Relationship between profitability and liquidity of enterprises listed on Warsaw stock exchange

Jacek Jaworski , Leszek Czerwonka

Abstract

The most frequently mentioned goal of working capital management is increasing profitability maintaining financial liquidity at the same time. From this point of view, the relationship between profitability and liquidity is relatively often studied, but the theoretical model describing this particular relationship has not been developed yet. On the one hand, enterprises with high profitability generate a large free cash flow increasing liquidity (a positive relationship). On the other hand, enterprises with high liquidity have a lot of current assets. It generates high costs and reduces profitability (a negative relationship). The Gentry's hypothesis attempts to integrate both directions of this relationship: the direction is positive at low liquidity levels, but with an increase in the level of liquidity, it turns into a negative one. The aim of this paper is to recognize the relationship between profitability and liquidity of companies listed on the Warsaw Stock Exchange. The research material consisted of the reporting data of 345 companies in the years 1998-2016. The panel models based on 3793 observations were used to identify the sought relationship. The statistically significant positive relationship between the return on assets and the current liquidity ratio was found. As for the quick liquidity ratio, a similar relationship was diagnosed in a sample of 90% of observations (observations with the highest and lowest level of QR were excluded). This study did not confirm the liquidity and profitability substitution which was most frequently diagnosed in other empirical studies. A negative relationship was also not found with regard to high levels of the liquidity. It means that the Gentry's hypothesis was not confirmed, either. However, the study confirmed the positive relationship between profitability and the company's size. The negative relationship between profitability and the level of indebtedness was also confirmed.
Publication typeOthers
Author Jacek Jaworski
Jacek Jaworski,,
-
, Leszek Czerwonka (FE / DMicro)
Leszek Czerwonka,,
- Department of Microeconomics
Pages326-334
Publication size in sheets0.5
Book Ribeiro Humberto, Naletina Dora, da Silva Ana Lorga (eds.): Economic and Social Development: 35th International Scientific Conference on Economic and Social Development - "Sustainability from an Economic and Social Perspective", Lisbon, 15-16 November 2018: book of proceedings, Economic and Social Development, 2018, Varazdin Development and Entrepreneurship Agency
Keywords in Englishfinancial liquidity, profitability, profitability and liquidity, trade-off, Warsaw Stock Exchange
URL http://www.esd-conference.com/upload/book_of_proceedings/Book_of_Proceedings_esdLisbon2018_Online.pdf
Languageen angielski
Score (nominal)5
ScoreMinisterial score = 0.0, ArticleFromJournal
Ministerial score (2013-2016) = 5.0, ArticleFromJournal - czasopismo zagraniczne spoza list
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