IMPACT OF FINACIAL LEVERAGE, LIQUIDITY AND

OPERATING EFFICIENCY ON FIRM’s PERFORMANCE;

Evidence from Listed Petroleum Firms of Pakistan

By

Waiza Nisar

Roll No: 01

BS (Banking & Finance) Hons

Session: 2017-21

Supervisor

Dr. Shahid Mehmood

Department of Banking and Finance

Faculty of Management Sciences

University of Kotli Azad Jammu and Kashmir

DEDICATION
1
I dedicate this project to my parents with a great love for giving me the necessary fundamentals and
instilling the value of education in me. Without their support, I am not able to achieve my aim and
objectives of my life.

All my friends, teachers, classmates and specially my supervisor, for their patience, tolerance, prayers, love,
motivations, dedication, inspiration and efforts to make me able to complete this project. Allah gave you
love to be peaceful and as you spurred me on. I know the results would be there for all to see. Indeed, this
has come to pass, and I thank to Allah and all of your great support.

ACKNOWLEDGEMENT
In the name of Almighty of Allah who is most beneficent, merciful and create this unique universe. I’m
thankful to Almighty Allah for giving the knowledge, power, strength, and courage to accomplish to complete

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my research work. Without his help, I’m unable to accomplish any goal of my life. I’m also thankful to Hazrat
Muhammad (P.B.U.H) who is a role model for my life and all Anbhiaa (A.S) and Sahaba (R.A).

This dissertation would not have been possible without love, support and encouragement I received from my
parents. I realize how much my parents and family sacrificed so that I could attend University and gain an
educations and skills. I don’t have words to adequately describe my deep gratitude for all they have provided
me, though I hope to show them in the years to come. I would like to express sincere gratitude to my
wonderful, great, punctual and handworker personality, Dr. Shahid Mehmood for sparing his time in
providing me with advice and support from the very start to end. Without his guidance and encouragement, I
would not have been able to complete this research project. Throughout this research, I gain a lot of
experience, knowledge and exposure to a situation that cannot be learned in the syllabus and definitely going
to be helpful in the future.

I would like to special thank Dean/HOD and faculty members of Faculty of Management Sciences of
University of Kotli, for their cooperation and support. I am very thankful to my family for the moral support
and inspiration. The prayers and supports of my family have helped me throughout my work.

ABSTRACT
This study analyzes the effect of financial leverage, liquidity and operating efficiency on firm performance
of oil industries listed in Pakistan Stock Exchange.From five different sectors from 2011-2020.Petroleum
sector is chosen as a population for current research, 5 companies were selected as a sample by using
convention sampling techniques. Data were collected by using annual reports of concerning
companies.Correlation, descriptive statistics and regression is used to analyze the data of current research.
The empirical effects of the take a look at indicated that liquidity (LIQ) measured by way of contemporary
property to cutting-edge liabilities has a wonderful and sizable impact on firm performance. The examine
unearths out that the impact of economic leverage has insignificant effect on company overall

3
performance.The operating efficiency has a positive significant impact on firm performance.Increase
efficiency and effectiveness of business operations. Provide easy access to real-time data. Allow for more
transparent business processes. Improve internal and external customer service.

Keywords: liquidity; operating efficiency; financial leverage; firm performance; return on equity (ROE).

Chapter 01
1 INTRODUCTION
1.1 Background

Infinance, the quick ratio, also known as the acid-test ratiois a type of liquidity ratio, which measures the
ability of a company to use its near cash or quick assets to extinguish or retire its current
liabilities immediately. It is defined as the ratio between quickly available or liquid assets and current

4
liabilities. Quick assets are current assets that can presumably be quickly converted to cash at close to
their book values. Liquidity plays an important role in the successful performance of in organizations. The
basic concept of liquidity management is easily convertible commodities in to cash with the shortage of
time. Now a day’s stakeholders and investors are given most prefer to liquidity management or current ratio
to success of business as compare to profitability. Liquidity ratios also use to meet their routine obligations
and mention the business performance.
According to Bhunia (2010), the study of the major effect of both inside and outside of measurements due to
the close relation with their routine operations. Dilemma in liquidity ratio is to complete brief trade- off b/w
current ratio and profitability (Rehemen et.al. 2007)
According to the JC and JM (2008), the liquidity assets consist of cash, profitable securities, and
independent debt fundamental reserve. Current ratio has a fruitful effect in organization like money markets
usually work from side to side the big digit of funds deposits by savers. Current ratio measures a bank
working ability to check the recites and payments tasks by relating the cash and with the payment
responsibilities. Easily convertible assets are good for business like marketable securities are easily
convertible in to cash the form of cash without,( Duijm P Wierts P, 2016).Healthily managed current ratio
administration monitoring regulates more or less supervision judgment on the beginning of one petroleum
current ratio situations to keep away from sufferers (Majid A and Rais A, 2003)The main role of liquidity
risk management is to prospectively evaluate the require of finances to fulfill obligations and createpositive
the ease of understanding of currency or undertaking to fulfill those necessities at the suitabletime by
coordinating the various ways of finances. Liquidity risk management is animportantfactor for risk
management structure of the petroleum industries and other financial institutions as it affects the
fruitlessness (Carlin Bl, Kogan S,& Lowery R, 2013).
According to the Niresh (2012), the sense of the maintaining liquidity within the firm is opportunities cost
of earning profitability. The liquidity administration can be recognizing as the strength of character of any
establishment. Therefore, the liquidity administration has a positive role to a certain extent than other
actions. Without maintaining sufficient liquidity level within the organizations, stakeholders cannot suppose
their future. If the organizations cannot any profit, it is think as the under the weather. But if the
organizationshave not any liquidity, it is downfallen and then died. As with the purpose ofsubstance,
liquidity is the pre- indispensable for formative the continued existence of the business.
According to the Horne (2013), the word leverage may be distinct as the present value revolutionize in
variables by the change or variables. There are following various ways to measure the leverage: Operating

