Investigating Liquidity-Profitability Relationship in Nigerian Quoted Companies: A Case Study of Selected Companies

Investigating Liquidity-Profitability Relationship in Nigerian Quoted Companies: A Case Study of Selected Companies

Author by Dr. Andy Okwu

Journal/Publisher: Ican Journal Of Accounting & Finance

Volume/Edition: 1

Language: English

Pages: 123 - 138

Abstract

The study investigated the relationship between liquidity and profitability in selected quoted companies in Nigeria. The Central objective was to examine the nature and extent of relationship between liquidity and profitability in profit-driven quoted companies and also to determine any and effect relationship existed between the two performance measures. Liquidity measure considered was current assets-liabilities ratio while profitability measure was operating profit-turnover ratio. Investigative and quantitative analysis methods were used for the study. Analysis was based on data extracted from annual reports and accounts of the companies for the relevant period. Regression model was specified, estimated and evaluated to enhance the analysis. Estimation was via the OLS technique, while evaluation was based on relevant statistics of regression results. The results showed that while a trade-off existed between liquidity in the banking company, the two variables were positively correlated and also reinforced each other in the other companies. In the banking firm, the performance exerted negative but insignificant effect on, and exhibited weak power in explaining variations in, each other. The measures exerted positive but insignificant effect on each other but showed moderately strong strength in explaining variations in each other. In the manufacturing firm, they also exerted positive but insignificant effect on, and exhibited weak power in explaining variations in each other. Consequently, the study recommends, among other things, that banks should always strike a balance between liquidity and profitability to satisfy regulatory requirements as well as shareholders’ wealth aspirations; manufacturing outfits should emphasise profitability over liquidity since son doing enhances liquidity; while processing outfits should always ensure adequate liquidity, especially raw material inputs to ensure production continuity and avoid stock out costs


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