Liquidity - profitability tradeoff: An empirical investigation in an emerging market
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: Purpose – The purpose of this study was to examine the actions owner-managers of small businesses undertake in managing working capital. Design/methodology/approach – The study adopted an exploratory research design. The point of saturation was achieved after ten owner-managers were interviewed. Data were analyzed using content analysis technique with the aid of NVivo software. Verbatim texts were used to explain the emergent themes. Findings – The findings indicate that in the absence of systems, structures and procedures, small business owner-managers intuitively plan, monitor and control their working capital. The activities undertaken include; reliance on memory and oral agreements, informal planning, assuming inventory limits, unconventional record keeping, cash flow based information management and giving credit to close associates. Research limitations/implications – A more detailed investigation of the steps in the action sequence ma y advance our understanding of the process. Future studies need to test the effect of personal characteristics on working capital management process. Practical implications – Owner-managers of small businesses do not require the same degree of sophistication employed in planning, monitoring and controlling working capital. They require soft skills. Therefore, academicians, practitioners and policy makers need to emphasize knowledge management and cash accounting. Originality/value – This study examines the process perspective of working capital management, an aspect that has not been adequately highlighted in previous studies.Qualitative Research in Accounting & Management 01/2013; 10(12):127-143.
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ABSTRACT: Profitability and liquidity are the most prominent issues in the corporate finance literature. The ultimate goal for any firm is to maximize profitability. However, too much attention on profitability may lead the firm into a pitfall by diluting the liquidity position of the organization. In this way, the present study is initiated to find out the cause and effect relationship between liquidity and profitability. The study covered 31 listed manufacturing firms in Sri Lanka over a period of past 5 years from 2007 to 2011. Correlation analysis and descriptive statistics were used in the analysis and findings suggest that there is no significant relationship between liquidity and profitability among the listed manufacturing firms in Sri Lanka.Researchers World. 10/2012;
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ABSTRACT: Purpose: The paper seeks to empirically investigate the relationship between liquidity and profitability. It also examines the impact of working capital management on profitability and the impact of investment & financing policies on profitability and risk. Design/Methodology/Approach: The analysis is based on 14 companies of Information Technology Sector (as per BSE 200 index) in India in respect of whom data from 2000-2010 has been taken from CMIE database. Karl Pearson correlation and regression analysis has been used. Findings: It was found that there is a strong significant relationship between the measures of liquidity and corporate profitability. The regression analysis reveals that there is a negative relationship between profitability and accounts receivables days, inventory days and cash conversion cycle but a positive relationship between profitability and accounts payables days. There is a negative relationship between degree of aggressiveness of investment policy and accounting measures of returns. However there is a positive relationship between degree of aggressiveness of financing policy and return. The results also indicate a positive relationship between the degree of aggressiveness of investment policy & financing policy and relative risk. Practical Implications: The findings suggest that managers can increase profitability by efficiently managing liquidity. Managers can create value for their firms by reducing the days inventory is held, days of accounts receivables and reducing cash conversion cycle.International Journal of Accounting and Financial Management Research (IJAFMR). 03/2013; 3(1):211-222.