An empirical investigation of liquidity's effect on profitability and indebtedness: the case of the ASE

Abstract

This article examines the relationship of liquidity with profitability, as well as with indebtedness, and how these relationships are changed, according to the ratio that is used for each variable. Moreover, we will investigate how these relationships are changed, if we use static (which is expressed by the current and the quick ratios), or dynamic liquidity measures (which is expressed by the cash conversion cycle). The results indicated that the relationship between the cash conversion cycle and the static liquidity ratios is positive, but not significant. The relationships between the static liquidity ratios with the return on equity, and the return on assets, are negative and significant, while the correlation between the cash conversion cycle and the return on assets is positive and with the return on equity is negative. The relationships between the three liquidity ratios and the indebtedness were negative and significant. The relationship between the firm size and the cash conversion cycle was negative and significant. Finally, there was not a significant correlation between the three liquidity ratios and growth, showing that under this crisis period Greek companies struggle for survival and there is no growth.