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Impacts of liquidity ratios on profitability (Case of oil and gas companies of Pakistan)

Author(s): Qasim Saleem | Ramiz Ur Rehman

Journal: Interdisciplinary Journal of Research in Business
ISSN 2046-7141

Volume: 1;
Issue: 7;
Start page: 95;
Date: 2011;
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Keywords: Liquidity ratios | Return on Investments | Return on equity | Return on Assets | Regression analysis

The present study aims to reveal the relationship between liquidity and profitability so that every firm has to maintain this relationship while in conducting day to day operations. The results show that there is a significant impact of only liquid ratio on ROA while insignificant on ROE and ROI; the results also show that ROE is no significant effected by three ratios current ratio, quick ratio and liquid ratio while ROI is greatly affected by current ratios, quick ratios and liquid ratio. The main results of the study demonstrate that each ratio (variable) has a significant effect on the financial positions of enterprises with differing amounts and that along with the liquidity ratios in the first place. Profitability ratios also play an important role in the financial positions of enterprises. Every stakeholder has interest in the liquidity position of a company. Suppliers of goods will check the liquidity of the company before selling goods on credit. Employees should also be concerned about the company’s liquidity to know whether the company can meet its employee related obligations–salary, pension, provident fund, etc. Thus, a company needs to maintain adequate liquidity so that liquidity greatly affects profits of which some portion that will be divided to shareholders. Liquidity and profitability are closely related because one increases the other decreases.
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