The Impact Of Liquidity On Profitability Finance Essay

The Impact Of Liquidity On Profitability Finance assayPadachi observed the trends in works smashing circumspection and its impact on performance of a sign. Return on summations and immediate payment reincarnation round of golf was apply to measure the trues lucrativeness and capability of on the job(p) chapiter worry respectively. He described that a sign of the zodiac should of importtain stability mingled with favorableness and placidness sequence maintaining its day to day activities. The manager of a avocation want to maximize cockeyeds look on by achieving likered trade- saturnine betwixt liquidness and positiveness of a degenerate. The end points indicated that the more coronation in inventories and receivables pocket-sizeer the favourableness of a unfaltering.Raheman Nasr (2007) discussed the impact of running(a) detonator precaution on positivity of a trusty. They as well as eminentlighted that the basic objective of a flying is to maximize profit but maintaining fluidity is also an eventful objective. There will be a serious problem if smashed amplification profit at the cost of liquid state. Both objectives argon all- fundamental(a) for the rigid. If a firm does not concerned intimately profit thusly it pratnot survive for a longer period. On the separate hand, if a firm does not concern about fluidness it may face bankruptcy. They took 94 firms of Pakistan and examine that thither is a negative relationship betwixt liquidity and profitableness of a firm.Michalski (2008) empirically analyzed the relationship between firms insurance regarding net operative investment and firms positiveness. Too low liquidity train may come up problems with timely reimbursement of its liabilities spot surplus liquid summations would negatively affect firms lucrativeness. He discussed that decisions regarding liquidity is very difficult, a firm has to choose one of the three policies first an aggressive constitution i.e. a large part of the firms resolved and volatile demand to finance fixed assets is supported with compact precondition support, second a moderate insurance i.e. a fixed part of authorized assets is financed with long term cash and volatile part is financed with short term funds lastly a conservative insurance policy i.e. both fixed and volatile parts of catamenia assets atomic number 18 financed with long term funds.Dash Hanuman (2009) were concerned about operative great(p) management and they analyzed the liquidity-favourableness trade-off model named as goal programming model. They supported that proper melt of fund is requisite to run any business. A firm has conflicting objectives regarding liquidity and profitability so the goal programming model determines how targeted take aims of profitability and liquidity would be achieved by maintaining menses and fixed assets and at the same time minimizing probability cost. Their model proposed that running(a) large(p) and take stock must be streamlined to profitability.Nazir Afza (2009) tried to find out the relation between aggressive working(a)(a) great management policy and firms profitability by using card data fixing model and Tobins q of 204 Pakistani companies for the period of 1998-2005. They claimed that investors give wideness to stocks of those firms which adopt aggressive policies to manage current liabilities. Their findings suggested that aggressive working jacket investment and backing policies and profitability are negatively associated. They claimed that investors consider that firms which arrest less long term loans and virtue can pay back amend performance than the separates.Burtescu (2010) documented the reflection of liquidity and profitability of a gild in the accounting result. He emphasized that it is not adequate for a firm to follow only economic indicators but it is also subjective for a firm to make sure its liquidity in its per sona of a specific dimension of fiscal management. The knowledge about solvency and liquidity are beneficial for a firm to predict the ability of a firm to fulfill its financial obligations. He argued that investors have a smashing concern about the cash flow of a society and it becomes prerequisite for a firm to include cash flow statement in its annual financial statements.Gill, Biger Mathur (2010) assay to examine the relationship between working great(p) management and profitability. They utilise try on of 88 firms listed on cutting York acquit Exchange for the period of 2005-2007. The results suggested that the relationship between cash innovation bike and gross profit margin is statistically significant. They also conclude that account receivables and profitability are negatively associated. The managers can enhance shekels of their confederacy by handling the cash transition cycle efficiently.Mohamad Saad (2010) attempted to scrutinize the impact of working chapiter management on profitability and groceryplace valuation of a firm. They analyzed the secondary data of 172 Malayan companies for the period of 2000-2007. They took working capital variables such as cash conversion cycle, current ratio, debt to asset ratio, current asset to kernel asset, current liabilities to number asset and profitability variables are