| Pub. Date | : October, 2021 |
|---|---|
| Product Name | : The IUP Journal of Accounting Research and Audit Practices |
| Product Type | : Article |
| Product Code | : IJARAP021021 |
| Author Name | : Suzan Dsouza and Houshang Habibniya |
| Availability | : YES |
| Subject/Domain | : Finance |
| Download Format | : PDF Format |
| No. of Pages | : 17 |
The paper examines the impact of liquidity on the profitability of Nifty Pharma Index (NSE India) listed on the National Stock Exchange (NSE) India. Liquidity is represented by current and quick ratios with working capital. In an attempt to measure the profitability, various factors like Return on Capital Employed (ROCE), sales, Return on Total Assets (ROTA) and Profit Before Tax (PBT) have been utilized. With a view to establishing the linear relationship between liquidity and profitability, a multiple regression model was used to analyze the statistical samples of Indian pharmaceuticals companies for a period of five years from 2012 to 2016. On the basis of overall analysis, it is therefore important to state that Current Ratio (CR) has a positive impact on ROCE, whereas Quick Ratio (QR) has a positive impact on ROTA. Sales is the strongest predictor of working capital. Hence, an unusual relationship between liquidity and profitability has been observed.
The primary aim of any organization is to maximize its profits. A business enterprise with maximum profit is perceived as efficient in terms of operation as well as investment. Profit is also considered as a measurement standard for the viability and sustainability of any business. The creditworthiness of such profitable firms is also perceived as favorable as it is less risky to the investors. But at the same time, it is also important for an organization to maintain the required liquidity level. An insistence on maximizing profits may lead to a situation of low liquidity, sometimes resulting in insolvency (Samiloglu and Demirgunes, 2008). There has always been a trade-off between profitability and liquidity (Dash and Ravipati, 2009). As stated by Khidmat and Rehman (2014), the liquidity ratio has a positive effect over the company's profitability Return on Assets (ROA), while solvency ratio has a negative impact on the ROA and Return on Equity (ROE). Their findings are based on 36 sample companies and focused on explaining the impact of liquidity on profitability of companies. Lartey et al. (2013) conducted research on nine listed banks in Ghana to determine