The Effect of Liquidity and Solvency on Profitability among Large Firms in Consumer Product Sector

Abstract :

Liquidity management and solvency is a component that is essential for any organization to ensure a smooth routine operation, particularly in maintaining firm performance. This issue is more critical for large companies who need a good level of liquidity and to ensure the stability of the business. This study is aimed to explores the relationship between the level of liquidity and profitability of the firms. In addition, this study also wants to determine the relationship between solvency profitability of the firms. For this study, a 100 firms in the consumer product sector are used as sample. Data will be derived from the annual financial statements from 2013 to 2015. Panel data analysis will be used to analyze the data to determine the effect between the level of liquidity and firm’s profitability as well effect between solvency and profitability of the firms. The outcome shows mixed result in which current ratio shows positive significant relationship while the quick ratio show negative significant relationship. Solvency through debt ratio show a positive significant relationship to profitability, but debt to equity ratio reveal the negative and significant impact on profitability.