A Study Of Liquidity And Profitability Relationship: Evidence From Indonesian Capital Market
Liquidity and profitability are two important aspects of a company’s health. The higher the liquidity of a company, the lower the probability that the company could not fulfill its short – term debt. However it means that the funds are confined and couldn’t be used for productive activities, hence lowering the profitability. On the contrary, the lower the liquidity of a company, the higher the probability that the company could not fulfill its short – term debt, however it means that the funds could be used for productive activities or investment, hence improving its profitability. According to the risk and return theory which states that the higher the risk, the higher the return and vice versa, the relationship between liquidity and profitability should be a trade – off. However, there have been some studies that gave different results, which indicates there might be a difference in nature of relationship in different sectors and even different industries or countries. This study aims to check the relationship between liquidity and profitability in agriculture and consumer goods sectors in Indonesia between 2005 – 2013, aiming to identify the nature of the relationship and whether the relationship is statistically significant or not. The result is there are negative relationship between liquidity and profitability indicators, in line with the risk and return theory.
Keywords- Liquidity, Profitability, Finance, Management, Risk and Return, Indonesia, Agriculture, Consumer Goods