Liquidity and Profitability

Liquidity and Profitability
An Empirical Analysis of Cement Sector



Generally working capital is a measure of both a company's efficiency and its short-term financial health. The working capital is calculated as:
          Working Capital = Current Assets – Current Liabilities
A firm is required to maintain a balance between liquidity and profitability while conducting its day to day operations. Liquidity is a precondition to ensure that firms are
able to meet its short-term obligations and its continued flow can be guaranteed from a profitable venture. (International Review of Business Research Papers Vo.2 No. 2. October 2006, Pp. 45 -58) by Kesseven Padachi.

Firms with too few current assets may incur shortages and difficulties in maintaining smooth operations (Horne and Wachowicz, 2000). Efficient working capital management involves planning and controlling current assets and current liabilities in a manner that eliminates the risk of inability to meet due short term obligations on the one hand and avoid excessive investment in these assets on the other hand (Eljelly, 2004).One reason for this is that current assets are short-lived investments that are continually being converted into other asset types (Rao 1989). With regard to current liabilities, the firm is responsible for paying these obligations on a timely basis. Liquidity for the on going firm is not reliant on the liquidation value of its assets, but rather on the operating cash flows generated by those assets (Soenen, 1993). Taken together, decisions on the level of different working capital components become frequent, repetitive, and time consuming.

Working Capital Management is a very sensitive area in the field of financial management (Joshi, 1994). It involves the decision of the amount and composition of current assets and the financing of these assets. Current assets include all those assets that in the normal course of business return to the form of...