The Influence of Liquidity and Leverage on Profitability: An Evidence from Textile Industry of Pakistan

Abstract

The textile business in Pakistan has built exceptional development over the years witnessed by exports of US$21 billion for FY22. Pakistan is the 8th major exporter of textile goods in Asia. The study tried to determine the relationship between the financial leverage and liquidity ratio with the profitability of the textile industry. A sample of 75 listed textile companies was taken for the duration of 2016 to 2020. Panel data analysis was carried out through fixed and random effect models after selection through different methods. The Panel regression showed that there exists a positive significant relationship between liquidity and return on assets. This implies that working capital requirements and liquidity issues fittingly can get significant yields on applied resources and return on assets. Findings also suggest that the asset turnover ratio has a significant relationship with return on equity. Leverage also has a significant relationship with return on equity but the relationship is inverse. This implies that the companies with higher obligations and influence have greater exposure to risk and are not fit to generate good returns.