Challenges in the Relationship between Liquidity and Profitability: Perspectives from a Literature Review

Abstract

Purpose: The purpose of the literature review is to examine and synthesize the current state of knowledge in the literature on the relationship between liquidity and profitability in companies. It aims to understand the importance of these two variables for the financial performance and long-term viability of organizations. Theoretical framework: The theoretical framework focuses on the importance of liquidity and profitability in the business context. Key concepts related to the ability of companies to service their debts (liquidity) and whether they are viable and generate profits over time (profitability) will be addressed. Factors such as capital intensity, competition, and industry-specific risks, which may influence the relationship between the two variables, are also considered. Design/Methodology/Approach: The design of the literature review involved the review and synthesis of a total of 250 articles related to liquidity and profitability. Of this number, 61 articles were selected from academic platforms such as SCOPUS, LATINDEX and others. A mixed approach was presented to address the topic, combining different perspectives and methodological approaches. Results: The results of the review revealed several gaps in the study of the relationship between liquidity and profitability. These include the lack of longitudinal cross-country studies, which limits the understanding of differences in financial performance in different contexts. It was also found that factors such as capital intensity, competition and sector-specific risks may cause heterogeneous relationships between liquidity and profitability across business sectors. Social, practical and research implications: The social implications of this review highlight the importance of maintaining good liquidity and profitability management in companies, as their ability to service debt and generate sustainable profits over time is derived from these variables. Business practices need to consider industry-specific factors to understand how they can influence the relationship between liquidity and profitability. From a research point of view, this review identifies the need for more longitudinal cross-country comparative studies and a sectoral approach for a more complete understanding of the relationship between these financial variables. Originality/value: The originality and value of this review lies in its mixed approach and synthesis of a significant number of academic articles related to liquidity and profitability. By highlighting research gaps and emphasizing the importance of a sectoral approach, this review provides valuable insights for future research and financial practices in the corporate context.