Impact of Liquidity on Profitability 2015

Chapter 1
1.1 Introduction:

The concept of Liquidity has been a source of worry to the management of firms of the
uncertainty of the future. The liquidity of an asset means how quickly it can be transformed into
cash. When referring to company liquidity one usually means its ability to meet its current
liabilities and is usually measured by different financial ratios www.investorwords.com). The
profitability of a company can by described as its ability to generate income which surpasses its
liabilities. Profitability is usually measured by different ratios such as ROA and
ROE.(www.businessdictionary.com) Efficient liquidity management involves planning and
controlling current assets and current liabilities in such a manner that eliminates the risk of the
inability to meet due short-term obligations, on one hand, and avoids excessive investment in
these assets, on the other. This is due in part to the reduction of the probability of running out of
cash in the presence of liquid assets. Liquidity is having enough money in form of cash, to meet
your financial obligations. Alternatively, the case with assets can be converted in to cash.
Profitability is measure of the amount by which a company`s revenue exceeds its relevant
expenses. Liquidity and profitability are the two corners of a straight line. If you are on the line
and move towards one, you automatically move away from the other. In other words, there is a
trade – off between liquidity and profitability.(Puneet & Parmil, 2012)

Liquidity management is a concept that is receiving serious attention all over the world
especially with the current financial situations and the state of the world economy. The concern
of business owners and managers all over the world is to devise a strategy of managing their day
to day operations in order to meet their obligations as they fall due and increase profitability and
shareholder’s wealth.

Liquidity management, in most cases, are considered from the perspective of working capital
management as most of the indices used for measuring corporate liquidity are a function of the
components of working capital. The importance of liquidity management as it affects corporate
profitability in today’s business cannot be over emphasis. The crucial part in managing working
capital is required maintaining its liquidity in day-to-day operation to ensure its smooth running

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and meets its obligation (Eljelly, 2004). Liquidity management is very important for every
organization that means to pay current obligations on business, the payment obligations include
operating and financial expenses that are short term but maturing long term debt. Liquidity ratios
are used for liquidity management in every organization. That greatly effect on profitability of
organization.

Liquidity profitability relationship is linked with the continuance of the appropriate intensity of
working capital. This concept tries to strike a level of liquidity that offers a relaxed balance of
liquidity and profitability, that is to say, the investment of the company in working capital must
be sufficient. It may generally be assumed that there is always a negative relationship between
the two. But it is not true in all the cases. The existence of a linear relationship, though not
continuous, between profitability and liquidity corresponding to the holding of current assets at
least up to a certain level by firms, is not an impracticable proposition. (Bhunia, Khan
&Mukhuti, 2012).

Liquidity and profitability are two very important and vital aspects of corporate business life. No
firm can survive without liquidity. A firm not making profit may be considered as sick but, one
having no liquidity may soon meet its downfall and ultimately die. Liquidity management has
thus, become a basic and broad aspect of judging the performance of a corporate entity
(Bardia,2007). It is thus, essential to maintain as adequate degree of liquidity of smooth running
of the business operations. The liquidity should be neither excessive nor inadequate. Excessive
liquidity indicates accumulated idle funds, which do not earn any profit for the firm, and
inadequate liquidity not only adversely affect the credit worthiness of the firm, but also interrupts
the production process and hampers its earning capacity to a great extent. Thus, the need for
efficient liquidity management in corporate businesses has always been significant for smooth
running of the business, (Valrshney,2008).

1.2 Significance of the study:

Liquidity plays a significant role in the successful functioning of a business firm. A firm should
ensure that it does not suffer from lack-of or excess liquidity to meet its short-term compulsions.
A study of liquidity is of major importance to both the internal and the external analysts because
of its close relationship with day-to-day operations of a business (Bhunia,2010). Business

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financing, especially at the wake of the global financial crisis, has become a major source of
concern for business managers as bank loans are becoming too expensive to maintain as a result
of tightening of both the local and international financial market and the reluctance of the public
to invest in the share of companies sequel to the crash of the capital market. These situations
compel business managers to device various strategies of managing internally generated revenue
to enhance their chances of making profit and meeting existing shareholders expectations.
Liquidity management and profitability are very important in the development, survival,
sustainability, growth and performance. Profitability does not translate to liquidity in all cases. A
company may be profitable without necessarily being liquid. Therefore, liquidity should be
managed in order to obtain an optimal level, that is, a level that avoid excess liquidity which may
translate to poverty of ideas by management. Also liquidity level should not fall below minimum
requirement as it will lead to the inability of the organization to meet short term obligation.

1.3 Objectives:
The following sub objectives are considered for the above purpose.

 To identify the factors which are significantly contribute to the liquidity ratios and
profitability.
 To find out the relationship between liquidity ratios and profitability.
 To suggest some measures to enhance the profitability of Listed Cement Companies.

