Relationship Between Liquidity and Profitability: An Empirical Study of Trade Service Sector in Jordan

Abstract

The aim of this paper is to examine the relationship between liquidity and profitability, through more than liquidity indicator. The paper main goal is to answer the following question: Do different indicators of liquidity have the same effect on profitability either negatively or positively?Liquidity indicators include current ratio and quick ratio which measure the company's ability to meet its short-term obligations, while profitability is measured by ROA and ROE.The data has been collected from ASE. Different tests applied to analyze the relationship between liquidity and profitability. This study sought to find out whether liquidity through quick ratio has significant impact on Jordanian trade services companies profitability through return on asset (ROA). The study used the 2008-2015 financial reports of 11 Jordanian trade companies listed at Amman Stock Exchange (ASE). The study revealed that there is significant impact of independent variable quick ratio on dependent variable return on asset (ROA). That means profitability through return on assets (ROA) is significantly influenced by liquidity through current and quick ratio

Keywords: Liquidity, Current ratio, Quick ratio, Profitability, Return on Assets, Jordanian trade sector.