Trade-Off Between Liquidity and Profitability: An Empirical Study of Pharmaceutical Sector in the Republic of North Macedonia

Abstract

Abstract The relationship between liquidity and profitability is one of the most interesting topics in the corporate finance research. Having in mind that the pharmaceutical industry is one of the most competitive sectors globally and that its substantial investments in research and development make this industry a key asset for a country’s economic well-being, this paper examines the liquidity-profitability trade off in pharmaceutical sector of RNM. The empirical research engages the secondary annual financial report data of the two pharmaceutical companies listed on Macedonian Stock Exchange (MSE) over the period from 2006-2016. Current ratio (CR), quick ratio (QR) and cash ratio (CAR) were used as measures of liquidity while return on assets (ROA) and return on equity (ROE) were used to measure profitability as a dependent variable. The statistical tests used to evaluate the effects of liquidity on profitability involved descriptive statistics, correlation and regression analysis. The findings suggest that there is no significant relationship between profitability and liquidity determinants of the listed North Macedonian pharmaceutical firms. Regarding practical implications, these findings can help managers overcome dilemmas with respect to the liquidity and profitability tradeoff. Furthermore, this study contributes to the existing research base in this field and represents one of the pioneer attempts in the case of RNM. The results gained from the research are very important for companies themselves, but they can also serve as a starting point for future research to eliminate financial and other corporate issues related to the relationship between profitability and liquidity determinants.