The impact of liquidity management on financial performance: a study of listed manufacturing companies on Colombo stock exchange

Abstract

This study assesses the relationship between liquidity management and financial performance in a sample of manufacturing firms listed in the Colombo Stock Exchange, in Sri Lanka, between the years 2016 to 2020. This research aims to analyse and investigate the impact of liquidity management on financial performance, by considering the listed manufacturing companies on Colombo Stock Exchange in Sri Lanka and gain an insight on the impact of firm’s liquidity position on its financial ratios. It further assesses whether there is any existence of trade-off between the two aspects. The study utilized the financial data published in the firms’ Annual Reports to assess the relationship between the variables of the two financial aspects, by conducting descriptive and regression analysis. It was observed that when measured with Return on Capital Employed and, financial performance had a significant positive relationship with liquidity, supporting the Hirigoyen Anti Trade-Off Hypothesis. Whereas it was observed that when measured with Price Earnings Ratio and, financial performance had a significant negative relationship with liquidity, supporting the trade-off theory. Also observed that when measured with Return on Investment and, financial performance had an insignificant negative relationship with liquidity. This deduces that there is a higher possibility of a negative relationship liquidity management and financial performance in the listed manufacturing firms on CSE, indicating that a minimum level of liquidity enable firms to increase its financial performance. The study demonstrates an exploratory nature and its deductions are limited to the Sri Lankan manufacturing industry and to the years observed.