Is there a positive relationship between liquidity and profitability? (2024)

Is there a positive relationship between liquidity and profitability?

Hirigoyen (1985) found that over the medium and long run, the relationship between liquidity and profitability could become positive, in the sense that a low liquidity would result in a lower profitability due to greater need for loans, and low profitability would not generate sufficient cash flow, thus forming a ...

What is the relationship between profitability and liquidity?

As liquidity and profitability are inversely related to each other, hence increasing profitability would tend to reduce firms' liquidity and too much attention on liquidity would tend to affect the profitability.

Why is there an inverse relationship between liquidity and profitability?

Broadly speaking, it's due to the unutilized liquid funds lying idle in hand, which, if put to use, would definately contribute to the profitability.

What is the impact of liquidity on profitability?

Therefore, the high liquidity may cause of low profitability and inefficient performance of the overall Banking sector. It may cause failure of banking performance in long term (Pandey, 2000). Liquidity is a financial term that means the amount of capital that is available for investment.

Does profitability varies inversely with liquidity?

In working capital management we find that profitability varies inversely with liquidity. 8. Generally, a greater margin of safety would be provided by more current assets and fewer current liabilities.

Which is more important between liquidity and profitability?

The liquidity is not only measured by the cash balance but also by all kind of assets which can be converted to cash within one year without losing their value. It has primary importance for the survival of a firm both in short term and long term whereas the profitability has secondary important.

What is the dilemma between liquidity and profitability?

Liquid assets are less profitable as compared to long term assets. The dilemma to a finance manager is whether to invest in more profitable long term assets and risk low liquidity or invest in short term assets which are less profitable and therefore reduce return on investment made.

What is the relationship between liquidity and profitability in commercial banks?

Results of analysis confirm, banks, which work with high level of surplus liquidity have low indicates of profitability (ROA, ROE). And banks, that operate with middle and low level of surplus liquidity, have indicates of profitability (ROA, ROE) higher (Table 1).

Are liquidity and profitability goals?

Liquidity and profitability are competing goals for the Finance manager. Under liquidity management, the Finance manager is expected to manage all its current assets including near cash assets in such a way as to ensure its effectivity with a view to minimize costs.

Why do banks need liquidity and profitability?

Overall, the reasoning behind the importance of liquidity is that a bank can have assets that exceed its liabilities, but it still faces the risk of a sudden bank run or any other situation where it will not be able to liquidate its assets in order to cover needs that may arise.

Can a company be profitable but not liquid?

In other words, a company can appear profitable “on paper” but not have enough actual cash to replenish its inventory or pay its immediate operating expenses such as lease and utilities. If a company cannot purchase new inventory, it will slowly become unable to generate new sales.

Can a highly profitable business with low liquidity survive?

However, it is essential to note that a company that is profitable but not liquid can face significant financial risks that may even end in insolvency. To ensure a company's long-term success, it is crucial to maintain a balance between profitability and liquidity.

What is relationship between liquidity and profitability and risk and return?

Take, for example, the (potential) trade-off between liquidity and profitability. In the stock market setting, more liquid shares would represent lower investment exit risk for the investor. Therefore, they should be recognized as more attractive assets, enjoying a higher price and lower market risk/expected return.

Why do banks care about liquidity?

Liquidity when creating a broker is one of the fundamental pillars in the Forex market, without it, a Broker Startup would not be able to provide its services. That is why it is very important to hire a provider with good liquidity that guarantees the best service.

Why do banks want liquidity?

Liquidity reflects a financial institution's ability to fund assets and meet financial obligations. It is essential to meet customer withdrawals, compensate for balance sheet fluctuations, and provide funds for growth.

What is the difference between liquid and profitability?

Having adequate or high liquidity does not mean a business is profitable – it simply means there are enough assets to sufficiently cover immediate and short-term expenses. And even if your business is profitable, that does not necessarily mean you are adequately managing your current financial obligations.

What is the relationship between liquidity and return?

In the stock market setting, more liquid shares would represent lower investment exit risk for the investor. Therefore, they should be recognized as more attractive assets, enjoying a higher price and lower market risk/expected return.

What happens if liquidity increases?

The more liquid an asset is, the easier and more efficient it is to turn it back into cash. Less liquid assets take more time and may have a higher cost.

What happens when liquidity goes up?

When more liquidity is available at a lower cost to banks, people and businesses are more willing to borrow. This easing of financing conditions stimulates bank lending and boosts the economy.

Does more liquidity mean more return?

Answer and Explanation: Less liquid assets often have more excellent return rates because they involve high risks due to low liquidity. That's why it is significant for investors to recognize the asset allocation technique that complements their needs to avoid risks.


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