The Impact of Liquidity Ratios on Profitability (With special reference to Listed Manufacturing Companies in Sri Lanka)

Abstract

The ultimate goal of the companies is to enhance the wealth of the shareholders. For that purpose the liquidity and profitability plays the vital and crucial role. Especially the liquidity and its management are caused to great extent of the growth and profitability of a firm. The liquidity management becomes most important one as the inadequate liquidity may injurious to the smooth operations of the firm as well as the excess liquidity can be disturbed to achieve the greater profits. In this way, the present study is aimed to investigate the relationship between liquidity and profitability. The analysis is based on 15 manufacturing companies listed on the Colombo Stock Exchange over a period of past five years from 2012 to 2016. Correlation and regression analysis as well as the descriptive statistics were applied in the analysis and findings suggest that Liquidity ratios (Quick ratio) have positive and significantly related to the firm profitability among the listed manufacturing companies in Sri Lanka. Overall this research can give a recommendation for the Manufacturing Companies in Sri Lanka that, pay more attention on the liquidity ratios as they have the significant impact on the profitability of the firms. Further they want to devise new strategies for the proper liquidity management as their current ratio values implies the lack of management in liquidity assets.

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