Impact of liquidity on profitability in corporate - The case of nonfinancial companies listed on hose

Abstract

The balance between liquidity and profitability is considered main factor contributing the survival of a firm. In theory, analysts believed that there is a trade-off between liquidity and profitability. If firm concentrates too much on liquidity, this will make funds become unavailable to use; as a result, firm may miss many valuable investment and opportunity cost will be generated. Inversely, focusing on profitability can make liquidity insufficient to cover debts falling due. Liquidity can be view as two ways: static view or dynamic view. Static measures of liquidity are traditional ratio such as current ratio, quick ratio and cash ratio. Dynamic measure usually is represented by cash conversion cycle. Many ideas claimed that liquidity should be measured by dynamic view-cash conversion cycle because it may reflex the true liquidity. This study is conducted to investigate how static liquidity affects profitability and how dynamic liquidity affects profitability. The result is expected to show the difference between two relations and firms can base on this to adjust their strategy. Independent variables include current ratio, quick ratio and cash conversion cycle. Dependent variables are return on equity and return on assets. Besides, study used some control variables which are firm size, firm growth and leverage. This study covers all of nonfinancial companies listed on HOSE over the period of five years (2011-2015). Data is collected from annually financial statement of each firm. Next, the author will conduct descriptive statistic analysis, correlation analysis and regression testing. Data in this study is panel data so this study must implement some tests to choose the appropriate model. The result shows that current ratio and quick ratio have no effect on both return on equity and return on assets while cash conversion cycle has negative significant influences on both return on equity and return on assets. This confirms the idea that liquidity should be measured by cash conversion cycle when investigating impact of liquidity on profitability. Besides, firm size and firm growth have positive significant effects on profitability. Leverage is found out that it affects probability negatively.