Liquidity, leverage, and solvency: What affects profitability of industrial enterprises the most?
-
DOIhttp://dx.doi.org/10.21511/imfi.18(3).2021.22
-
Article InfoVolume 18 2021, Issue #3, pp. 249-259
- Cited by
- 2118 Views
-
1087 Downloads
This work is licensed under a
Creative Commons Attribution 4.0 International License
The purpose of this paper is to show the relative impact of liquidity, leverage, and solvency on profitability of industrial enterprises listed on the Amman Stock Exchange to ascertain which of them has the most effect on profitability. To reach the objectives of this study, 44 Jordanian industrial companies are examined from 2012 to 2018. Return on assets (ROA) and return on equity (ROE) are examined as measures of performance, current ratio and quick ratio as measures of liquidity, debt ratio and debt to equity ratio as measures of leverage, and the interest coverage ratio as a measure of financial solvency. Multiple regression analysis was used to check the hypotheses. A negative and statistically significant impact was found at the 1% level between financial leverage and profitability. At the same time, findings did not show the same for the effect of liquidity and solvency on profitability. In addition, leverage has the highest relative impact among independent variables on profitability, followed by solvency and then liquidity. Moreover, it is indicated that company size is a control variable of the effect between liquidity, leverage, and solvency on performance. Thus, it is concluded that management of industrial companies should reduce dependence on debt to finance companies to achieve the highest possible returns; it is recommended to maintain an acceptable level of liquidity to ensure the continuity of companies and attention to the level of solvency within companies to maintain a high financial performance.
- Keywords
-
JEL Classification (Paper profile tab)L25, M41
-
References26
-
Tables6
-
Figures3
-
- Figure 1. The study model
- Figure 2. The relative impact of solvency, leverage, and liquidity on ROA
- Figure 3. The relative impact of solvency, leverage, and liquidity on ROE
-
- Table 1. Descriptive statistics of the study variables
- Table 2. Matrix of cross-correlations between independent variables
- Table 3. Q-Stat autocorrelation test for the remainder of the regression equation
- Table 4. Hausman test results
- Table 5. Results of H01-1–H01-3 testing
- Table 6. Results of H02-1–H02-3 testing
-
- Akenga, G. (2017). Effect of liquidity on financial performance of firms listed at the Nairobi Securities Exchange, Kenya. International Journal of Science and Research, 6(7), 279-285.
- Al-Ali, A. (2018). The effect of financial leverage on liquidity and profitability: An applied study on a sample of companies listed on the Damascus Securities Exchange. Al-Baath University Journal, 40(1), 173-205. (In Arabic).
- Ali, M. (2014). Relationship between Financial Leverage and Financial Performance (Evidence of Listed Chemical Companies of Pakistan). Research Journal of Finance and Accounting, 5(23), 46-56.
- Aliwi, N. (2019). The effect of financial leverage on the financial performance of the Jordanian public joint-stock companies listed on the Amman Financial Market (Master Thesis). Middle East University.
- Al-Jafari, M. K., & Samman, H. A. (2015). Determinants of profitability: evidence from industrial companies listed on Muscat Securities Market. Review of European Studies, 7(11).
- Baum, C. F., Schäfer, D., & Talavera, O. (2006). The Effects of Short-Term Liabilities on Profitability: The Case of Germany (DIW Discussion Papers No. 635). German Institute for Economic Research.
- Bhatt, S., & Verghese, N. (2018). Influence of Liquidity on Profitability: Evidence from Nepalese Banks. International Journal of Multidisciplinary and Current Research, 6, 1085-1090.
- Bitar, M., Saad, W., & Benlemlih, M. (2016). Bank risk and performance in the MENA region: The importance of Capital requirements. Economic Systems, 40(3), 398-421.
- Chang, C. C., Batmunkh, M. U., Wong, W. K., & Jargalsaikhan, M. (2019). Relationship between capital structure and profitability: Evidence from Four Asian Tigers. Journal of Management Information and Decision Sciences, 22(2), 54-65.