issue on asset and return on invested capital. By using triple regression analysis and correlation, their results revealed that working capital variables have negative association with firms profitability. Firms cannot exist without working capital and it can improve the profitability and market comfort of a firm. peal Su (2010) also conducted a study to find out the relationship between working capital management and firms profitability. The working capital management has an significant part in the success and failure of a firm because it has a great impact on the profitability and liquidity of a firm. Their samp le is based on 130 firms which are listed in Vietnam stock market for the period of 2006-2008. Their findings proved that profitability and cash conversion cycle is powerfully negatively associated. By optimum working capital management, the managers may cook a value of stock for the shareholders. The firm should maintain a sense of balance between its twain objectives profitability and liquidity. One objective should not be achieved at the cost of other. Their findings also suggested that profitability can be change magnitude by decreasing the number of days accounts receivable and inventories.Saleem Rehman (2011) observed a significant relationship between liquidity and firms performance. Liquidity of a society is very principal(prenominal) for its every stack holder. If a firms cash and stuffy cash assets are insufficient to encounter its immediate payment obligations than firm may face difficulties. This can affect firms day to day business operations and profitability. They evaluated that liquidity and profitability are inversely colligate, one increases the other will lessens.Bhunia, Khan Mukhuti (2011) provided the evidence with respect to the relationship between liquidity and profitability of a firm. They took steel companies of private sector in India to assess the management of liquidity as a factor of performance. They studied all important(predicate) liquidity indicators and analyzed that optimum working capital management can be achieved by controlling the trade-off between profitability and liquidity of a firm. Firm value is positively affected by optimal working capital management so the investment in working capital must be satisfactory. They concluded that liquidity and profitability are significantly positively associated.Saghir, Hashmi Hussain (2011) studied the relationship between working capital management and profitability of a firm. They used cash conversion cycle to measure working capital management efficiency and retu rn on asset to measure profitability while analyzing the financial data of 60 textile firms listed on KSE for the period of 2001 to 2006. They suggested that smooth inflow of profit is in general affected by the optimum point of working capital. Working capital means companys current assets and it has a direct effect on the liquidity and profitability of a firm. According to the risk and return surmise, when firms liquidity of working capital is proud and so it has low risk and low profitability and vice versa. The shorter cash conversion cycle is better for the firm profitability. Their result shows the negative relation between working capital management and profitability of a firm.Alipour (2011) researched about working capital management and corporate profitability while taking sample of 1063 companies from Tehran stock exchange. To test the hypothesis, multiple regression and pearsons correlation was used. He analyzed that sale and profit of a company is greatly influenced by the working capital management. Due to inefficient working capital management, a company may be incapable to pay its debts on time. The results show a significant relationship between working capital management and profitability of a company. There is a negative relationship between cash conversion cycle, average accretion period, inventory turnover in days and profitability.Qazi et al. (2011) examined the impact of working capital on the profitability of a firm. Using the financial data of Pakistani automobile and oil and gas industry for the time period of 2004-2009, he proposed that the important components of working capital are debtor, creditor and inventory. The efficient and effective working capital can pee-pee value of the shares to shareholders. He persuaded that maintaining the companys liquid level is a study task of a company. So, by ignoring liquidity objective, company may face insolvency or bankruptcy. Their results showed the positive impact of working capit al on profitability.Ching, Novazzi Gerab (2011) scrutinized the financial statements of devil separate groups of companies working capital intense and fixed capital intensive having16 companies in each group listed on Brazil Stock exchange during 2005-2009. They used return on assets, returns on sales and returns on loveliness to measure profitability and cash conversion cycle, debt ratio, days receivables, days inventory and days of working capital are used as independent variables. Their results showed that managing working capital is very important for both lineament of companies. Moreover, working capital intensive type of company gets more profit by managing inventory and cash conversion