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Chapter no 2
Literature Review
Large numbers of studies have been conducted to find the relationship between the
Liquidity and Profitability. In the literature, however, while some researchers have argued that
liquidity is more important than profitability, some see profitability to be more important than
liquidity, and yet others argue that both are equally important.

Liquidity plays a very significant role in the successful functioning of the firm. A company needs
to maintain adequate liquidity so that liquidity greatly affects profits of which some portion that
will be divided to shareholders. Liquidity and profitability are closely related because one
increases the other decreases. A firm should ensure that there must be balance in liquidity. A
firm should not suffer from the lack-of or excess liquidity to meet its short-term compulsions.

As of one of Pakistani researchers Qasim Saleem and Ramiz Ur Rehman (2011) in his
study of “Impacts of liquidity ratios on profitability” with the samples of 26 Oil and Gas
companies listed on KSE using the data representing the periods of 2004 – 2009 found that
liquidity ratios affect the profitability ratios. They have used CR, QR, LR as independent
variables and ROA, ROE, ROI as dependent variable. They conclude that liquidity ratios affect
the profitability ratios and profitability is improved for oil and gas sector that hold some liquid
assets. And the also conclude that the Liquidity and Profitability are closely related to one
another because one increases the other decreases. In their research the result shows that there is
significant impact of only liquid ratio on ROA while insignificant on ROE and ROI and the
result also shows that ROE is no significant effected by the three ratios Current ratio , Quick
ratio and Liquid ratio (Saleem & Rehman, 2011).

Shahchera (2012) in his study of “The Impact of Liquidity Asset on Iranian Bank Profitability”
with the samples of 17 commercial banks using the data representing the periods of 2000-2009.
Using the Generalized Method of Moment (GMM), this study analyzes the profitability of listed
banks using unbalanced panel data over the period of 2002-2009. The estimated relationship
between liquid assets and bank profitability is as expected. Coefficients for the liquid assets ratio,
its square, business cycle, regulation and its product of interaction business cycle and regulation
are all statistically significant. As

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expected , we find evidence of a non-linear relationship between profitability and liquid asset
holdings. An important finding of this study is that the business cycle significantly affects bank
profits. The coefficient of regulation is negative and significant. Therefore if regulators reduce
the constraints imposed on banks, banks obtain profit. And conclude that Profitability is
improved for banks that hold some liquid assets, however, there is a point at which holding
further liquid assets diminishes a banks’ profitability (Shahchera, 2012).

Some other Pakistani researchers Abdul Raheman, Talat Afza, Abdul Qayyum, and Mahmood
Ahmed Bodla (2010) in the study “Working Capital Management and Corporate Performance of
Manufacturing Sector in Pakistan” with the panel data of 204 manufacturing firms is used which
are listed on Karachi Stock Exchange using the data representing the periods of 1998 to 2007.
The results indicate that the cash conversion cycle, net trade cycle and inventory turnover in days
are significantly affecting the performance of the firms. The manufacturing firms are in general
facing problems with their collection and payment policies. Moreover, the financial leverage,
sales growth and firm size also have significant effect on the firm’s profitability. So they
conclude that Working Capital Management has a significant impact on profitability of the firms
and plays a key role in value creation for shareholders as longer Cash Conversion Cycle and Net
Trade Cycle have negative impact on Net Operating Profitability of a firm (Raheman, Afza,
Qayyum, & Ahmad, 2010).

Chukwunweike (2014) investigated the association between liquidity and profitability through
“The Impact of Liquidity on Profitability of Some Selected Companies: The Financial Statement
Analysis (FSA) Approach” the population of this study consist of all companies in the
“industrial/Domestic products” industry; that are quoted in the Nigerian Stock Exchange
(NSE).Current Ratio and Quick Ratio used as independent variable and ROA is used as
dependent variable. The research design adopted for this study is the “quantitative research
design”. The population consists of publicly quoted companies that make up the
“industrial/Domestic products” industry. The sampling technique adopted is the “non-
probability” sampling technique of four selected companies. The data used for the study was
secondary data in the form of the “Annual Reports and Accounts” of the selected companies.
Simple correlation analysis was used to test the hypothesis at 10% level of significance. Result of
this study found that there is a significant positive correlation between current ratio and

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profitability (ROA) and there is no definite significant correlation between Acid test ratio and
profitability (ROA) (EHIEDU & Chukwunweike, 2014).