5
leverage, level of operating leverage, financial leverage, level of financial leverage. In the sector of finance
control leverage is used to degree give an explanation for the capability to apply constant value belongings
and budget. Words leverage wonderful as the service of an assets or finance for the agencies will pay a set
fees or constant return. Therefore, in keeping with him a leverage corporation employs assets of finance
which incorporate a everlasting charge of return. In everlasting running fee at the same time as the
concluding can be termed as a unchanging financial prices. Leverage is as well decided through some as
trading injustice and wonderful effect on ROE.
Geogeta and Vintilla et al (2012), the experimental decision shows that far above the ground debt
pointedoutraging impact on debt is used by many organizations to leverage their investment and earnings.
The purpose of his study were to empirically examine the determinates of leverage of scheduled
organizations. The research shows that the both manufacturing and service sectors. The relationship b/w
both sectors are significant, the impact of services sectors are significant discovered that the
developmentspeed, current ratio hasconnection with leverage. Also relationship b/w industrial sectors are
positively liquidity tangible with leverage, (Khalid, Alkatib, 2012). Peswani, Shilpa (2011), in her research
analyses The impact of leverage on company overall performance of the two groups of FMCG sector i. E
Britannia Industries Ltd and Marico Industries. The final results was display the sky-scraping leveraged
from on Britannia Industry Ltd. A high leveraged company were capable of supplied that high ROE to its
traders.
According to Jameel (2004), create out that the value of the firm is dependent on financial leverage, and this
judgment is constant with the well-known view. This study identifies that there are the significant
relationship b/w value of the firm and the financial leverage (Ronald, 1983), (Wippern, 1966). Once another
study of the Kuban (2008) identify that how the volatility of the local interest rate impact on capital
structure. Moreover, he also considers increase in financial leverage negatively correlated with the firm
value. The main objective of this study was to investigate whether capital structures both positive and
negative influence the value of the firm in a South African context.
These research studies try to classify the connection b/w financial leverage and the worth of the
organization. According to Pandey (1993), financial leverage is only the debt capital taken, not the
predilection capital. For the major purpose of this study iscalculated the value of firm by witheffectiveness
and growth ratios. He has mention 3 ways to calculate of the financial leverage as the relative amount of
debt to total capital, the ratio of debt to equity capital, the ratio to fixed charge to net operating income.
ROE and ROE ratios has been taken by (Kuben, 2008), as proxies to measure the firm performance.

6
According to Ahmadu (2015), research financial leverage is employed to improve the ROE. The mix of
corporate loan and equity is planned decision of corporate managers. There are some benefits of the
company can give from raising fund from external sources such as tax because interest is a non – taxable
expense, this will reduce profit. Taqi, khan, and Anwar (2020), has the study measured financial leverage
using debt to equity ratio and debt to total assets ratio and profitability on ROE, Margin ratio and ROE.
They explained the effect of leverage on profitability of India oil and gas sectors b/w during 2008 to
2017.The study using correlation and regression to analysis data E-views and SSP software. According to
results there is significant impact association with sampled Indian oil and gas companies. Hence Anifowose,
Soyebo and Tanimojo,(2020) studied the positive impact of financial leverage on firms profitability in
Nigeria by focusing on listed pharmaceutical firms during 2003 -2018 and also found out debt equity has a
significant positive on results of company.
In a business context operating efficiency is a measurement of recourses allocation and can be defined as the
ratio b/w an output gained from the business and an input to run a business operation. Hence we find out the
value of O.E =Net sales / Total assets.
According to research of Barr, Seiford and Siem(1994), the current circumstances in banking sectors of
operating efficiency is incorporated internationally, it is necessary for commercial banks to build the
appropriate business operations to avoid possibility of give way. Operating efficiency of commercial banks
is a key factor of contributing banks success and failure. Operating efficiency is combinations of resources
of the business operation of any kind of the businessdetermination develop production of commodities and
services existing a company. Operating effectiveness is viewed as the capability of the business to decrease
operating costs in attainting its objectives from side to side combination of right people, process and
knowledge (Shawk, 2008).
Mills and Schumann (1985), study and find out the relationship b/w operating efficiency to companies, the
companies that operate efficiency tend to recover and keep level stability of output and operating
performance compared companies which are less efficient within the industry. The cost saved from income
of pervious function as results of OE can be redirected to new opportunities that add value organizations.
According the study of Kosmidou (2008) says that there is a significant favorable connection of O.E
because if the OE is elevated it gives the guarantee of increase in productivity. Naceur and Goaied (2002)
acknowledged that the finance maintence issues return the insignificant connection with effectiveness. The
significance of money useful for the selection compositions and volume of the corporation. The finance
pretty crucial affects the effectiveness and empowers the corporations to bulk a strong positive in market

7
 (Athanasoglou, Brissimis & Delis, 2008). The ratio to working percentage to overall assets indicates the
green assets utilization and extraordinarily positive impact on effectiveness with giant connection to each
different (Miller& Noulas, 1997; Sufian & Habibullah, 2009).

