Liquidity of Short-term Assets Related to Debt Paying Ability: An Empirical Study on Pharmaceuticals Sector of Karachi Stock Exchange

Abstract

The study is done to test the facts of statement “liquidity of short-term assets related to debt paying ability” with the help of econometric analysis. In this study the relationship between turnover ratios and liquidity ratios was studied with the help of regression and correlation. In this study the secondary data was collected from 5 self-selected pharmaceuticals companies from the year 2004 to 2014. Dependent variables of the study are net working capital, current ratio, acid test ratio, cash ratio and sales to working capital ratio and independent variables of the study are accounts receivable turnover, accounts receivable turnover in days, inventory turnover, inventory turnover in days and cash conversion cycle. The results studied that ART is positively related with NWC, CR and ATR but negatively related with STW. Moreover, it is studied that ARTD is positively related with CR and ATR, INVT and INVTD is positively related with CR and ATR but INVTD is negatively related with STW. There was no relationship studied between turnover ratios and cash ratio. The study concluded that by managing the turnovers efficiently an entity can easily manage its liquidity. Moreover, it can be concluded by this study that by maintaining the optimal level of liquidity and turnover ratios the short-term debt paying ability will also be improved.

Keywords: Liquidity Ratios, Turnover Ratios, Short-Term Debt Paying Ability, Log-Linear Model.