Saswata Chatterjee (2012) done the research on the topic of “The impact of working capital on
the profitability” Usually, it was observed that, if firm wants to take a bigger risk for bumper
profits and losses, it minimize the dimension of its working capital in relation to the revenues it
generates. If it is willing to improve its liquidity, that in turn raises the level of its working
capital. This research has analyzed the impact of working capital on the profitability for a sample
of 100 Indian companies listed in the Bombay Stock Exchange for a period of 2 years from
2010-2011. The various components for measuring the working capital management include the
Receivable days, Inventory turnover days, Payable days, Cash conversion cycle, Current ratio
and Quick ratio on the Net operating profitability of the Indian companies. The results depict
that, there is a strong negative association between the components of the working capital
management and the profitability ratios of the Indian firms which indicates that, as the cash
conversion cycle increases it would tend to reduce the profitability of the company, and the
managers might increase the shareholder’s value by shortening this cash conversion cycle to a
minimum level (Chatterjee, 2012).

Other researchers Bordeleau and Graham (2010) also study “The Impact of Liquidity on Bank
Profitability” with the sample of Canadian and American banks from 1997 t0 2009 and also find
the non‐linear relationship between profitability and liquidity. The study conclude that
Profitability is improved for banks that hold some liquid assets, however, there is a point at
which holding further liquid assets diminishes a banks’ profitability, all else equal.

Sunny Obilor (2013) has conducted the research of the topic of “The Impact of Liquidity
Management on the Profitability of Banks in Nigeria” This work investigated the impact of
liquidity management on the profitability of banks in Nigeria. The work is necessitated by the
need to find solution to liquidity management problem in Nigerian banking industry. Three
banks were randomly selected to represent the entire banking industry in Nigeria. The proxies for
liquidity management include cash and short term fund, bank balances and treasury bills and
certificates, while profit after tax was the proxy for profitability. The result of this study has
shown that liquidity management is indeed a crucial problem in the Nigerian banking industry.

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The study therefore recommends that banks should engage competent and qualified personnel in
order to ensure that right decisions are adopted especially with the optimal level of liquidity and
still maximize profit.

Niresh (2012) in his study “Trade-off between liquidity & Profitability: A study of selected
Manufacturing firms in Sri Lanka” with the sample of 31 listed manufacturing firms over the
period of five years from 2007 to 2011 found the correlation values to be negative between
profitability and all the liquidity variables. CR, QR, LR is used as independent variable and Net
profit, Return on Capital Employed and ROE used as dependent variable. This study conclude
that there is no significant relationship between liquidity and profitability.

Bhunia, Khan, and Mukhuti (2011) in the study “A Study of Managing Liquidity” with the
preferred samples of private sector steel companies from the year of 1997 to 2006 found that the
optimal of working capital management is could be achieve by firm that manage the tradeoff
between profitability and liquidity. Current Ratio, Liquid Ratio and absolute Liquid Ratio used
as independent variable and Return on Investment used as dependent variable. Results of this
study found that correlation and regression results are significantly positive associated to the firm
profitability.

Al Nimer, Warrad, and Al Omari (2013) in the study “The impact of Liquidity on Jordanian
banks Profitability through Return on Asset” the study checks financial reports for overall
Jordanian Banks listed on the Amman Stock Exchange (ASE) for the period 2005- 2011
conclude that there is significant impact of independent variable quick ratio on dependent
variable return on asset (ROA). That means profitability in Jordanian banks is significantly
influenced by liquidity. QR is used as independent variable and ROA is used as dependent
variable and there is significant impact of independent variable quick ratio on dependent variable
return on asset (ROA).

A.A janthan (2013) in his study “A Nexus between Liquidity & Profitability: A Study of Trading
Companies in Sri Lanka” using the sample of trading sector consists of 08 trading companies
listed in the Colombo Stock Exchange (CSE) over a period of past 5 years from 2008 to 2012
found that there is relationship between liquidity and profitability and there is significance
impact of liquidity on profitability.CR, QR ,LR used as measure of Liquidity and ROA, ROE are

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used as measure of Profitability. Results of this study found that correlation and regression
results are significantly positive associated to the firm profitability.

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Chapter no 3
3.1 Industry Background (Cement Industry)

When Pakistan came into being it had only four cement plants operating in the country. The
cement industry registered a steep progress and today, the number of cement companies stands
at29. Cement industry is indeed a highly important segment of industrial sector that plays a
pivotal role in the socio-economic development. Cement is a product that requires high infra-
structure and conducive locations. Most of the cement industries in Pakistan are located in the
close vicinity of mountainous regions that are rich in clay, iron and mineral capacity.

Local demand in the country for the year 2009 was estimated at 20 million tons. Domestic
demand is expected to grow at 13% Capacity growth rate (CAGR) during next five years.
National demand of cement is the function of multiple factors. Higher the GDP growth rate is
higher will the demand of cement. The projected GDP growth rate is 4.2%, although a modest
figure, but higher than the GDP rate of 2.4% of the previous year. The demand is expected to rise
in future years. Over the last few years housing sector is registering a steady progress. It accounts
for 40% of cement consumption.
The global cement market is steadily expanding and it was estimated at 2836 million tons in
2010. Pakistan is a country with modest cement production capacity of 40 million tons. Exports
constitute one third of the national output. Pakistan utilizes 70 to 75 % of its production capacity.
It can comfortably meet any increase in the foreign demand.