1.2 Problem Statement

This study has been conducted and observed in abroad and at a very little is studied and observed in
Pakistan and the wide range of knowledge is not available in Pakistan on this topic. There are many
shortcomings in the previous research work. Especially petroleum industry has been neglected, therefore I
have chosen petroleum sector so that I can do a comprehensive study and observation keep in view all the
aspects. So that wide range of knowledge and results can be bxprovided.

1.3 Research Questions

I. What is liquidity has impact on firm performance?

II. What is the impact of Operating efficiency on firm performance?

III. What is the relationship b/w financial leverage on firm performance?

1.4 Research Objectives

I. To identify the impact of liquidity on firm performance.
II. To analyzed the effect of operating efficiency on firm performance.
III. To analyze the impact of financial leverage on firm performance.

1.5 Significance of study

The study demonstrates useful information for businesses to keep the strong financial position that is helpful
for generating the maximum outcome. The study provides the firm base knowledge for students to

8
understand clearly about the effect of liquidity and leverage on business. It also provides wide range of
knowledge about the effect and significance of liquidity and leverage on business, to know the exactly about
the role of liquidity and leverage in business activities.
The study also helps the companies for taking clear and beneficial decisions about the liquidity and financial
leverage of business, it is also helpful for running the business activities smoothly without any shortfall of
the fund. The study also provides the way to the companies for maintaining sensible financial position of
business with decent ratio of liquidity.

1.6 Gap Analysis

Previous study is done in 2019 in the Journal of Finance and Accounting and researchers choose
2007-2015 time of duration. We choose ROA and ROE as proxy variables for agency performance.
The located results of the study indicated that liquidity (LIQ) measured through current property to
modern liabilities, economic leverage (FLIV)on return on equity (ROE) used as performance and Firm
length (FS) and Firm Growth (FG) as a manipulate variable.In the current study researcher choose the
period 2011-2020 to analyze the determinant of strong profits on oil Sectors in Pakistan and added
new variable such as operating efficiency. This is a gap in previous studies and current studies. This
new factor helps oil sectors to make higher profits. Now a day the prices of petroleum is increase
constantly.

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 Chapter 2
2 LITERATURE REVIEW
2.1 Liquidity
According to research study by Padahi conducted in (2016), published in the Journal of International review
of Business research titled as “Trends operationalresourcesorganization and its effect on
businesspresentation: An investigation of Mauritian small industrialized firms. The finding of the paper is a
favorable relationship b/w working capital management and productivity has found in their preceding
research. Further in study it is proved that liquidity has positive effect on the ROE. Similarly, it is also
positive effect on operating efficiency on firm performance.
According to the study by Ugwu et al. (2013), International Journal of Academic multidisciplinary research
“Potential Implication of firm specific factors on insurance profitability in Nigeria”. Firm liquidity, firm
leverage, profitability were independent variables and ROE are the dependentvariables. The impact of the
study was helpful firm size have a potential implication on profitability of insurance. However, the firm
size and firm leverage have negative impact on profitability,
Daniel Mrhari and TilahumAemiro are conducted a research study (2014), in European Scientific Journal
titled as “Firms specific factors that determine insurance companies ‘performance in Ethiopia “. They
selected age of company, size of company, leverage, liquidity was the independent variables and ROE was
dependent variables. They hypothesis size are helpful insurance premium growth on impact of insurance
companies. The findings of the research are showing the insignificant effect of insurance ‘size, leverage and
tangibility of assets were positively related on insurance companies and their related performance.
SairaSundus and Minaam Butt conduct research study in (2021), published International Journal of
commerce and finance on the “Impact of liquidity on profitability and performance. A case of textile sector

10
in Pakistan “. Liquidity ratio, firm size was the independent variables and ROE; ROE was dependent
variables. Hence the fruit able results in firm size and firm liquidity. The liquidity ratio has favorable
association with profitability value both with return on assets. The research is conduct in Pakistan textile
sectors and 152 samples for findings the research results.
According to Al Hamidi et al. a research study in (2020), the Journal of Asian finance economics and
business titled as “The liquidity of Indian Firms “. They selected the leverage ratio, inflation rate, GDP,
exchange rate, interest rate and assets size, capital adequacy, was independent variables and ROE; ROE are
dependent variables in this study. The outcomes of this research are most fruitful the effect of price
increasescharge has a favorable involvement with the liquidity of the listed firm in India the duration of
2010 to 2016. However, the study also shows the LIV ratio, ROA and firm age have a positive association
with liquidity pooled, fixed and random effect models, while the firm size and interest ratio have a fixed and
random. The research is conducted in India .2159 firms selected as samples for the research.
According to the research study by Wan Rozima et al. (2021), the Journal of Banking Accounting and
Finance “The impact of COVID-19 on the financial performance of PN17 and GN3 status firms”. Financial
leverage, liquidity ratio was independent variables and ROE are the dependent variables of the study. The
results are dependents on these variables. There is a positive impact of COIVD-19 pandemic period on the
financial firms. However, liquidity ratio associated with profitability value both shows helpful relation b/w
return on assets. They conducted the research in Malaysia on the firms and the sample size of the research
is 24 to calculate the firm performance during COVID – 19.
According to the research by Varouj A et al. in (2021), on the journal of South Asian journal of finance”
The effect of monetarypower on firm effectiveness: Evidence from non – financial firms scheduled in
Colombo Stock Exchange Sri Lanka “. Liquidity, ROE and profitability are the dependent and independent
variables of the research paper. The finding of the study is helpful impact of financial leverage on firm
performance of the listed companies in Sri – Lanka on non – financial firms. The samples size of the
research is 82 in banking and finance companies in Sri Lanka.
According to the study by Sarah Nabalayo et al. in (2020), on the research journal of finance and accounting
“Assessing the effect of liquidity on profitability of commercial banks in Kenya “. Liquidity, ROE and
profitability are the dependent and independent variables to finding our results. The samples size of the
research is 82 on commercials banks in Kenya. And also conducted the research is Kenya. The result shows
the helpful impact of liquidity and bank effectiveness, on the other hand when currentresources are
apprehendedcompletely they generate little concentration at all.

