THE RELATIONSHIP BETWEEN LIQUIDITY AND PROFITABILITY: AN EMPIRICAL STUDY ON JORDANIAN MANUFACRTURING COMPANIES LISTED IN AMMAN STOCK EXCHANGE.
ABSTRACT
Many studies have tested the relationship between Liquidity and Profitability, and the results of them are mixed. This study aims to investigate liquidity (current ratio(CR) , quick ratio(QR) , working capital ratio(WCR) , inventory period(IP) , receivable period (RP), and operating cash flow ratio(OCF)), in addition to its relationship with profitability (return on assets(ROA) , return on equity(ROE)), and for nine years period from 2002-2010 using sample of (54) manufacturing listed firm in Jordanian economy.
Using Pearson correlation, and stepwise regression analysis, the results provide evidence that working capital ratio is positively associated with profitability, and it has the strongest relation with profitability comparing with the other liquidity measures. In addition to the operating cash flow which is positively associated with profitability. Furthermore, the results of current ratio show a positive and significant relationship with Return on Equity, and when add new liquidity variable/variables to the equation, the CR shows negative and the effect of it increased. Although, Inventory period is negatively associated with profitability, but Receivable period has no relationship with profitability.