- Dahiyat, A. (2016). Does Liquidity and Solvency Affect Banks Profitability? Evidence from Listed Banks in Jordan. International Journal of Academic Research in Accounting, Finance and Management Sciences, 6(1), 35-40.
- Durrah, O., Rahman, A. A. A., Jamil, S. A., & Ghafeer, N. A. (2016). Exploring the relationship between liquidity ratios and indicators of financial performance: An analytical study on food industrial companies listed in Amman Bursa. International Journal of Economics and Financial Issues, 6(2).
- Ehiedu, V. C. (2014). The impact of liquidity on profitability of some selected companies: the financial statement analysis (FSA) approach. Research Journal of Finance and Accounting, 5(5), 81-90.
- Gujarati, D. N. (2009). Basic econometrics. New Delhi: Tata McGraw-Hill Education.
- Kanaan, A., & Saoud, A. (2018). The effect of financial leverage on profitability - An applied study on non-financial companies listed on the Damascus Stock Exchange. Economic and Legal Sciences Series, 40(3), 265-280.
- Kebewar, M. & Shah, S. M. N. A. (2012). The effect of debt on corporate profitability: Evidence from French service sector (MPRA Paper No. 43304). Munich Personal RePEc Archive.
- Khidmat, W., & Rehman, M. (2014). Impact of Liquidity and Solvency on Profitability Chemical Sector of Pakistan. Economics Management Innovation, 6(3), 34-67.
- Madushanka, K. H. I., & Jathurika, M. (2018). The impact of liquidity ratios on profitability (With special reference to Listed Manufacturing Companies in Sri Lanka). International Research Journal of Advanced Engineering and Science, 3(4), 157-161.
- Mohanty, B., & Mehrotra, S. (2018). Relationship between liquidity and profitability: An exploratory study of SMEs in India. Emerging Economy Studies, 4(2), 169-181.
- Nguyen, T. N. L., & Nguyen, V. C. (2020). The Determinants of Profitability in Listed Enterprises: A Study from Vietnamese Stock Exchange. The Journal of Asian Finance, Economics and Business, 7(1), 47-58.
- Owais, W. (2016). Examination of the effect of liquidity and solvency on the profitability of industrial companies - An empirical study: Jordanian industrial companies. Journal of Studies in Economics, Trade and Finance, 5(1), 73-90.
- Rudin, M., Nurdin, D., & Fattah, V.Y. (2016). The Effect of Liquidity and Leverage on Profitability of Property and Real Estate Company in Indonesian Stock Exchange. International Journal of Social Sciences and Management, 3(4), 300-304.
- Saleh, I., Abu Afifa, M., & Murray, L. (rev.ed.). (2020). The effect of credit risk, liquidity risk and bank capital on bank profitability: Evidence from an emerging market. Cogent Economics & Finance, 8(1), 1814509.
- Sarwat, S., Iqbal, D., Durrani, B. A., Shaikh, K. H., & Liaquat, F. (2017). Impact of working capital management on the profitability of firms: Case of Pakistan’s cement sector. Journal of Advanced Management Science, 5(3).
- Shahzad, F., Fareed, Z., & Zulfiqar, B. (2015). Impact of working capital management on firm’s profitability: A case study of cement industry of Pakistan. European researcher, 91(2), 86-93.
- Sudiyanto, B., Puspitasari, E., Suwarti, T., & Asyif, M. M. (2020). Determinants of Firm Value and Profitability: Evidence from Indonesia. The Journal of Asian Finance, Economics, and Business, 7(11), 769-778.
- Yusoff, H.B.M. (2017). The Effect of Liquidity and Solvency on Profitability: The Case of Public-Listed Consumer Product Companies in Malaysia (Master Thesis). University Tun Hussein Onn Malaysia.