11
SajidIqbal a et al. conducted a research in (2015), journal of business and management research on the
“Impact of liquidity risk on firm specific factors: A case of Islamic banks in Pakistan”. They selected the
following variables Leverage, liquidity risk, bank size and ROE, profitability are the independent and
independent variables to find out the results of the study there is the fruitful result in return on assets and Co
integrate with liquidity risk. There is a strong relationship b/w ROE and liquidity risk and impact on
Pakistan Islamic banks. The impact of leverage is helpful. The samples of the study are 13 Islamic banks in
Pakistan to find out the favorable bank performance in Pakistan. The research is conducted in capital of
Pakistan Islamabad.
Rizwan Ismail conducts a research in (2016), International journal of Innovation and applied studies on the
“Impact of liquidity management on profitability of Pakistan firms: a case of KSE -100 indexes”. He
selected liquidity, current ratio, quick ratio, cash conversion cycle and firm performance, profitability are
variables of the research to find out the firm performance in Pakistan. The cash ratio is significant associated
with the firm performance. There are favorable relationship b/w cash cycles and return on assets. The
findings of the research are consistent with the study Bagchi et al. The samples of the studies are 100
indexes in Pakistan, and the research conduct in Mirpur University of sciences and technology (MUST)
Mirpur Azad Kashmir, Pakistan. The research showing the positive impact of firm performance.
According to the study by Ehiedu, Victor Chukwunweik (2014), they are founded the current ratio is
favorable impact on correlation with profitability, return on assets. There are the correlation b/w current
ratio and profitability on measure by return on assets. With the help of current ratio, liquidity ratio and ROE,
profitability is the dependent and independent variables of the study. Research journal of finance and
accounting. The samples of the studies are 2 stock exchanges in Nigeria to check out the firm performance.
Research are conducted in Department of Accounting, Banking and Finance, Delta State University Asaba
Campus in Nigeria The studies are showing the favorable performance of firms in Nigeria.
Badreldin F.et al. conducted a study in (2016) Accounting and Finance Department “The impact of liquidity
management on financial performance in Omani Banking sectors”. They selected liquidity risk, loan,
deposit and ROE, net interest margin are dependent and independent variables of the research. There is the
favorable relationship b/w the banks liquidity risk exposure and banks profitability. Hence the relationship
b/w banks loan to total assets, liquidity assets to liquidity liabilities ratio and bank‘s ROE is positive relation
in term of ROE liabilities. The samples of the research are 7 commercial banks in Shalala state EU.
MaziarGhasemi and NazrulHisyamAbRazak conducted a study in (2016), International journal of Economic
and Finance “The impact of liquidity on the capital structure: Evidence from Malaysia” .They are selected

12
current ratio , quick ratio and ROE as the dependent and independent variables on perform on firm
performance. There are helpful relationship b/w liquidity ratio and debt equity ratio. However the liquidity
positive impact on all the proxies of leverage. According to the results, quick ratio has a favorable effect on
leverage. The samples size of the study is 300 Industrial products, proprieties, industry, and consumer
product in Malaysia firms to get our results. The purpose of the to find out the impact of firm performance
in Malaysia.
According to the study by Ehiedu ,Victor Chukwunweik (2014), they are founded the current ratio is
favorable impact on correlation with profitability , return on assets .There are the correlation b/w current
ratio and profitability on measure by return on assets . With the help of current ratio, liquidity ratio and
ROE, profitability is the dependent and independent variables of the study. Research journal of finance and
accounting. The samples of the studies are 2 stock exchanges in Nigeria to check out the firm
performance .Research are conducted in Department of Accounting, Banking and Finance, Delta State
University Asaba Campus in Nigeria The studies are showing the favorable performance of firms in Nigeria
The study is the journal of Asian finance, Economics and Business on the basis of “The impact of corporate
governance on firm performance during the COVID- 19 Pandemic: Evidence from Malaysia”. They selected
the following variables of their study proxies leverage, liquidity, dividend per share and ROE are dependent
and independent variables. The results are fruitful ceteris paribus aboard of independence impact on firm
performance. However they study two types of market larger small size and long term market during
COIVD-19 and the results of the study is favorable. The sample size of the is 188 Non – financial firms in
Malaysia to test and check firm performance in Malaysia during COVID -19 and the research is conduct in
Bahru Johor, Malaysia .(SalehF.A.Khatib , Abdul –Naser Ibrahim Nour , 2021).
According to the study by DedeHertina et al. in (2021), Turkish journal of computer and Mathematics
Education “Company value impact of liquidity, solvability and profitability”. Current ratio, firm size and
ROE the main proxy to find out the results. The results are fruitful profitability has a significant effect on
the firm performance. Liquidity; solvency and profitability in the textile manufacturing in sub-sectors
companies have a positive effect on the firm value. The research conducted in Widyatama University,
Bandung, Indonesia. The sample size of the research is 09 in the listed companies in Sahira Index.
According to the studies by Muhammad Yameen et al.in (2019) Academic journal Interdisciplinary Studies
“The impact of liquidity on firms performance: Empirical Investigation from India Pharmaceutical
companies “.They selected the 82 companies in India for their research purpose and Pharmaceutical
companies and the variables are use in study are current ratio, quick ratio, leverage liquidity and ROE are

