The Relationship between Liquidity and Profitability in Emerging Countries: Evidence from Bangladesh

Abstract

The relationship between liquidity and profitability has become an important issue among any organization. It is all about managing current assets and current liabilities in such a way so as to maximize profitability. Liquidity is perceived as the debt paying ability of going concern. Hence, it is important to keep a constant eye on the liquidity position of the company as without it the company cannot survive. The concern of business owners and managers are to devise a strategy that will help maintain liquidity as well as to increase profitability. Liquidity and profitability are closely related because one increases, and the other decreases. This study aims to reveal the relationship between liquidity and firm’s profitability by using the data of the cement industry listed on the Dhaka Stock Exchange Ltd in Bangladesh. Annual data of 6 out of 7 companies are used for the period 2013-2017 in the study. The relationship between liquidity and firm’s profitability were examined by the Pearson’s correlation analysis using the SPSS-23 version. The dependent variable is defined by net profit, return on assets and return on equity and the independent variables are the current ratio, quick ratio, and the cash conversion cycle. The results in the correlation matrix show the existence of the relationship between liquidity and profitability. The study found that the cash conversion cycle has a strong negative relationship with all profitability ratios (NPM, ROA, and ROE). Moreover, the study also observed that the liquidity ratio (CR, and QR) have positive relationship with all profitability ratios of the cement industry in Bangladesh.