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Liquidity ‐ profitability tradeoff: An empirical investigation in an emerging market

Abuzar M.A. Eljelly (Assistant Professor of Finance, King Saud University, Saudi Arabia, Department of Business Administration, College of Administrative Studies, P.O. Box 2459 Riyadh, 11451, Saudi Arabia)

International Journal of Commerce and Management

ISSN: 1056-9219

Article publication date: 31 May 2004



This study empirically examines the relation between profitability and liquidity, as measured by current ratio and cash gap (cash conversion cycle) on a sample of joint stock companies in Saudi Arabia. Using correlation and regression analysis the study found significant negative relation between the firm’s profitability and its liquidity level, as measured by current ratio. This relationship is more evident in firms with high current ratios and longer cash conversion cycles. At the industry level, however, the study found that the cash conversion cycle or the cash gap is of more importance as a measure of liquidity than current ratio that affects profitability. The size variable is also found to have significant effect on profitability at the industry level. Finally, the results are stable over the period under study.



Eljelly, A.M.A. (2004), "Liquidity ‐ profitability tradeoff: An empirical investigation in an emerging market", International Journal of Commerce and Management, Vol. 14 No. 2, pp. 48-61.



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Copyright © 2004, Emerald Group Publishing Limited

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