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The relationship between profitability and liquidity is inverse.
How does the relationship between profitability and liquidity work?
The foundation of efficient management of current assets and liabilities is short-term financial planning, which is also the starting point for managing liquidity…. The following table demonstrates that the relationship between risk and profitability is inversely proportional, and that profitability moves in tandem with risk.
What kind of link does having plenty of cash have with being profitable?
A company’s equity reserves and growth possibilities both improve when it achieves profitable operations. On the other hand, liquidity refers to a company’s capacity to meet both short-term and long-term commitments, such as the present fraction of liabilities that must be paid in the short run and long-term obligations that must be paid in the future by the company.
What is it that moves in the opposite direction of liquidity?
The profitability of a venture is inversely proportional to its liquidity.
Is there a tension between maintaining profitability and maintaining adequate liquidity?
The goals of liquidity and profitability are in direct opposition to one another in the majority of the decisions that the finance manager takes… On the other hand, an increase in a firm’s return will lead to an increase in the profitability of the company. So, in the day-to-day operations of a company, it is necessary to strike a balance between the company’s ability to preserve liquidity and its ability to generate profits.
GCSE Mathematics: What Does It Mean to Be Inversely Proportional? #91
We found 16 questions connected to this topic.
Why do liquidity and profitability have a negative relationship with one another?
According to the risk and return theory, which states that the higher the risk, the higher the return and vice versa, profitability and liquidity are not in the same line, which means that they have an inverse relationship. This is due to the fact that the more liquid a company is, the more it indicates that its funds are confined to liquid assets, which makes them…
Are there any situations in which liquidity and profitability may coexist?
The degree to which your company has access to liquid resources and its capacity to turn a profit are two of the most critical key performance indicators… Even though your profitability will have an effect on your liquidity, and your liquidity will have an effect on your profitability, the two are not the same thing, but they do go hand in hand. Your liquidity has an impact on your profitability, and your profitability will have an impact on your liquidity.
What is it that moves in the opposite direction of the profit?
The relationship between profitability and liquidity is inverse.
Which of the following has the opposite relationship to profitability?
Profitability and liquidity have a relationship that works in the opposite direction from one another. If there is a high level of liquidity, there will be a correspondingly low level of profitability, and vice versa. The Financial Manager must balance the competing priorities of maintaining liquidity while also increasing profitability.
What impact will it have on the liquidity of a corporation if part of its products are sold directly from inventory?
What impact will it have on the liquidity of a corporation if part of its products are sold directly from inventory? The increase in the company’s liquidity can be attributed to the fact that inventory is being turned into cash (cash being the asset with the highest liquidity).
What is the relationship between liquidity and profitability?
One of the most important factors that goes into determining long-term profitability is liquidity. The primary distinction between profitability and liquidity is that whereas profitability refers to the extent to which a business generates a profit, liquidity refers to an organization’s capacity to rapidly convert assets into cash. This is the most important distinction between the two.
How are the two concepts related to each other in terms of return?
They come to the conclusion that liquidity has a detrimental impact on the risk-adjusted stock returns, and this effect is statistically significant. According to Pastor and Stambaugh (2003), equities that have higher levels of volatility in their liquidity tend to have lower levels of expected returns. The implication of this is that there is a inverse relationship between liquidity and expected returns.
Which of the following assertions provides the most accurate description of the connection between liquidity and profitability?
Which of the following assertions provides the most accurate description of the connection between liquidity and profitability? There is a direct correlation between an asset’s lack of liquidity and the amount of revenue that can be generated from that asset… Both the liquidity and profitability of long-term assets are significantly increased. There is no connection between liquidity and profitability in this situation.
Discuss in a nutshell how the concepts of liquidity and profitability are related to one another.
If a company can earn the short-term capital it needs through normal business operations rather than taking on additional debt, the company’s profits will increase. Hence, profitability describes the amount of money made by a corporation as a result of its activities, whereas liquidity describes the extent to which a company is able to satisfy its short-term requirements for finances.
Explain why a decline in profitability occurs whenever liquidity levels rise.
The possibility of the company going bankrupt has increased as a result of this development. The following is a concise explanation of the risk return syndrome: When there is an increase in liquidity, the risk of going bankrupt is minimized, but this comes at the expense of profitability. Nevertheless, when the liquidity is decreased, not only does the profitability grow, but so does the risk of the company going bankrupt.
How are the two concepts related to one another in terms of profitability and risk?
Profit is a reward for the risk that is taken in business, according to a theory of economics that was proposed by a professor and economist named F.B. Hawley. According to Hawley, the potential financial return for the owner of a firm is proportional to the level of risk that the business faces. The higher the level of risk, the bigger the possible financial reward.
What exactly does it mean to be profitable?
The ratio of an organization’s profits to its operating costs is a key component in determining its profitability. An organization that is less efficient will need to incur greater costs in order to achieve the same level of profit as one that is more efficient; nevertheless, the more efficient organization will realize a greater profit as a percentage of its expenses.
What kind of impact does the current ratio have on profitability?
The current proportion The ratio of a company’s current assets to its current liabilities can be used to evaluate its capacity to meet its short-term financial obligations, such as accounts payable and loans for a limited period of time. Despite the fact that a lack of liquidity could cause a decrease in the company’s energy, it might still have an impact on profitability.
Which of the following does not belong to the category of profitability ratios?
The option (a) cash ratio is the one that should be chosen.
What does the ratio of net profit mean?
Once all of the costs of manufacturing, administration, and financing have been subtracted from sales and income taxes have been realized, the remaining profit is what is referred to as the net profit ratio.
In the context of a business, what role does effective management of working capital play?
Management of the company’s working capital that is both effective and efficient helps to ensure that operations run smoothly and also has the potential to contribute to increases in earnings and profitability. The administration of working capital entails the management of both accounts receivable and accounts payable, in addition to the management of inventories.
Is it possible for a corporation to have sufficient liquid assets but still lose money?
In order for a business to meet the criteria for profitability, the money generated by the operations of the business must be higher than the costs incurred by the business. A corporation can be solvent even if it is not lucrative, but it is impossible for a company to be profitable if it is not solvent.
What are the trade-offs that need to be made between profitability and liquidity?
The question of how an organization should balance maintaining their liquidity while also maximizing their profits has become an important one for all businesses.It all comes down to effectively managing both your present assets and your current liabilities in order to achieve the highest possible level of profitability.When the corporation works toward its goal of having a growing number of current assets and the fewest possible current liabilities, the…
Can you be lucrative but not liquid?
Because accrual accounting is used, it is possible for a business to be profitable while illiquid at the same time.
What kind of relationship does an investment’s level of liquidity have with the rate of return it generates?
In the context of the stock market, shares that are more easily traded would indicate a lower level of investment exit risk for the investor. As a result, they ought to be acknowledged as more desirable assets, meaning that they ought to be granted a higher price and a lower market risk/expected return. Writers like Amihud and Mendelson (1986) are cited in this study.