13
the dependent and independent variables to find their results. Quick ratio has fruitful results on the position
of Pharmaceutical companies. Current, liquidity, leverage and ROE has a positive relationships. The study
is conducted in UAE. And the hypothesis is significant in this research and positive impact of the firm
performance.
According to the research by Sameer Shekhar and N. Jena in (2020), Solid State Technology “The impact of
liquidity management on profitability of Steel authority of India limited: An Empirical Assessment”. They
conducted the secondary research on SAIL and variables are current ratio , liquidity , total debt ,turn over
and ROC are the proxies to measure the firm performance of the company .Quick ratio has a favorable
impact on ROCE . Hence quick ratio, current ratio, liquidity, total debt assets and return on capital has a
positive impact, therefore the company current ratio has significant impact on return on capital. The
research is conduct in New Delhi India. And the impact of firm performance is positive.

2.2 Operating Efficiency

Stella KemountoRatemo&Dr.F.W.SNded conducted a study in (2021), Journal of Finance and Accounting
“Liquidity risk and financial performance of commercial banks in Kenya “. They selected the liquidity, bank
size, operating efficiency and ROE is the dependent and independent variables to getting the favorable
results. The Hypothesis of the study is helpful to bank size no effect on financial performance of
commercial banks in Kenya. However, the efficiency and effectiveness is a banks is converting assets in to
profits is linked amount of assets its controls. Hence they are using 42 commercial banks for their finding
research hypothesis. The
Research is conducted in Kenyatta University, Kenya.
The study paper is Journal of Finance and Accounting titled as “The effect of liquidity and financial
leverage on firm performance “: Evidence from listed manufacturing firms on the Ghana Stock Exchange.
The sample of the study is in manufacturing firms on the Ghana stock exchange and research conducted in
Zhenjiang in China. The majors finding of the research paper is dependent on these proxies’ leverage,
liquidity, operating efficiency and ROE is dependent our results. Finding of the study is FLIV has a fruitful
relationship effect on the firm performance in scheduleddeveloped industries in Ghana. They also show a
strong relationship b/w financial leverage ratio and firm performance. (Jiang Hongli et al., 2020) conduct
this research.
According to the Josephat Lotto,(2019), Journal Of Lotto Cogent Economics and Finance “Evaluation of
things influencing bank working efficiency in Tanzanian banking sectors”. The sample size of the study is
36 commercial banks in Tanzanian. The hypothesis of the research is” H3: Bank liquidity is expected to

14
have a positive relationship with operating efficiency”. However, there are the most significant relationship
b/w bank workingeffectiveness and businessvolume according to the study. The results are showing the
positive impact of operating efficiency and liquidity. (Ghosh, 2006), who find the significant relationship
b/w Capital law and financial institution efficiency. They disagree those sufficiently capitalized banks are
financially strong. These in the end enhance the banks working performance.Liquidity, operating efficiency
and firm performance used independent and dependent variables.
Khizer Ali &Muhammad FarhanAkhtar et al, (2011), says in their research International Journal of Business
and Social science “Bank specific and Macroeconomic Indicators of Profitability – Empirical Evidence
from the Commercial Banks of Pakistan”. They selected the operating efficiency, consumer inflation rate,
economy growth as an independent variables and firm performance are dependent variables. The
hypothesis of the research is “H1; There is a significant relationship b/w economic factors with operating
efficiency”. Hence the major effective assets management & economic growth establishes significant
relation with profitability of both firm performances. The high credit risk measured by ROE. They selected
public and private commercial banks in Pakistan for research and the sample of the study are 22.

2.3 Hypothesis
H1. There is significant positive effect of financial leverage on firm performance.
H2. Operating efficiency has significant positively influence the firm performance.
H3. There is significant positive relationship b/w liquidity firm performance.

2.4 Research Model

Liquidity
15
 Chapter 3
3 METHODOLOGY
3.1 Introduction
This part of the study is about methods for carrying out the investigation on “Impact of liquidity, leverage
and operating efficiency on firm performance.” This study is conducted on Petroleum industry in Pakistan.
The methodology for current research consisted of the following parts:

