Investigating Liquidity-Profitability Relationship: Evidence from Companies Listed in Saudi Stock Exchange (Tadawul)

Abstract

The growth and survival of business houses hinges on the liquidity and profitability. The dexterity to lever between the two domains is of paramount significance for the financial managers. The current study makes an earnest endeavor to investigate the relationship between liquidity and profitability of companies listed in Saudi Stock Exchange (Tadawul). The study encompasses 99 listed companies in Tadawul. The data are culled and collated from audited annual financial statements of listed companies for a period of five years from 2008 to 2012. The profitability facets of the companies are represented by the variables, namely, Return on Assets (ROA) and Return on Equity (ROE). The liquidity of the companies is gauged by current ratio, quick ratio and the absolute liquid ratio. The overall results revealed that there is only one positive significant relationship between Return on Assets (ROA) and Current Ratio (CR) of the companies in Saudi Arabia. Further, it is revealed that there is negative but insignificant relationship between the Return on Assets (ROA) and Quick Ratio (QR) & Cash Ratio (CHR) of the companies in Saudi Arabia. Likewise in the case of Return on Equity (ROE), there is insignificant relationship with the three selected independent variables, namely, Current Ratio (CR), Quick Ratio (QR) and Cash Ratio (CHR).