The speed of transferring assets of an organization in to
cash is referred to as liquidity, as stated in Durrah (2016)[4]. In the same study, current ratio is defined as the organization’s ability to pay short term liabilities. In
other words, the extent to which current assets cover the current liabilities of the organization is
calculated
in current ratio. The
magnitude of the ratio will depict the liquidity position of the organization.
In the study conducted by Durrah et. Al in 2016, it was
found that there was a weak positive relationship between current ratio and the
net profit margin, due to the fact that components in current ratio such as trade
receivables and trade payables had low impact on net profit. However in
the study of Erdogan et Al. (2015), it was found that there was
a significant positive
relationship between the current ratio and the net profit margin. It indicates that, increase in the current ratio will significantly increase the company profitability.
2.2. Earnings Per
Share
Earnings per share ratio is calculated as Net profit after
preference share dividends divided by outstanding number of ordinary
shares. According to Sha(2017)[16],earnings per share showed a significant effect on share prices and net profit of
an organization.
Fama and French quoted in Erdogan et Al. (2015)[5], has
also stated that, stock returns (EPS) has an association with company
profitability. However, in the study conducted by Saputra (2019)[15], it has been mentioned that EPS did not have a significant impact on the profit margin of the company, which is contradicting with the findings of Sha and Erdogan’s findings.
2.3. Gearing Ratio
According to the study
conducted by Hill et. Al (1996), leverage or the
gearing has been calculated as the
ratio between total liabilities to total assets. The same has been used in the study of Erdogan
et Al. (2015)[5]. It was found that the profitability
and leverage had a negative significant relationship between. And according to
Hill’s study in 1996, higher the leverage, higher was the probability of
a firm
pacing
towards
bankruptcy.
This might have been influenced by the higher finance cost resulting from the
higher borrowings, which would have lead to lower profit ratios. In the study of Erdogan et Al. (2015)[5], this finding was proven. Their finding was that, higher gearing will deteriorate
the
company
performance as lenders and banks related to the organization will perceive the higher leverage as having financial difficulties and as an indication of
financial risk. Therefore, a higher leverage ratio would act as a red flag to the organization
