Abstract:
Purpose:
Liquidity and profitability are the two major concerns of companies now a day. Increased
profitability is the ultimate goal of every firm and every firm strives to achieve optimum level of
profitability. Because of significant relationship between profitability and liquidity, this research
was aimed to examine the causality between Liquidity and profitability.
Methodology:
The nature of the study is explanatory which is based on deductive approach. The research
focused on the cement sector of Pakistan and taken data of a random sample of 5 cement
producing companies; listed in Pakistan stock exchange; through their financial statements of the
companies for a period of 10 years (2008-2017).The research study has takencurrent ratio, quick
ratio and working capital as liquidity measures whereas profit margin, Return on Assets, Return
On Equity and Return on capital Employed as profitability measures. E-Views is being used to
integrate the data. The tests applied for data validity and characteristics were namely Descriptive
statistics and multiple regression. Multiple regressions were applied on each of the pair of
independent and dependent variable to find the causality.
Findings:
Through the statistical analysis it was found that Current Ratio has a significant and positive
impact on all the profitability measures taken into consideration, Quick Ratio has a negative but
insignificant impact on Return On Assets and Return On Capital Employed whereas it shows no
statistical impact on Profit Margin and Return On Equity. Moreover, the statistical findings of
Working Capital reflect no significant impact on profitability.
Current ratio was found to be the best indicator of liquidity and should be managed and
controlled minutely Current ratio should be taken into consideration in management decision
making for better profitability.
Significance of Study
The determination and impact of the association can be helpful for companies in the planning of
trade and investment policies. Moreover, the research has taken seven sub variables and applied
statistical measures to find out the causal relationship between each independent variable with each dependent variable so it will be helpful for management to knowing that what are the
factors which are most important for better liquidity management and profitability maximization;
in making sound decisions
