premiums, and retirement contributions.

https://www.bankrate.com/taxes/what-is-net-income/#:~:text=Net%20income

%20refers%20to%20the,or%20raw%20material%20and%20taxes.

Net income measures how business perform well, in fact, it is found in a

financial statement called income statement or statement of financial performance. It

evaluates how efficient and effective the company creates money out of its

resources and from management its operation. According to the study of Berry-

Johnson (2022), net income is a crucial business indicator because it shows the

money that is left over after paying out dividends to shareholders and other

obligations. Furthermore, through this it helps a business to determine whether the

business appeals to investors, whether it can get a loan or whether the entity is

sustainable.
 https://www.legalzoom.com/articles/what-is-net-income#:~:text=Net

%20income%20is%20an%20important%20business%20metric%20because%20it

%20represents,your%20business%20appeals%20to%20investors.

Total Asset Turnover

In business, assets are the resources of a business that is used in generating

revenues. These are the property that is owned or controlled by the business that

has a future economic benefit. Asset must be used by the company efficiently and

effectively to create income for the business to sustain and this is called asset

turnover. According to Beers (2022), asset turnover ratio assesses how well a

business uses its resources to produce income or sales. In connection with this, a

higher ratio is typically preferred because it suggests that the business is more

effective at generating sales or revenues. A lower ratio shows that a business could

not be utilizing its resources as effectively.

https://www.investopedia.com/ask/answers/032415/how-asset-turnover-

calculated.asp

Asset turnover is useful for the investors and creditors as they may see how

an entity used properly its assets and turning into greater opportunities. It is also

how well the investments and loans used efficiently in generating revenues.

Investors can compare two businesses in the same sector using this ratio to see

which one is more effective at allocating cash to drive sales (Levy, 2022). In addition,

a rise in asset turnover over time is a sign that management is successfully

expanding the company and therefore, investors and creditors are willing to invest

more to continuously reach its production capacity to generate more income.

https://www.fool.com/investing/stock-market/basics/asset-turnover/

Synthesis

The Financial Economic Theory (Muteti, 2014) and New Institutional Theory

(Williamson, 1998) states that proper risk management and policies and procedures

effected by the company is the best response in minimizing the risks in achieving its

financial profitability. Risks in operational is one the areas in business that is prone to

fraud and errors thus, need special attention by the management (

The growth of annual sales, net income and asset turnover is useful in measuring

the financial performance of a business. It is said that growth in annual sales

In addition, net income is also a good indicator that a business is performing well as

it measures how well an entity run its operations using its profit to cover its expenses

(Porter, 2023). Lastly, the asset turnover measures how efficiently and effectively the

organization utilize its assets in generating income (Beers, 2022)