Liquidity-Profitability Trade-Off: A Panel Study of Listed Non-Financial Firms in Ghana

Abstract

This study sought to explore the trade-off between liquidity and the profitability of non-financial firms listed on the Ghana Stock Exchange (GSE). A panel data extracted from the audited and published annual reports of fifteen (15) selected firms for the period 2008 to 2017 was used for the study. In the study, liquidity was surrogated by the Cash Flow Ratio (CFR) and the Cash Ratio (CaR), whilst profitability was proxied by Return on Capital Employed (ROCE). After undertaken some diagnostic and specification tests to address the basic assumptions of the Classical Linear Regression Model (CLRM), the study uncovered that, cash flow ratio had a significantly positive effect on the firms' profitability as measured by ROCE [β=0.1050416, (p=0.038)<0.05], but the cash ratio had an insignificantly negative influence on the firms' profitability as measured by ROCE [β= -0.0805403, (p=0.306)>0.05]. It was further discovered that, the cash flow ratio and the cash ratio had a combined significant effect on the firms' profitability as measured by ROCE [Wald chi2(1)=7.43, (p=0.0244)<0.05]. In order to ensure continuous survival and success, the firms should not play with the issue of liquidity management. The entities are expected to maintain an optimal liquidity level that will be capable of performing the 'twin' role of meeting their financial obligations and at the same time maximizing their shareholders' wealth. This optimal liquidity level could be obtained if the establishments are to meet the standards set by the Ghana Stock Exchange (GSE). Adhering to these standards will help the firms to reduce the cases of financial distress. In other words, the firms should keep an adequate level of liquidity that will not portend their going concern status, and yet allow them to make ample returns on their investments. Thus, the firms should strike a balance (trade-off) between their liquidity and profitability. Also, surplus liquidity and inadequate liquidity are two financial ailments that can simply wear down the firms' profitability. Therefore, the establishments must embrace liquidity management in their attempt to optimize profitability. This could be attained if the firms lessen the amounts they hold in cash and focus more on investments so that, they could gain higher returns rather than tying them down in idle cash. From the perspective of theory, the outcome of this study is in tandem with that of prior studies by bringing to light the effect of liquidity on firms' financial performance as measured by ROCE. The firms should therefore inculcate into their decisions the findings of this study so as to meet their operational and expansion needs, as well as the desires of their shareholders. `

Equity and Debts on Financial Performance of Listed Consumer Goods Sector in Nigeria

“…In summary, there were mixed outcomes from the studies on the effect of equity and debts on the performance of listed consumer goods in various climes. The studies of Olaoye et al ( 2020), Alao and Sanyaolu (2020), Ohaka et al (2020), Kong, Musah, and Agyemang (2019) from Ghana, Ajibola et al (2018) were in tandem with the report that capital structure had a significant effect on the performance of consumer goods sector in Nigeria. The following studies had contrary views on the relationship between capital structure and the performance of the consumer goods sector in Nigeria: Ali (2020); Azziz and Abbas (2019) from Pakistan; Muigai and Muriithi (2017) from Kenya, Das (2017) from India.…”

“…The study of the relationship between capital structure proxies by short-term debt, term debt, and long-term debt showed a negative insignificant effect on the return on assets of manufacturing firms listed in Nigeria which was carried out by Ajibola et al (2018). This is in tandem with the study of Kong, Musah, and Agyemang (2019). Equity debt had a negative impact on the ROA and ROE of the Malaysian industrial sector in the study carried out by Basit and Iewan (2017).…”

Working Capital Management and Performance Metrics of Quoted Brewery Firms in Nigeria

“…ROE illustrates how well a shareholder's investment is utilized (Khalid et al, 2018). ROE is regarded as a gauge of a company's profitability and how well it produces returns for shareholders (Kong et al, 2019). The management of a firm is more effective at generating income and growth from its equity financing when it produces a higher ROE.…”

“…The objective of the study is to assess the effect of working capital on the return on assets, the return on equity, and the profit margin of quoted brewery firms in Nigeria. There were not many studies on this title that addressed the brewery industry though there had been studies on the consumer goods sector (Etale & Oweibi, 2020;Oko et al, 2020;Kong et al, 2019;Khalid et al, 2018;Arachchi et al, 2017). The brewery industry attracted the researchers' attention due to its contribution to the world GDP and Nigeria's GDP.…”

Evaluation of the Effect of Foreign Exchange Market Instruments on Financial Performance of Commercial Banks in Meru County, Kenya.

“…Regionally in Africa, there had been unfavorable banking policies and high inflation causing banking products such as swaps to be extremely expensive (Kong et al, 2019). Additionally, illiquid and undeveloped capital markets that supported diverse investments such as forwards and futures has been other major concerns (Price Water house Coopers, 2020).…”