3.2 Definitions/Measurement of Variables

A) Independent Variables
i) Liquidity
Liquidity is a term which is use in accounting or finance to change commodities within seconds or few
times. We have a lot of assets to we can change in shortage of time. For example, cash, foreign currency,
stock and bonds etc.
The above mention commodities are easily convertible in market with in time.
Importance of liquidity for financial performance:
Liquidity is a very important factor for our planning investments to make sure they fulfill our long term
goals.
There are a lot of different ways to measure liquidity ratio of any kind of institutions to manage their short
term obligations for different ways like cash ratio, quick ratio, current ratio to check the firm financial
performance (Robinson et al, 2015).
Current Ratio = Current Assets / Current Liabilities
Role of Liquidity Ratio in Investment:
Liquidity of assets helps accelerate transaction.
Liquidity simplifies the selling process.
Liquidity is an overlooked attribute.
Liquidity assets maintain their value.
Financial Leverage
Finance leverage is the amount of the borrowed or debt of the business, investment to increase our business
positions. Leverage is showing to our debt assets to mention our financial position of the business. Also
financial leverage calculated from three different ways; short term, long term and total debt, like in prior
study (Abor, 2005; Ebaid, 2009). The purpose of financial leverage is to increase the expected financial
16
performance measured as Return on One of anotherstudy about financial leverage and he says about
leverage is a debt ratio of organizations, type of financial structure decisions and there is also important for
organizations management in mostly developing nations (Banafa et al, 2015).
Formula
Total debt / total shareholder equity.
Importance of Leverage:
Most of the organizations are using financial leverage finance as an asset. Also stakeholders use it a lot to
increase their returns and provide on an investment. They focus their investment by different ways like
futures a/c margin a/c etc.
Operating Efficiency
Operating efficiency is a ratio of contribution to start a business process and output gain from business. The
input to output ratio improve when operating efficiency improvers. To measure the operational efficiency
researcher used assets turnover ratio this is used to check efficiency by which companies deploy their assets
to generate revenue. Operating ratio is ratio of sales of the company to its assets value. In general speaking,
the company is performing better when its operating ratio is higher
Formula:
Operating Ratio= Operating expenses/ Net Sales.

3.3 Dependent Variables

Firm Performance
Is a term which can consist of the organizational performance, working of the firm and outcome of its
operations? It’s not only focus on organizations efficiency of the organizations it’s also depends on the
market. Firm performance shows the financial health of the organizations.
According to Yuchtman & Se ashore (1967), firms begin to explore various unique ways to start their
performance in 60s to 70s. In this duration presentation were cleared since a businesscapability to utilize
atmosphere for access and by means of the restricted recourses. Firm performance was measured by ROE in
current research.
ROE= Net Income / Total Equity

3.4 Research Population & Sample size

In this study our population is whole petroleum sector (5 petroleum companies) and researcher selected 5
petroleum companies as a sample study:

17
1. Shell (Safety Habitat Education Long Life.)
2. PSO (Pakistan State Oil)
3. Total Parco
4. Attock Petroleum Limited
5. Hascol
Researcher uses the data of time period 2011 – 2020. Researcher selects sample size of companies on the
basis of market capitalization. It may not apply on whole population due to convenient sampling.

3.5 Sampling Techniques

In this study researcher used Non-Probability Sampling (convenient Sampling) techniques for analyzing the
relationship b/w the Liquidity, operating efficiency and leverage and firm performance.

3.6 Econometric Model

Thecurrent study investigates the outcome of liquidity, financial leverage, and operating efficiency on firm
performance.

ROEi , t= β° + β1 LIQi ,t + β2 LEV i , t + β 3 OE i , t +ε i ,t

β˳ = Constant
LIQ = Liquidity
LVE= Leverage
OE= Operating Efficiency
ἱ= Selected firm
Ɛ = Error Term
t= Time series data
ROE= Return on Equity

3.7 Data Collection methods and sources

In this study data used is secondary data registered on Pakistan Stock exchange annual reports, company
financial reports, ratio calculations and business recorder’s websites. The data which is used for study
purpose consist of wide range of different variables which shows their significant relationship with liquidity,
leverage and operating efficiency.

18
3.8 Data analysis Techniques
The study is based on convenient sampling as the data collected from specific petroleum firm’s annual
reports of country. And data analyze by correlation, descriptive and regression. That method is very useful
and easy to explain the study variables effectively.

19
 Chapter 4
4 RESULTS & DISCUSSIONS
The researcher uses the linear regression to check and find the completion b/w impact of financial
leverage; liquidity and operating efficiency on firm performance check the relationship b/w independent
variables and dependent variables. For finding the results researchers use E – views software. In this
research the results are presented by Correlation Matrix, Descriptive Statistics, and Regression. These four
tables showing the connection b/w financial leverage, liquidity and operating efficiency on firm
performance and data is taken for ten years (10 years) from 2011 to 2020.The findings are showing that
there are strong significant and positive relationship b/w liquidity, and operating efficiency on firm
performance and financial leverage has negative impact on firm performance.

4.1 Correlation
Correlation is a study with relationship between variables with another. In another words correlation is study
seeks to form out if two or more variables are connected and, if so, in what way.
Table: 4.1
Correlation Matrix
ROE LIQ LEV OE FS GROWTH
 
ROE  1.000000
LIQ  0.222005  1.000000
LEV   -0.064222 -0.150199  1.000000
OE  0.272410 -0.049688 -0.121115  1.000000
FS -0.328101  0.227760 -0.273245  0.143330  1.000000
GROWTH    0.189864 -0.032075 -0.026368 -0.036512  0.060126  1.000000

To address the problem of multicollinearity correlation matrix check is used. The values of the table monitor
that there's no problem of multicollinearity the various explanatory variables. All the values of variables are
much less than .7 or 70% which shows there's no difficulty of multicollinearity.

4.2 Descriptive Statistics

Descriptive statistics are used to identify the fundamental facial behavioral of the data in our study.

20
Descriptive statistics are measured as mean, medium and mode. Also calculate of unpredictability of
standard deviation, variance, minimum and maximum variables.