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UAE (Dubai), Kuwait, Iraq, Qatar, Djibouti, Afghanistan, South Africa India, Sri Lanka and
other South Asian country are the target destinations of our cement exports. The country
provides Clinker in large quantities to milling units in foreign lands. Many bright opportunities
are coming across Pakistan. The demand is on the rise in the countries of Middle East and
Africa. China and India are themselves large manufacturers of cement but they are suffering
from supply deficit and their markets promises opportunities to our cement industry. The
Ongoing trade negotiations will provide additional incentive to our industry to export cement to
India. FIFA 2014 Football World Cup will be held in South Africa and she is considering cement
products of Pakistan for the construction of stadiums. The demand of Pakistan origin cement will
also be supported by closing down of some cement units in Europe due to their strict laws
governing pollution control and other environment hazards. Pakistan having many big cement
units and large reserves of raw material, the import of Cement from Pakistan will be the prime of
choice of the International buyers all over the world (Ali,Yasir,2012).

3.2 Current Situation of Cement Industry

Cement exports stood at Rs5,894 per tonne or $58.6 per tonne in the first quarter of the current
fiscal year which was Rs5,989 per tonne or $58.2 per tonne in the corresponding period of last
fiscal year. Cement exports earned Rs14.362 billion or $143 million (2.436m tonnes) in July-
September 2014-15 as compared to Rs15.17bn or $147.5m (2.534m tonnes) in same period last
fiscal year. According to figures of Pakistan Bureau of Statistics (PBS), the local industry
exported cement at Rs5,986 per tonne or $58 per tonne in 2013-14 as compared to Rs6,142 per
tonne or $63.5 per tonne in 2012-13. Cement exports fetched Rs52bn or $509m (8.73m tonnes)
in 2013-14 as compared to Rs56bn or $577m (9.09m tonnes) in 2012-13. In contrast, consumers
are now paying Rs520-540 per 50 kg bag at retail level including taxes and duties. Two years
ago, the retail price of cement was Rs400 per 50 kg bag. As cement export is being carried out
excluding taxes and duties, officials in cement industry gave different figures. Some said that
around Rs120 per 50 kg bag is deducted under various taxes and duties including freight charges
for cement export, while others in the industry estimate Rs155 per 50 kg bag. The manufacturers
must be earning through exporters but have maintained export price for years when prices of
everything have gone up. A cement maker said that in view of stiff competition with Taiwan,
China, Iran, South Korea etc, the exporters have kept a competition rate to stay in the export

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market. He said in the last three to four years, power rate for cement makers have gone up to
Rs15 per KW as compared to Rs eight but a steep drop was recorded in coal prices. The price of
coal had fallen to $80 per tonne from $150 per tonne in 2007 but rupee devaluation made
imported good costlier. Coal and power hold 55-60 per cent share in total cost of cement.

Local cement exporters are already facing a probe in South Africa where it is alleged that
Portland Cement imported from Pakistan is being dumped on the South African Customs Union
(SACU) market. A cement manufacturer and exporter said that official export figures provided
by PBS is conveniently ignoring the cost which is incurred because of sea freight, discharge port
charges, inland freight and VAT of importing country. If it adds all these costs then prices will
be more than the local prices, he explained.

He said that currently the local cement industry is defending the case before regulatory authority
in South Africa and as against their claim of 48pc dumping margin, as per our calculation the
effective differential is not more than 10pc which is standard difference between local and
imported cement anywhere in the world. The manufacturer pointed out that landed prices of the
cement of importing countries and comparing the same with local prices of cement in Pakistan,
the rates are still cheaper here than cement in South Africa, India, Sri Lanka, Bangladesh, Egypt,
UAE and other gulf countries (Published in Dawn, October 31st, 2014).

I have selected some cement industry for my research projects and they are:

1. Maple Leaf Cement

2. Pioneer Cement

3. DG Khan Cement

4. Lucky Cement

5. Attock Cement

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3.3 Explanation of the companies

Maple Leaf Cement:

Maple Leaf Cement is a part of Kohinoor Maple Leaf Group (KMLG). The Group comprises of
companies, which are ranked amongst the top companies in the cement and textile sector. Maple
Leaf Cement Factory Limited (MLCFL) is one of the pioneers of cement industry in Pakistan.
Operations of MLCFL are subject to different environmental and labour laws. Providing quality
cement and ultimately customer satisfaction is our business model. MLCFL owns and operates
two production lines for grey and one production line for white cement. The plants are located at
Daudkhel District Mianwali. Total annual clinker capacity of the Company is recorded at
3,360,000 tons. The Company supplies its products in local market and exports as well in
African, Gulf, and other Asian Countries. The Company is fully complying with all applicable
environmental, labour, corporate and other relevant laws (Annual Report 2013).

