Abstract :
Purpose: All of the choices made in the workplace concerning cash, receivables, inventory, and payables influence how a corporation maintains its liquidity level. Liquidity plays a vital role in the successful functioning of every business. The important part in managing working capital is maintaining liquidity on a day-to-day basis to ensure the smooth running of the organisation and to meet its obligations. Hence, it is very important to keep a close eye on the liquidity position of the company as without it, the company cannot survive. But efforts to increase the profitability would tend to reduce firms' liquidity and too much attention on liquidity would tend to affect profitability. No doubt, every firm tries to maximise profitability by maintaining liquidity. But the question arises, is it the liquidity or profitability that helps in maximizing shareholder’s wealth by increasing the share price of Indian cement companies? Hence, the study is aimed to understand the impact of liquidity and profitability on the share price of Indian cement companies.
Approach: To determine wheather investors in the cement sector should prefer companies those are liquid or profitable, we applied the t-test, correlation test, and the resultant p-value. It is found that, having a quicker cash conversion cycle (CCCy) increases the company's market value indicating that, higher the liquidity, more is the chances that the share price may go up.
Findings: It is found that the profitability in cement companies isn't as high as the company's ability to pay its debts, i.e. liquidity. In other words, the liquidity of Indian cement companies are more and the profitability is less, and the market value of a firm rises in tandem with the growth in its liquidity. Moreover, when the market value grows, the CCC decreases, whereas the economic value added (EVA) increases.
Value: Prior studies reveal that the working capital requirements of Indian cement companies are much more as compared to other industries. Although low operational cash affects the daily operations of the business, excess working capital usage will harm the firm's profitability. Hence, the question, why do Indian cement businesses need so much of working capital? This study's purpose was to answer it. The findings of this research states that, companies believe that maintaining liquidity will increase their share price.
Paper Type: Conceptual Research
Keyword :
Liquidity, Profitability, Market Capitalization, Economic value added (EVA), Market Price