The Effect of Liquidity and Financial Leverage on Firm Performance: Evidence from Listed Manufacturing Firms on The Ghana Stock Exchange

Abstract

This paper analyzes the effect of liquidity and financial leverage on firm performance of manufacturing industries quoted on the Ghana Stock Exchange from six different sectors from 2007-2015. We choose ROA and ROE as proxy variables for enterprise performance. We use fixed effect model and random effect model for modeling, and choose the more appropriate model. The empirical results of the study indicated that liquidity (LIQ) measured by current assets to current liabilities has a positive significant effect on return on equity (ROE) used as performance. The study finds out that the effect of financial leverage has a strong positive impact on firm performance (ROA&ROE) with 65% of debt used to finance firm assets which in some extent has a great influence on firm performance. The study recommends management to minimize the use of debt financing and rather use more of their retained earnings for their operations to avoid bankruptcy soon.

Keywords:  liquidity; financial leverage; firm performance

DOI: 10.7176/RJFA/10-8-08

Publication date: April 30^th 2019