Pioneer Cement:

Pioneer Cement Limited is committed to produce high quality cement as per International and
Pakistan Standards. The top management will ensure that products of Pioneer Cement meet and
exceed the product quality requirements to achieve customer’s satisfaction. The Company is
committed to abide by all applicable legal and regulatory requirements and shall orient for
continual improvement including prevention of pollution by establishing and monitoring of its
Quality and Environmental objectives. The Chief Executive and management are committed to
communicate and maintain this policy at all levels of the company and achieve continual
improvement through teamwork.

Pioneer Cement Limited markets its product under the brand name of “Pioneer Cement” and
because of its quality which meets rather exceeds the expectations of the consumers, has been
awarded as winner of the “Brand of the Year Awards 2006” in cement sector in National
Category (pioneer website).

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D.G Khan Cement:

DG Khan Cement Company Limited (DGKCC) was established under the management control
of State Cement Corporation of Pakistan Limited (SCCP) in 1978 as private limited company.
DGKCC started its commercial production in April 1986 with 2000 tons per day (TPD) clinker
based on dry process technology.

Future Outlook and ongoing projects:

 The management foresees that your Company has splendid capability to grow and
flourish further. However, organizations work in various layers of environments all of
which have different spells.
 It requires untiring and sincere efforts from government to support the shaky economic
situation and may demand tough decisions. But decisions should be in the right direction.
 In Finance Act passed in June 13 for FY14, the government has taken various steps to
document the economy and to generate extra revenue from tax sources. However, due to
lack of planning this put extra burden on business community. Moreover, instead of
broadening tax base, government put extra burden on current tax payers in terms of
documentation and additional taxes.
 It is expected that local demand of cement may increase due to expected government
spending on infrastructure projects. Revival activities may result in additional demand of
construction material (D G Khan Cement Website).

Lucky Cement:

Lucky Cement Limited (LCL) is Pakistan’s largest producer and leading exporter of quality
cement with the production capacity of 7.75 million tons per annum. The company is listed on
Karachi, Lahore, Islamabad and London Stock Exchanges.

Over the years, the Company has grown substantially and is expanding its business operations
with production facilities at strategic locations in Karachi to cater to the Southern regions, Pezu
and Khyber Pakhtunkhwa to furnish the Northern areas of the country. Lucky Cement is
Pakistan’s first company to export sizeable quantities of loose cement being the only cement
manufacturer to have its own loading and storage terminal at Karachi Port.

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Lucky Cement is an ISO 9001:2008 and 14001:2004 certified company and also possesses many
other international certifications including Bureau of Indian Standards, Sri Lankan Standard
Institute, Standards Organization of Nigeria, Kenya Bureau of Standards and South African
Bureau of Standards. (Annual Report 2013)

Attock Cement:

Attock Cement Pakistan Limited (ACPL) is a public limited company, listed on the Karachi
Stock Exchange since June 2002. Main business of the company is manufacturing and sales of
cement. ACPL is part of the Pharaon Group, which in addition to investment in cement industry
has diversified stakes in Pakistan mainly in the oil and gas sector, power and real estate sector.

ACPL's project was conceived in 1981. The project is a Pak-Saudi venture and has involved an
initial capital outlay of around Rs.1.5 billion with a FOREIGN EXCHANGE component of
around US$ 45 million. ACPL's manufacturing plant is located in Tehsil Hub, District Lasbela,
Balauchistan, at a distance of about 45 kilometers north west of Karachi.

ACPL has attained ISO 9001:2000 and ISO 14000 certifications from Lloyds Register Quality
Assurance (LRQA) in 2002 and 2006. The Plant's original capacity was 2000 TPD of Clinker
and it was the first plant in the country to be based on the latest SUSPENSION, PRE-
HEATER/PRE-CALCINATION, dry process technology which results in substantial savings in
fuel and energy costs besides balanced plant operations. With continuous growth in cement
demand both in local and regional markets, the company put up another line of 3,300 TPD of
clinker in 2006-2007 at a total investment of US $ 61 million. With this additional line the total
clinker capacity of the company has reached 1,710,000 MT of clinker per annum. The cement
manufactured and being marketed under the “FALCON” brand is of the highest standard and
truly the market leader.

ACPL is making substantial contribution to the country's economy and deposited over Rs.2,600
Million (US$ 30 Million) to the national and provincial exchequer in the form of Excise Duty,
Sales Tax, Special Excise Duty, Royalty and Income Tax during the year 2010 - 2011 (Annual
Report 2013).

