Impact of liquidity and financial leverage on firm’s profitability – an empirical analysis of the textile industry of Pakistan

Abstract

Purpose

This study aims to determine the impact of liquidity and financial leverage on the profitability, using a sample of 40 selected publicly quoted companies in the textile sector of the Pakistani economy.

Design/methodology/approach

Through quantitative approach, pooled panel regression and descriptive statistics models are used by taking annual data of Pakistan’s textile sectors from 2006 to 2016. Secondary data has been gathered from financial statements of the firms.

Findings

The results revealed that there is a positive relationship between liquidity and profitability and negative relationship between financial leverage and profitability. The results for liquidity measure CR revealed positive strong impact on ROA and the financial leverage measure D_E ratio showed negative but not strong impact on ROA. The other part of result concluded that there is a positive strong impact of C_R on ROE too and D_E has a negative impact on ROE.

Research limitations/implications

The results are showing the impact among these ratios for the textile sector of Pakistan only.

Practical implications

This study can help higher management of textile firms firm in decision-making stating clearly about how to perform well to enhance financial health of company, which can encourage investors to invest in companies having sound market standing.

Originality/value

This study takes the latest empirical data with different analysis technique.

Citation

Samo, A.H. and Murad, H. (2019), "Impact of liquidity and financial leverage on firm’s profitability – an empirical analysis of the textile industry of Pakistan", Research Journal of Textile and Apparel, Vol. 23 No. 4, pp. 291-305. https://doi.org/10.1108/RJTA-09-2018-0055