Volume 15, No 2, 2018
Liquidity and Profitability Relationship: Analysis of KSE 100 Index Non-Financial Firms in Pakistan
Atiqa Rehman, Hafiz Muhammad Arshad
Abstract
The main objective of this study was to assess the impact of liquidity ratios on the profitability of the firms selected from KSE 100 index of Karachi stock exchange of Pakistan. Liquidity ratios included the current ratio (CR), cash conversion cycle (CCC), current liabilities to total assets (CLTA), quick ratio (QR), current assets to total assets (CATA) and operating cash flow (OPCF). Leverage and firm size were also included in the model as control variables. Profitability of firms was measured with the help of the financial ratios viz ROE, ROCE and ROA. Non-financial firms were considered as sample for this study. Five years data (2009-2013) for these companies was taken from their annual audited reports as these reports are audited by professionals and are considered as a reliable source of information Multiple regression was used to estimate the impacts. The results show that liquidity variables viz CCC, QR and CLTA have negative effects on return on assets (ROA), but CR, CATA and OPCF have positive effects. Similarly, CR and OPCF have positive effects on return on equity (ROE) but all other liquidity variables viz CCC, QR, CATA, CLTA have negative effects. As regards the effects of liquidity variables on return on capital employed (ROCE), CR, CLTA and OPCF have positive effects, but CATA, CCC, and CR have negative effects.
Pages: 157-167
Keywords: Liquidity Ratios, Return on Assets, Return on Capital Employed, Return on Equity. Conflicts of Interests: Nil