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Chapter no 4
4.1 Research Methodology:

This research is a quantity type of study in which secondary data is used. Secondary data is
already available data that is collected for some other purpose. The data that is used in the
research is collected from the annual reports of the selected Cement Industries. I also used
financial statement analysis of companies (non-financial sector) listed at Karachi stock exchange
for the period 2009-2013 that is. It will help me in gaining authentic results. For collection of
supportive data different websites, book, journals, and articles are used. Which provide a
guideline for my study, as it help me for studying lecture, and previous studies and research that
is being carried out relevant to my topic.

4.2 Data Collection:

The study is conducted between the year’s 2009 and 2013 and after collecting data about the
financial positions as a result of annual activities and the related ratios of 5 enterprises per year
traded on the Pakistan (Cement Industry), as Karachi Stock Exchange (KSE).

4.3 Sampling Designs:

The sample size of this study is consisting of 5 listed Cement Industries from Karachi stock
exchange. All other companies are excluded from this study. Data is taken from 2009 -2013 of
listed Cement Companies. These mills are selected on the basis of Liquid Ratios and
Profitability.

4.4 Statistical Techniques:

It is generally thought that liquidity has an impact on profitability financial of the companies.
The current study is conducted to check the impact of liquidity on profitability. Regression
analysis are used to find out the impact of liquidity on profitability of the selected cement
companies of Pakistan. Descriptive statistics are used to describe and summarize the results and
behavior of the variables of the study.

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4.5 Variable used:

4.5.1 Dependent Variable:

Financial Performance is used by different ratios but in my research my dependent variable is

Return on Assets ROA.

Return on Assets:

ROA tells you what earnings were generated from invested capital (assets). ROA for public
companies can vary substantially and will be highly dependent on the industry. This is why when
using ROA as a comparative measure, it is best to compare it against a company's previous ROA
numbers or the ROA of a similar company.

The assets of the company are comprised of both debt and equity. Both of these types of
financing are used to fund the operations of the company. The ROA figure gives investors an
idea of how effectively the company is converting the money it has to invest into net income.
The higher the ROA number, the better, because the company is earning more money on less
investment.

4.5.2 Independent Variable:

A company's ability to turn short-term assets into cash to cover debts is of the utmost importance
when creditors are seeking payment. Bankruptcy analysts and mortgage originators frequently
use the liquidity ratios to determine whether a company will be able to continue as a going
concern.Liquidity ratios can be calculated by different variables. They are

 Current Ratio
 Quick Ratio
 Liquid Ratio

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Current Ratio:

The ratio is mainly used to give an idea of the company's ability to pay back its short-term
liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher
the current ratio, the more capable the company is of paying its obligations

Quick Ratio:

Quick Ratio is an indicator of company's short-term liquidity. It measures the ability to use its
quick assets (cash and cash equivalents, marketable securities and accounts receivable) to pay its
current liabilities.

Quick ratio specifies whether the assets that can be quickly converted into cash are sufficient to
cover current liabilities.

Liquid Ratio:

Liquid ratio is that in which we can use the cash and short term investment.in other words we
can say liquid ratio as cash ratio

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Table No 1 (Variable, Ratios and Measurement)

Variables Ratios Measurement

Profitability Return on Assets Net profit before tax/ Avg.Total Assets

Current Ratio Current Assets / Current Liabilities

Liquidity Quick Ratio Current Assets-Inventories/ Current Liabilities

Liquidity Ratio Cash+ Short Investment/ Current Liabilities

Conceptualization:
This study is aim to check the impact on liquidity on profitability. For this purpose we are
focusing on cement companies in which we want to justify our objective. And for this purpose
we take the 5 year data of different companies.

Profitability Liquidity Ratios

Return on Asset Raio Current Ratio

Quick Ratio
Liquid Ratio

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Hypothesis
Hypothesis of the study are

Ho: there is a negative relationship between liquidity and profitability.

H1: there is a positive relationship between liquidity and profitability.

4.6 Graphical Representation of Data

Graph-1 Maple Leaf Cement Company (Dependent and Independent variable)

Dependent Variable

ROA
0.15

0.1

0.05

0 ROA
2009 2010 2011 2012 2013
-0.05

-0.1

-0.15

Source Annual Report 2009-2013

Independent Variable

3
2.5
2
Current Ratio
1.5
Quick Ratio
1
Liquid Ratio
0.5
0
2009 2010 2011 2012 2013

Source Annual Report 2009-2013

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Graph-2 Pioneer Cement (Dependent and Independent Variable)

Dependent Variable

ROA
0.2

0.15

0.1

0.05 ROA

0
2009 2010 2011 2012 2013
-0.05

-0.1

Source Annual Report 2009-2013

Independent Variable

1.2

0.8

Current Ratio
0.6
Quick Ratio
Liquid Ratio
0.4

0.2

0
2009 2010 2011 2012 2013

Source Annual Report 2009-2013

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 Impact of Liquidity on Profitability 2015

