Impact of Liquidity Ratio on Profitability of Firm: An Empirical Evidence from Automobile Industry of Pakistan

Abstract

Pakistan automobile industry was experiencing a boom from the last two decades, but currently it is facing footraces due to financial suffering in the Pakistan market. This study is an attempt to investigate the impact of liquidity on profitability either positively or negatively. Liquidity of a firm can be measured through different ratios e.g. current ratio, cash ratio, and quick ratio, whereas profitability or financial performance of firm can be scaled with the proxies like return on equity and return on assets. Panel data of 5 years of 12 automobile firms listed in PSX is used for the analysis. Fixed effect model and random effect model were used for empirical investigation and Hausman test was employed to choose appropriate model between fixed and random effect. Results of the analysis revealed that the liquidity (quick ratio) positively effect on profitability; return on assets (ROA). However, there is a negative relationship between liquidity (current ratio and cash ratio) with return on asset.

Keywords: Profitability, Liquidity, Return on assets, quick ratio, current ratio, cash ratio financial performance.

DOI: 10.7176/RJFA/10-22-16

Publication date: November 30^th 2019