Table# 4.2
Descriptive Statistics
ROE LIQ LEV OE FS GROWTH
 Mean    0.208928  1.244172  2.385666  1.491215  16.93427  0.050498
 Median    0.221000  0.915600  1.737400  0.041000  17.49775  0.080766
 Maximum    0.615000  2.609000  5.053000  5.818000  19.84879  0.930105
 Minimum -0.219000  0.086000  1.017000  0.013900  12.32494 -0.750916
 Std. Dev.    0.184530  0.704017  1.466462  2.336141  2.242506  0.444968

After the analysis of data in current research the above table is showing the results of descriptive statistics
for all the variables of current research.

In current research dependent variables is firm performance measure under the proxy ROE is measured by
net income to total equity. The other involved variables are independent variables. As the major focus in
current research was to examine the effect of financial leverage, liquidity and operating efficiency.
The above table famous the descriptive facts of statistics. The average cost of ROE is 0.208928; while the
primary value of the records is 0.221000. The maximum range and minimum variety of the records is
zero.615000 and -0.219000 respectively which depicts that information is normal. There is no distortion
within the information and it's miles indicates the uniformity of records as well. The value of standard
deviation is 0.184530; the figure suggests that dispersion of facts is across the suggest.

Moreover, The mean fee of LIQ is 1.244172 and median fee of statistic is zero.915600. The most value of
LIQ is 2.609000 and minimal discern is 0.086000, whereas the unfold of records of the variable is
zero.704017 that's near about the suggest price. Furthermore, the common value of LVE is 2.385666 and
median fee is 1.737400. The maximum and minimal value of LVE is 5.053000 and 1.017000, at the same
time as the dispersion of LVE is across the imply due to the fact the value of trendy deviation is 1.466462.
Likewise, the average price of OE is1.491215 and significant cost is zero.041000. The highest fee of OE
and lowest price is 5.818000 and 0.0139000 correspondingly. The fee of trendy deviation is two.336141 of
21
OE which depicts that spread of records is close to about imply value. The average value of FS is 16.93427
and median value is 17.93427. The maximum and minimum variety of records is 19.84879 and 12.32494.
The price of fashionable deviation is 2.242506 which are around the mean cost.

Similarly, the average value of FG is 0.050498 whereas; the central value of data is 0.080766. The
maximum value of FG is 0.930105 and minimum value is-0.750916 which depicts that the data is between
the standard limits. The value of standard deviation is 0.444968 which reveal that dispersion of data is
around the mean value Finally, on the basis of above descriptive statistics results which reveal that each and
every value of data is normal and between the limits or range. There is no issue in the data set as well as no
distortion, which means data is on same parity.

4.3 Regression
Regression is a technique to check the relationship between independent variables to dependent variables,

and check how changes independent variables relations into dependent variables.

Regression helps to stakeholders, investors and financial managers to find out the true and accurate value of

assets and understand the relationship between variables.

. Table: 4.3

Regression
Dependent Variable: ROE

Variable Coefficient Std. Error t-Statistic Prob.  

C 1.702000 0.421578 4.037213 0.0002

22
LIQ 0.064839 0.034315 1.889549 0.0512
LEV -0.007046 0.011095 -0.635084 0.5290
OE 0.018999 0.007557 2.514134 0.0161
FS -0.094067 0.023367 -4.025676 0.0002
GROWTH 0.152225 0.052591 2.894520 0.0061

R-squared 0.485278
F-statistic 4.190207    Durbin-Watson stat 2.150183
Prob(F-statistic) 0.000724

In current research the dependent variable is firm performance measured by ROE, independent variables in
current study is financial leverage, liquidity and operating efficiency Above table showing the results for
regression with ROE.
The impact of LIQ on ROE has great due to the fact the cost of chance is equal to five% that is 0.
0661.Likewise the course of dating among those two variables is advantageous as the cost of coefficient is
zero.064839. Furthermore, LEV has insignificant effect on ROE as the chance price is zero.5290 that's more
than five%. The direction of dating between LVE and ROE is bad because the fee of coefficient value is -
zero. 007046.OE has a full-size effect on ROE due to the fact the price of opportunity is much less than five
% that is zero.0161 as the nice coefficient fee is zero.018999.
According to the results shown in table of coefficient value of FS is -0.094067, and the value of probability
is less than 5% which is 0.0002. Moreover, the Growth P value is 0.0061 which is less than 5% and the
coefficient value is 0.152225.
Whereas, the cost of adjusted R- square is 0.485278 which shows that explanatory variables have 48. Fifty
two% power to provide an explanation for the structured variable. The Prob(F-statistic) is large which
represents that the model of the study is healthy for regression; there is no problem inside the health of the
model. As a value of zero.000724. Moreover, the price of Durbin-Watson stat is 2.150183 that is close to
about as the usual value of autocorrelation, it depicts that there's no difficulty of autocorrelation within the
statistics of the study.

23
Summary of accepted / rejected hypotheses
Hypothesis Statement Results
H1.There is significant positive effect of financial leverage on firm performance. Rejected
H2. Operating efficiency has significant positively influence the firm performance. Accepted
H3. There is significant negative relationship among liquidity and firm performance. Accepted

