Liquidity, leverage, and solvency: What affects profitability of industrial enterprises the most?

Abstract

The purpose of this paper is to show the relative impact of liquidity, leverage, and solvency on profitability of industrial enterprises listed on the Amman Stock Exchange to ascertain which of them has the most effect on profitability. To reach the objectives of this study, 44 Jordanian industrial companies are examined from 2012 to 2018. Return on assets (ROA) and return on equity (ROE) are examined as measures of performance, current ratio and quick ratio as measures of liquidity, debt ratio and debt to equity ratio as measures of leverage, and the interest coverage ratio as a measure of financial solvency. Multiple regression analysis was used to check the hypotheses. A negative and statistically significant impact was found at the 1% level between financial leverage and profitability. At the same time, findings did not show the same for the effect of liquidity and solvency on profitability. In addition, leverage has the highest relative impact among independent variables on profitability, followed by solvency and then liquidity. Moreover, it is indicated that company size is a control variable of the effect between liquidity, leverage, and solvency on performance. Thus, it is concluded that management of industrial companies should reduce dependence on debt to finance companies to achieve the highest possible returns; it is recommended to maintain an acceptable level of liquidity to ensure the continuity of companies and attention to the level of solvency within companies to maintain a high financial performance.