efficiency at optimum level and fixed capital intensive type of company yield more profit through other two variables.Karaduman et al. (2011) also investigated the link between management of working capital and profitability of a firm. In the recent economic conditions, the survival of a f irm greatly depends upon the ability to manage its financial function. Their sample is based on 127 companies listed in the Istanbul Stock Exchange during 2005-2009. The cash conversion cycle was used as a proxy of working capital management and returns on assets was used to measure profitability. The results portrayed that ROA is positively affected by the reduction in CCC. The profitability is increased by developing efficiency of working capital.Alam et al. (2011) studied the influence of working capital management on the profitability and its market value of firms which are listed on Karachi stock exchange. They claimed that a misconception that firm survival is based on its profits has been cleared due to the record liquidity crises. They used financial data of 65 companies listed on Karachi Stock exchange during 2005-2009. Return on assets and returns on invested capital were used as proxy for measuring financial performance of the firm, Tobins Q was used to determine the ma rket value of a firm and five financial ratios such as cash conversion cycle, current ratio, debt to asset ratio, current asset to total asset ratio and current liabilities to total asset ratio were used as dependent variables. Their empirical results presented sufficient evidence that firms strongly depends upon current assets to generate profits.Ogundipe, Idowu Ogundipe (2012) provided evidence regarding the influence of working capital management on performance of a firm and its market value. They collected data from annual reports of 54 Nigerian companies for the period of 1995-2009. They explained working capital management as management of current assets and current liabilities and it has a direct effect on firms profitability and market valuation. Their findings suggested that as cash conversion cycle decreases firms profitability increases and efficient working capital management also increases the market value of a firm.Barine (2012) established the relationship between ef ficient working capital management and firms profitability. Working capital management ensures a firms ability to satisfy both short term obligations and forthcoming operational expenses. They compared the cost and returns of working capital of 22 listed firms on Nigerian stock exchange. Their findings proposed that if cost of working capital is greater than returns on working capital investment then it negatively affects profitability and firms should have optimized working capital investments to stay apart from over or under investments.Bhunia (2012) explored the influence of liquidity on profitability while taking the sample of FMCG companies in India during 2001 to 2010. He argued that working capital management plays an important role in the financial management decisions of a firm and managers should manage the trade-off between liquidity and profitability to give away optimal working capital management as it can create value for the firm. By using applied normality test, co rrelation and regression, the results indicated that liquidity and profitability are positively associated.The research of Vahid, Mohsen and Mohammadreza (2012) also highlighted the affect of working capital management policies on firms profitability. They explained that working capital management has a great impact on profitability and liquidity of a firm and it is responsible for the success and failure of a firm. Their sample consists of 28 Iranian companies listed on Tehran stock exchange for 2005-2009. Their results suggested that conservative investment policy i.e. high level of short term investment have a negative impact on profitability and value of a firm, while aggressive investment policy i.e. long term investment have positive impact on profitability and value of a firm. Their results also showed that aggressive financing policies i.e. high level of current liabilities to finance firms hurl have a negative impact on profitability and value of a firm, while conservative financing policies i.e. having more long term liabilities to finance firms operating activities have a positive impact on firms profitability and value.Al-Mwalla (2012) tried to observe the affect of working capital management policies on the profitability and value of a firm. He persuaded that a firm has to maintain adequate level of working capital to fulfill its short term obligations. Therefore, a firm can adopt one of the two policies a conservative policy by maintaining low level of current assets to total assets or an aggressive policy by keeping high level of current liabilities to total liabilities. He took annual data of 57 firms listed in Amman Stock Market during 2001 to 2009 for analysis. The results portrayed that conservative policy of investment and financing are positively associated with profitability and value of a firm.Ahmad (2012) highlighted the influence of working capital management on forms performance while taking a sample of 253 companies related to non f inancial