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
Highlights
The automobile industry is the significant driver of Pakistan economy
This study aims to measure the impact of liquidity ratio on the profitability of the listed automobile firms at Pakistan Stock Exchange (PSX), it was tried to find that is there any significant impact of liquidity ratios on profitability either positive or negative
From the random effect model, estimation output the several liquidity independent variables, which include of current ratio, cash ratio, and the quick ratio has the following results: The positive relationship of current ratio with return on assets (ROA); with a p-value of 0.91, we can say that current ratio is insignificantly contributes to return on assets (ROA)
Summary
The automobile industry is the significant driver of Pakistan economy. It plays a vital role in industrial as well as overall economic growth. The automobile industry is one of the largest revenue generating industry in Pakistan, where different listed companies manufacture variety of products like car, rickshaw, trucks, buses and bikes. Listed companies in Pakistan Stock Exchange (PSX) include national and multi-national both and are assembling different products for different sections of market. Financial stability of these companies always attract investors by offering good return on investments and dividends (Öztürk & Karabulut, 2018). Investors remain curious about the company’s financial condition and financially stable companies can remain viable in the current and log run economic scenario so making their investments less risky (Mathur & Agarwal , 2016)
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