Graph-3 Pioneer Cement (Dependent and Independent Variable)

Dependent Variable

ROA
0.25

0.2

0.15

ROA
0.1

0.05

0
2009 2010 2011 2012 2013

Source Annual Report 2009-2013

Independent Variables

3.5

2.5
Current Ratio
2
Quick Ratio
1.5 Liquid Ratio

0.5

0
2009 2010 2011 2012 2013

Source Annual Report 2009-2013

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 Impact of Liquidity on Profitability 2015

Graph-4 DG Khan Cement (Dependent and Independent Variables)

Dependent Variable

ROA
0.12

0.1

0.08

0.06
ROA

0.04

0.02

0
2009 2010 2011 2012 2013

Source Annual Report 2009-2013

Independent Variables

2.5

Current Ratio
1.5
Quick Ratio
Liquid Ratio
1

0.5

0
2009 2010 2011 2012 2013

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 Impact of Liquidity on Profitability 2015

Source Annual Report 2009-2013

Graph-5 Attock Cement (Dependent and Independent Variable )

Dependent Variable

ROA
0.25

0.2

0.15

ROA
0.1

0.05

0
2009 2010 2011 2012 2013

Source Annual Report 2009-2013

Independent Variable

2.5

Current Ratio
1.5
Quick Ratio
Liquid Ratio
1

0.5

0
2009 2010 2011 2012 2013

Source Annual Report 2009-2013

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Chapter no 5
5.1 Analysis:
This section explains the results and analysis of our research study. To test the impact of
explanatory variable on dependent variable multiple linear regression model is used.

Table 2 Summary Output of Regression Analysis

Number of Obs 25
F (3, 21) 12.92
Prob > F 0.0001
R - Squared 0.6486
Adjusted R - Squared 0.5984
Root MSE 0.05788

Note: Here I have taken data of Cement Industry from KSE, following companies are used for
the study ( Lucky Cement, D.G Cement, Maple Leaf, Attock Cement, Pioneer Cement) and time
period is used from 2009 to 2013. Total Observations are used 25 as a sample, and the results
shows that Prob >F is equal to 0.0001 which tells that our model is significant and R-Squared is
0.6486 which is showing that our data is accurate. Source (Annual Report 2009-2013).
R-Square which explains the extent to which the independent variables affect the dependent
variable. R-square is 0.64 or 64%which means 64% variation in the dependent variable were
explained by the independent variable while 36% were affected by other variables outside the
independent variables. Moreover, this table also shows the results of F = 12.92 at Significance
level of 0.0001 with df (21, 3).

Table 3 Anova Table:

Source SS df MS
Model 0.129853018 3 0.043288339
Residual 0.070357041 21 0.003350335
Total 0.200210059 24 0.008342086

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Table 4 Regression Analysis

ROA Coef. Std. Err. t P > |t| [ 95% Conf. Interval]
Current Ratio 0.1206885 0.0258581 4.67 0.000 0.0669137 0.1744633
Quick Ratio -0.1036893 0.0318071 -3.26 0.004 -0.1698357 -0.0375428
Liquid Ratio 0.0639005 0.0282349 2.26 0.034 0.0051827 0.1226182
_Cons -0.0259694 0.0227621 -1.14 0.267 -0.0733057 0.021367

Note: This table shows regression analysis; it explains the relationship between ROA
(Dependent Variable) and Current Ratio, Quick Ratio, Liquid Ratio (Independent Variable).
Current Ratio and Liquid Ratio have the positive relation between ROA and there is a negative
relation between Quick Ratio. The reason may of inventory and in future it will researchable.

Table 5 Descriptive Statistics

Variable Observation Mean Std. Dev Min Max
ROA 25 0.07252 .091335 -.099 .232
Current Ratio 25 1.5456 .9400757 .27 3.38
Quick Ratio 25 1.16472 .8365177 .05 2.61
Liquid Ratio 25 0.51208 .5908664 .01 1.96

Note: Descriptive Statistics are used over the period of 2009-13 data and in our research there is
25 observations out of which current ratio and quick ratio have the mean of 1.54 and 1.16
respectively. The standard deviation of current ratio is 0.94 , ROA is 0.91 and quick ratio 0.83.
all the data taken from the annual report of the respective companies (cement industry).

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Chapter 6
Findings

I carry out the research on the topic of impact of liquidity on the profitability of cement sector of
Pakistan. In order to expand this topic it should be look at by other researchers as this area
demand a lot of work for making Pakistan development. The Government of Pakistan should
award more importance to its all aspects in an effectual way. In this research study i have worked
on the secondary source of data so policy makers of Cement sectors of Pakistan should be given
more importance to the primary source of data collection for this topic of research. Due to
shortage of time my study is bound with tight period of time schedule as five years data
collection it should be given long period of time in order to get more meaningful and better
results.

