Title: Impact of liquidity and leverage on the profitability of Indian manufacturing firms

Authors: Shilpa Jain; Vijay Kumar Gupta

Addresses: Faculty at Softvision College, Scheme No. 54, Sector-F, Opposite Meghdoot Garden, Vijay Nagar, Indore, M.P., India ' Faculty Block A, Indian Institute of Management, Indore, Prabhandh Shikhar, Indore, M.P., India

Abstract: The purpose of this study is to provide fresh evidence on the impact of liquidity and leverage on profitability, as well as the impact of liquidity on leverage, in Indian manufacturing enterprises. The research also investigates the role of leverage in mediating the relationship between liquidity and profitability. The researchers studied 124 Indian manufacturing businesses included on the S&P BSE Industrial Index from 2011 to 2019. The technique of analysis is structural equation modelling. The empirical findings indicate that the direct influence of liquidity on profitability is positive, implying that enterprises must practise careful working capital management in order to achieve a healthy liquidity profitability trade-off. The indirect impact of liquidity on profitability is also positive, meaning that liquidity allows enterprises to take advantage of favourable financing offers. The second result demonstrates that liquidity has a negative influence on leverage, leading to the conclusion that efficient management of current assets lowers the cost of debt for highly liquid enterprises. The final conclusion suggests that leverage has a detrimental influence on profitability, lending credence to the pecking order idea. The study makes advantage of current data and contributes to the existing literature by presenting management implications.

Keywords: leverage; liquidity; manufacturing firms; profitability; structural equation modelling; SEM.

DOI: 10.1504/AAJFA.2025.144753

Afro-Asian Journal of Finance and Accounting, 2025 Vol.15 No.2, pp.203 - 220

Received: 04 Feb 2022
Received in revised form: 07 Feb 2023
Accepted: 27 Feb 2023
Published online: 03 Mar 2025 *

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