Impact of Liquidity on Profitability through EBITDA Margin: A Study of Sri Lankan Banking Industry

Arthika Rajaratnam¹ & Nishanthini Andrew^2

1,2 Department Business & Management Studies, Faculty of Communication & Business Studies, Trincomalee Campus, Eastern University, Sri Lanka
DOI – http://doi.org/10.37502/IJSMR.2024.7101

Abstract

Liquidity and the profitability are regarded as the important indicators of the organizational health. As every firms intend to maximize the shareholder wealth, it is essential to keep an eye on the liquidity and profitability. Because, it is generally accepted that the excess liquidity reduces the ability to earn profit and insufficient liquidity will disturb the smooth functioning of the operations. Thus, this study primarily focuses to evaluate the impact of the liquidity on the profitability. Also, the movement of the liquidity and the profitability and income tax has been explored using descriptive statistics. Furthermore, liquidity is operationalized as the Current ratio and liquidity ratio whereas profitability as EBITDA Margin. The study used IBM SPSS statistics 25 to analyze data. Descriptive analysis and regression tests have performed. The results indicated the positive impact of the current and liquidity ratios on the EBITDA Margin. Also, with regard to the income tax, it has specifically shown a decreasing trend from 2018-2022 in the Sri Lankan context. Moreover, the liquidity and the profitability ratios have portrayed a slight decreasing trend from 2012-2022. Most interestingly, this study adds the valuable contribution to the existing literature by using EBITDA Margin to operationalize profitability amongst traditional measures.

Keywords: Liquidity, Profitability, Sri Lanka, Banking Industry

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