Liquidity profitability trade-off: Evidence from medium enterprises

Slavica Stevanovic; Jelena Minovic; Isidora Ljumovic

doi:10.7595/management.fon.2019.0004

Slavica Stevanovic Institute of Economic Sciences
Jelena Minovic Institute of Economic Sciences
Isidora Ljumovic Institute of Economic Sciences

DOI: https://doi.org/10.7595/management.fon.2019.0004

Abstract

Research Question: This paper examines the impact of liquidity on the profitability of the Serbian polluting medium sized enterprises. Motivation: We study the impact of traditional liquidity indicators and indicators based on cash flow on the profitability. In domestic literature, a contribution in the field of financial stability analysis based on cash-flow is rare, consequently we use cash flow indicators as a liquidity measure. Focus of this paper is on the medium sized enterprises in Serbia being the major sources of environmental pollution. Medium-sized enterprises are the main drivers of economic growth. For improving environmental performance and applying technologies and processes that meet environmental requirements, it is necessary the liquidity and profitability improvement. The progress in the area of environmental protection is the relevant part of the accession process of Serbia to the EU. Idea: The idea of this paper was to empirically examine the liquidity profitability trade-off of selected enterprises. The research was conducted using return on assets as the dependent variable, and three liquidity ratios and three cash flow based indicators as independent variables. Data: The financial analysis is based on the sample of 48 polluting medium-sized enterprises for the period 2010-2015. The official financial statements were taken from the Serbian Business Registers Agency. The data are used on an annual basis. Tools: We tested the panel regression model of profitability with the total number of observations being 288. We estimated the unbalanced panel because our dataset had missing values. It is used the standard pooled OLS estimator. Before estimated panel regression model, we did stationarity and cointegration analysis of sample data. Findings: The results of our study show a significant impact of quick liquidity ratio, cash flow operating margin and cash flow investing margin on profitability measured by return on assets. However, there are no significant effects of current liquidity ratio, operating cash flow liquidity ratio and cash flow financing margin on profitability. The conclusions of our paper refer to the selected enterprises in the observed periods. Contribution: This paper contributes both to the literature concerning liquidity and profitability analysis, since we use cash flow indicators as a liquidity measure.

Author Biographies

Slavica Stevanovic, Institute of Economic Sciences

Slavica Stevanović, PhD is employed as a Research Associate at the Institute of Economic Sciences in Belgrade. She graduated and she got her magister degree at the Faculty of Economics, University of Belgrade. She acquired her PhD degree at the Belgrade Banking Academy - Faculty for Banking, Insurance, and Financing, University Union in Belgrade. Slavica participated in international and national scientific conferences and was an author and co-author of numerous scientific papers. Her research interests are financial reporting and analyses, cash flow analyses, accounting, and environmental reporting and accounting. She is engaged in several domestic and international projects, and she is an editor of the annual publication named: National Network for Medium Enterprises in the Republic of Serbia, published by the Institute of Economic Sciences.

Jelena Minovic, Institute of Economic Sciences

Jelena Minović, PhD is Senior Research Associate at the Institute of Economic Sciences in Belgrade. She acquired her PhD degree (2012) at the Faculty of Economics, University of Belgrade. Jelena completed her studies at the European Business School (EBS University) in Wiesbaden, Germany for post-doc research stay from May 2013 to August 2013. Jelena participated in many international and national conferences. She was an author and co-author of a significant number of papers (about 70). Her research interests are: Quantitative Methods and Models in Finance and Economics, Econometrics, Time Series Analysis, Financial Economics and Financial Markets. Her articles have been published in various international journals, such as Applied Economics, Economic Research, Panoeconomicus, Engineering Economics, International Journal of Engineering Education, Economic Annals, Theoretical and Applied Economics, and others.

Isidora Ljumovic, Institute of Economic Sciences

Isidora Ljumović, PhD is employed as a Senior Research Associate at the Institute of Economic Sciences in Belgrade. She graduated in the field of organizational sciences, and she got her master and PhD degrees in the field of banking. She is engaged in several domestic and international projects, among which are projects financed by the MESTD RoS, the World Bank, the European Union and other international donors. She has published two monographs, numerous scientific papers in domestic and international scientific journals and has participated in scientific conferences in Serbia and abroad.