Paper Title
A Study Of Liquidity And Profitability Relationship: Evidence From Indonesian Capital Market
Abstract
Liquidity and profitability are two important aspects of a company’s health. The higher the liquidity of a
company, the lower the probability that the company could not fulfill its short – term debt. However it means that the funds
are confined and couldn’t be used for productive activities, hence lowering the profitability. On the contrary, the lower the
liquidity of a company, the higher the probability that the company could not fulfill its short – term debt, however it means
that the funds could be used for productive activities or investment, hence improving its profitability. According to the risk
and return theory which states that the higher the risk, the higher the return and vice versa, the relationship between liquidity
and profitability should be a trade – off. However, there have been some studies that gave different results, which indicates
there might be a difference in nature of relationship in different sectors and even different industries or countries. This study
aims to check the relationship between liquidity and profitability in agriculture and consumer goods sectors in Indonesia
between 2005 – 2013, aiming to identify the nature of the relationship and whether the relationship is statistically significant
or not. The result is there are negative relationship between liquidity and profitability indicators, in line with the risk and
return theory.
Keywords- Liquidity, Profitability, Finance, Management, Risk and Return, Indonesia, Agriculture, Consumer Goods