Hypotheses Testing
H1. There is significant positive effect of financial leverage on firm performance.
In current study finding showed that there is insignificant positive effect of financial leverage on firm
performance. Thus the hypothesis formulated for current study H1 is rejected and the findings of current

research are persistent with the results of (Md. Musfiqur RAHMAN &Kawsar JAHAN April, 2020) ,this
study finds ROE has a insignificant negative relationship with STDR ( short term debt to equity),
LTDR( long term to debt equity), ER( equity to total assets) and AGE. This fact can be explained by the
negative trends in profitability measures used during the study period. Observing the data set it is found that
textile firms have experienced low ROE during 2011-2015 and even most of firms have negative
profitability.
H2. Operating efficiency has significant positively influence the firm performance.
In current study finding showed that operating efficiency has a significant positively influence the firm
performance. Thus the hypothesis formulated for current study H2 is accepted and the finding of current
research is persistent with the results of (Josephat Lotto, 2019); Bank liquidity is expected to have a positive
relationship with operating efficiency. However there are the most significant relationship b/w bank
operating efficiency and bank size according to the study. The results are showing the positive impact of
operating efficiency and liquidity.
H3. There is significant positive relationship among liquidity and firm performance.
In current results showed that there is significant positive relationship among liquidity and firm
performance. Hence the hypothesis formulated for current research H3 is accepted. (Mohammad Yameen
Najib and H. S. Farhan,2019), Current ratio and short ratio are taken for measuring corporations’ liquidity
while return on belongings for measuring firms’ performance. This paper found that modern liquidity ratio

24
and quick ratio have an advantageous and tremendous effect on the profitability of pharmaceutical area
measured by using go back on property.

25
 Chapter 5
5 CONCLUSIONS AND RECOMMENDATIONS
5.1 Conclusion
The study on financial leverage, liquidity and operating efficiency Inside the firms are the common
problems going through the survival and operations of firm overall performance with which records on them
are seriously hidden. In order to collect data a sample of as many companies as possible was to be analyzed
in statistical manner.
To test the research questions financial performance was used as dependent variable. Financial performance
was measured by Return on Equity. The independent variables in study are financial leverage, liquidity and
operating efficiency. This study shows the relationship b/w the 4 variables (liquidity, financial leverage, and
operating efficiency) on ROE, which is used as determinants of firm performance.

Data is collected 10 years of 5 petroleum companies (2011- 2020) registered in Pakistan stock exchange that
is used for estimation. Regression and correlation analysis are used for estimation. Descriptive statistics is
also performed to measure mean, median, mode and standard deviation.

Study revealed that operating efficiency has significant positive impact on firm performance (ROE).
Liquidity has insignificant negative effects for firm performance (ROE), and also financial leverage has
insignificantnegative manipulate on firm performance (ROE).

According to Mashhad (2012), liquidity hasanimportantconsequence on firm performance, on the other hand
when liquid resources are held completely they create modest or no importance at all. The researcher
recommends that companiescan increase its liquidity ratios include paying off liabilities, using long-term
financing, optimally managing receivables and payables, and cutting back on certain costs.

According to Josephat Lotto (2019), the research intelligence a statistically majorassociationamong

operating efficiency and firm performance presentationwith the purpose of companies be supposed to put
more importance on improving their ability to createtake-home pay to go up their operational efficiency.
The document, further, shows that benefitexcellence has a statistically importantconnection with business
workingeffectiveness. This implies so as toadministration non-performing loans reduces costs connected
with loans collection and that firms’ most positive use of their asset faculty enhances their incomecapacity.

Edwin, Sawa Wabwile, et al (2014), the outcome of revisionshowstohere is a unconstructive correlation

amongmoney owingbenefitrelation and ROEC and ROCEC even if not noteworthy. That is as the money
owingrelation increases, it funds the banks’ the majorityresourcesbe individual financed by togetherlasting
and temporary liabilities and therefore the come back on such resources as healthy as that on
resourcesworking is concentrated to supply for the wonderful liabilities. Here is encouragingCorrelation

26
between the debt asset ratio and the EPS even if not important. There is a bad correlation among debt ratio
and the PBV even though now not extensive.
The statistical results indicate that the hypothesis of my study is rejected. The results of my study
recommended to policy maker to proper utilize the debt funds.
Hence our H1 is rejected, H3 andH2 areaccepted.

5.2 Recommendations
For future research it is recommended that researchers may research on this topic by using data of different
sectors and of different countries. Researchers may use data of different years and different sample size. In
this study not all factors of firm performance are studied researcher use only few variables in this study
there are many factors are available that effect firm performance, researcher suggested that researchers may
use other factors in their studies and results are different in this study.

According to this study the results are showing the relationship b/w independent variables and
dependent variables on firm performance. Financial leverage has a negative effect on ROE and liquidity and
operating efficiency has a positive effect on ROE.

So the researchers suggested that the stakeholders of Petroleum sectors in Pakistan liquidity has negative
impact on firm performance in future they should be mention their company liquidity ratio or quick ratio.
Operating efficiency has a significant positive impact on firm performance (ROE) then policy makers
increase investments and use portfolio management in future to mention our company financial statements.
Financial leverage has an insignificant negative impact on return on equity the owners of the companies not
proper utilized the debt funds, and the results are negative. In Future then proper utilized their debt funds
then the financial statement results are differing.

5.3 Limitation of Study

The major limitations of this study are sample size, number of years no of industries or sectors, time
constraint is also part of this study. There is no huge amount of time is available that’s why we use small
size of our study, number of years and we take only one oil / energy sector (petroleum) and researcher take
data of Pakistan companies only.
 Data were collected only for ten years regarding only five petrol pumps, so by increasing the sample
size and time period researchers may new insight regarding findings of results.
 By using mediation and moderation study will be more valuables contribution for existing body of
knowledge.

27
  Future researchers can conduct research on basis of comparative analysis of financial and non-
financial sectors as current research based on oil sectors in Pakistan.
Future researcher can conduct the same research for industries other than petroleum industry.

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