Abstract:
The purpose of this study is to examine the relationship between liquidity and profitability of firms at hotels and
travels sector in Sri Lanka. Cash conversion cycle (CCC) and its properties namely accounts receivable
outstanding days (AROD), accounts payable outstanding days (APOD) and inventory outstanding days (IOD)
have been used to explain liquidity management. Profitability is measured through return on asset (ROA), return
on equity (ROE), gross profit margin (GPM) and net profit margin (NPM). Analyzing a sample of 26 randomly
drawn companies listed in Colombo Stock Exchange (CSE) in hotels and travels sector over three years from
2011 to 2013, the study finds that CCC is positively and significantly related to the profitability. Regression
models with AROD, APOD and IOD as predicting variables instead of CCC better explain nearly all profitability
measures. This effect of disaggregation is more sensitive when the profitability is measured in terms of net profit
margin. Hotels and travels companies can increase profitability by allowing more credit outstanding days and
having lower inventory conversion period. Accounts payable outstanding days are found to be insignificantly
related to profitability. The findings reveal the effects of aggregation and de-aggregation of CCC in predicting
profitability of firms in hotels and travels sector. The study also informs the hoteliers and travels firms about
how different components of CCC are to be managed for increased profitability. This investigation is also
significant as prior literature on liquidity and profitability nexus in hotels and travels sector is extremely limited.
Findings obtained here are useful for hoteliers and policy makers to ensure efficient working capital management
at hotel sector in Sri Lanka. Profitability of hotel sector firms in Sri Lanka is investigated in this paper with
aggregated and de-aggregated models of cash conversion cycle.