sector listed on Karachi Stock Exchange, Pakistan. He use ROA and ROE as proxy of firm performance and current asset over total sales, current asset over total asset, debtors turnover, current ratio and inventory turnover as proxies of working capital management. Using OLS regression, Pearson correlation analysis and logistic regression techniques, he found that all explanatory variables are positively check to firm performance except current assets to total sales as it has a negative correlation with firm performance.Usama (2012) extended the work of Rehman and Nasar regarding working capital management while taking the sample of 18 companies from other food sector listed on Karachi Stock Exchange for the period of 2006-2010. The tec used different variables to measure working capital management such as average collection period, inventory turnover in days, cash conversion cycle, average payment period, debt ratio, firm size, current ratio, and financial asset to total as set. Using common effect model and pooled least form regression, the results indicated that working capital management has significant positive association with firms profitability and liquidity. He also concluded that firm size and minimum inventory turnover in days has positive influence on firms profitability.Myers (2001) purported that there is no general conjecture regarding debt and equity woof. He discussed three main theories for the choice of debt and equity. He described that according to trade off theory firms adopt that debt level which balances the tax benefits of additional debt against the cost of financial distress. Debt financing gives a tax shield to a firm therefore they took high level of debt to gain maximum tax benefits and eventually increase profitability. However, the increase of debt financing increases the possibility of bankruptcy. According to pecking coiffure theory, when firms cozy cash flow is not enough to fulfill its capital expenditure then fi rms prefer debt on equity. Mostly low profitable firms entail external financing and accumulate debt. According to the free cash flow theory, when a progress firm has profitable investment opportunities and its operating cash flow is good exceeds its investment opportunities, so this dangerous level of debt will have a positive effect on firms value regardless of threat of financial distress.Berger Bonaccorsi di Patti (2003) supported that leverage has a direct impact on histrionics cost which influences firm performance. They proposed that high leverage or a low equity capital ratio causes to reduce the agency cost related to outside equity and raises firm value. They used annual information of U.S. moneymaking(prenominal) banks from 1990 to 1995. Their result showed that a 1% increase in leverage decrease equity capital ratio surrenders a predicted 6% increase in profit efficiency.Fama French (2005) described the financing decisions of firms. They tested prodigys of pecking order theory about financing decisions and claimed that more than half of their sample firms defy the pecking order predictions. Their first result is against the pecking order prediction that firms hardly issue stock. infra their sample, 67% of the firms issue stock each year during 1973-1982 and it rises to 74% for 1983-1992, and 86% during 1993-2002. So, equity decisions of a firm frequently violate the pecking order. Second prediction is that capital structure of a firm is derived by asymmetric information problem but their findings are against this prediction. They suggested that this problem can be avoided by issuing equity through different ways.Elsas, Flannery Garfinkel (2006) studied firm major investment, financing decisions and long run performance. They took 1,185 U.S. firms which made huge acquisitions or capital expenditures during 1989-1999. They observed that large firms financed their new investment with debt whereas equity has a down in the mouth role. With the passage of time, new debt replaced with equity funds. Small firms mostly rely on issuing equity when financing its new investments to replace debt while internal cash flow is used by medium sized firms. They analyzed that debt financing produces negative long run performance more than equity financing whereas financing with internal funds never produce important share underperformance.Dittmar Thakor (2007) developed a new theory of topic of protective cover that is when stock impairments are high then firms issue equity. This issue is unconnected with the two major theories of capital structure pecking order and trade off theory. The main idea of their theory is that managers decision about security issuance is based on how their decisions will influence the investment choice of the firm and how this choice will influence the post-investment stock price of the firm. After the investment in the project, managers are more concerned about the stock price and the long term equity value of the firm. The shareholders and bondholders may object to the managers choice of investment because they have dissimilar beliefs regarding the value of the project. Their findings suggest that firms which issue equity have higher stock prices, higher values of agreement argument and higher increase in investments.