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

Liquidity ‐ profitability tradeoff: An empirical investigation in an emerging market 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png International Journal of Commerce and Management Emerald Publishing

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

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References (10)

Publisher
Emerald Publishing
Copyright
Copyright © 2004 Emerald Group Publishing Limited. All rights reserved.
ISSN
1056-9219
DOI
10.1108/10569210480000179
Publisher site
See Article on Publisher Site

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.

Journal

International Journal of Commerce and ManagementEmerald Publishing

Published: May 31, 2004

Keywords: Liquidity; Profit; Saudi Arabia; Cash

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