IMPACT OF CHANGES IN LIQUIDITY ON PROFITABILITY: AN EMPIRICAL STUDY ON CEMENT SECTOR OF PAKISTAN

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