Liquidity - profitability tradeoff: An empirical investigation in an emerging market

International Journal of Commerce and Management 05/2004; 14(2):48-61. DOI: 10.1108/10569210480000179

ABSTRACT This study empirically examines the relation between profitability and liquidity, as measured by current ratio and cash gap (cash conversion cycle) on a sample of joint stock companies in Saudi Arabia. Using correlation and regression analysis the study found significant negative relation between the firm’s profitability and its liquidity level, as measured by current ratio. This relationship is more evident in firms with high current ratios and longer cash conversion cycles. At the industry level, however, the study found that the cash conversion cycle or the cash gap is of more importance as a measure of liquidity than current ratio that affects profitability. The size variable is also found to have significant effect on profitability at the industry level. Finally, the results are stable over the period under study.

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    ABSTRACT: Cash conversion cycle (CCC) has been considered a useful measure of firm's effective working capital management and especially the cash management. This study was conducted with the aim to look into the association of the cash conversion cycle with the size and profitability of the firms in the four specific manufacturing sectors listed at Karachi Stock Exchange namely Automobile and Parts, Cement, Chemical, and Food Producers. The data was collected from the annual reports of 31 sampled firms out of the total firms in the related sectors i.e. 143 covering the period of 2006-2010. The data analysis was conducted by using One-Way ANOVA and Pearson correlation techniques. The lowest mean value of the CCC length is found in the cement industry, with an average of -52.38 days, and the highest mean value of the CCC is found in the Automobiles industry, with an average of 73.72 days. As was expected there was found a significant negative correlation between the CCC and the firm size in terms of total assets, and was found a negative correlation between CCC and profitability in terms of return on total assets with the values of -0.415 and -0.131 respectively. This study presents an update account of the investigation into the subject matter of cash management-an area which is not very much researched upon in the developing nations like Pakistan. Within the particular context of the liquidity management it is supposed to be valuable for setting up ideal threshold points in the related sectors. Despite having limited base for data analysis, the present study has a number of useful implications and is supposed to be insightful for the finance managers, industry planners, academics and researchers.
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    ABSTRACT: This study investigated the relationship between cash conversion cycle and levels of liquidity, invested capital, and performance in small firms over time. In a sample of 879 small U.S. manufacturing firms and 833 small U.S. retail firms, cash conversion cycle was found to be significantly related to all three of these aspects. Firms with more efficient cash conversion cycles were more liquid, required less debt and equity financing, and had higher returns. The results also indicate that small firm owners/managers may be reactive in managing cash conversion cycle. The study highlights the importance of cash conversion cycle as a proactive management tool for small firm owners.
    Journal of Small Business & Entrepreneurship. 01/2011; 24(3):381-396.
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    ABSTRACT: This paper aims to assess the effect of working capital management (WCM) on the performance. Utilizing unbalanced data for a sample of 49 Jordanian Industrial corporations listed at Amman Stock Exchange -2005 to 2009. Using two alternative measures of profitability as proxy for the performance and five proxies for the Working Capital Management, estimation of twenty models panel data cross-sectional time series have been tested employing two regression models; the Fixed-Effects Model and the Ordinary Least Squares Model. The findings of our study found to be significantly consistent with the view of the traditional working capital theory. The results suggest that working capital management and performance are positively correlated. The regression results also concluded that the Jordanian industrial firms follow a conservative investing policy and less aggressive financing policy in the working capital, and a well-efficient managing of the working capital can add value to the shareholders wealth.