Impact of Liquidity on Firm Profitability of Fertilizer Sector of Pakistan

Abstract

The major intent of this study is to examine the impact of liquidity on firm profitability of fertilizer sector of Pakistan. Liquidity management and profitability both are necessary factors for business firms. Liquidity management is necessary to meet short term obligations, in order to survive in the market and avoid bankruptcy. Similarly profitability is also necessary for firms to grow properly by maximizing firm’s profits and shareholders wealth. The variables that were used includes independent variables current ratio, quick ratio and cash ratio as liquidity measures while dependent variables includes return on asset, return on equity and net profit margin as profitability measures. To examine the impact liquidity on firm profitability secondary data of eight years (2010-2017) were collected and collected from the financial statements of seven fertilizer companies. Descriptive analysis, correlation analysis and panel least squares regression analysis were used to found out the results by using E-Views software. According to previous studies authors had different point of views some suggested that liquidity has positive impact on profitability while some suggested that liquidity has negative impact on firm profitability. This study concluded that current ratio, cash ratio has weak, positive but significant relationship with return on assets and quick ratio has insignificant relationship with return on assets. Secondly, current ratio and cash ratio has weak positive but significant impact on return on equity and quick ratio has insignificant relationship with return on equity and lastly current ratio and cash ratio has moderate positive but significant impact on net profit margin but quick ratio has weak significant positive impact on net profit margin. So, this study concluded that liquidity has weak, positive and significant impact on firm profitability of fertilizer sector of Pakistan.