Most of the studies have been conducted to find out the result on liquidity and profitability but
not most in Pakistan. There is a lot of researchers who conduct the research on the basis of
liquidity and profitability but they did not conduct the research in Pakistan and specifically
cement industries. Cement industry is growing day by day and it has a great contribution towards
the GDP it requires effective marketing strategies to expand business. Unfortunately no Pakistani
researchers do the research on cement industry specifically on the topic of liquidity and
profitability. Researches need to identify effective strategies to help the managers of Cement
sector. For this purpose I take the company of cement such as Lucky cement, Attock cement, DG
Khan cement, Pioneer cement, Maple cement, for the period of five year as my base paper result
there is a significant relationship between liquidity ratio on ROA. As my result shows that there
is a positive relationship between liquidity and profitability and our hypothesis H1 is accepted.
But the result of quick ratio is negative due to an effect of inventory and it will be researchable.

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Chapter 7
Conclusion

The purpose of this research study is to determine relationship between liquidity and
profitability of cement sector in Pakistan for the period of (2009-2013). And the result shows that
there is a positive relationship between liquidity and profitability. As our profitability increases
our liquidity also increases and vice versa. In this study Return on Assets is taken as a dependent
variable and Current Ratio, Quick Ratio and Liquid Ratio is taken as independent variables. To
test the impact of explanatory variable on dependent variable we utilize multiple linear
regressions model. Results demonstrate that there is a positive relationship between liquidity and
profitability. Since the profitability has positive relationship with liquidity, so do not reject H1.

In result R-square is 0.64 or 64% which explain the extent to which the independent variable is
affected by the dependent variable. In this case 0.64 or 64% of the variation of the variation in
the dependent variable were explained by the independent variable while 0.36 or 36% were
affected by other variables outside the independent variables. Also my result concludes that there
is significant relationship between current ratio and liquid ratio with profitability. But there is a
negative relationship between quick ratio with profitability which means there is a role of
inventory behind the result of negativity. And my result also has given me the result of my base
paper in which (Qasim Saleem and Ramiz ur Rehman 2011) in his topic “Impacts of liquidity
ratios on profitability “ a case study of oil and gas companies they conclude the result that there
is a positive and significant impact of liquidity ratios and profitability some other researchers like
(Shahchera, 2012) , Abdul Rehman and Talat Afzal 2010 , (EHIEDU & Chukwunweike,
2014) , Bhunia, Khan, and Mukhuti (2011) they also conclude in their research that there is a
positive relationship between liquidity and profitability.

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References:
Chatterjee, S. (2012). THE IMPACT OF WORKING CAPITAL ON THE PROFITABILITY. 1-
1.

EHIEDU, & Chukwunweike, V. (2014). The Impact of Liquidity on Profitability of Some

Selected Companies: The Financial Statement Analysis (FSA) Approach. Research
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garcia, j. (2011). The Impact of Working Capital Management upon Companies Profitability. 1-
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gill, a., biger, n., & mathur, n. (2010). The Relationship Between Working Capital Management
And Profitability. Business and Economics Journal, 2010, 1-9.

k, p., & b, N. (2013). Liquidity Management and Profitability. International Journal of

Technological Exploration and Learning (IJTEL), 2(4), 161-165.

Lazaridis, I. (n.d.). The relationship between working capital management and profitability of
listed companies in the Athens Stock Exchange. 1-12.

Mathuva, D. (2010). the impact of working capital management components on corporate

profitability. Research journal of business management, 1-11.

Obilor, s. (June 2013). The Impact of Liquidity Management on the Profitability of Banks in
Nigeria. Journal of Finance and Bank Management, 37-48.

OREMADU, s. (2012). Working Capital Management, Liquidity and Corporate Profitability

among quoted Firms in Nigeria Evidence. International Journal of Academic Research in
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Raheman, A., Afza, T., Qayyum, A., & Ahmad, M. (2010). Working Capital Management and
Corporate Performance of Manufacturing Sector in Pakistan. International Research
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Saleem, Q., & Rehman, R. (2011). Impacts of liquidity ratios on profitability. Interdisciplinary
Journal of Research in Business, 1(7), 95.

Shahchera, M. (2012). The Impact of Liquidity Asset on Iranian Bank. International Conference
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2008 International Academy of Business and Economics ISSN: 1544-8037

European Journal of Economics, Finance and Administrative Sciences ISSN 1450-2275 Issue 11
(2008)
Working Paper/Document de travail 2010-38 (The Impact of Liquidity on Bank Profitability)
Liquidity-profitability tradeoff: an empirical investigation in an emerging market. International
Journal of Commerce & Management Publication Date: 01-JUN-04

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