A Study on Liquidity and Profitability in Selected Indian Software Companies

Abstract

The present research paper mainly focused on the relationship between liquidity and profitability in selected software companies from the Information Technology sector of India. For the purpose of the study six software companies have been chosen- four top software companies is such as TCS, Infosys, Wipro, HCL and two medium size firms such as Mindtree and Infotech interms of sales have been selected in order to know the size effect of the software companies. The overall working capital management variables mainly liquidity ratio, cash to current liabilities ratio, interval measure ratio, working capital policies in level and financing of current assets –current assets/ non-current asset ratio and share of current liabilities to current assets (short- term financing), profitability ratios such as rate of return on equity and capital employed/net assets have been computed and examined over a period of ten years. The study reveals that when we correlate the liquidity ratios along with level and financing of current assets- liquidity ratios -liquidity and rate of return on equity and capital employed ratios –profitability all sample units together the relationship between liquidity and profitability have not been established among sample units. However, when we correlate the cash levels in terms current assets, current liabilities- gross profit, maintenance of liquidity assets to meet operating expenditure  in terms of no. of days and cash turnover ratios to  profitability ratios- rate of return on equity and capital employed. We can observed negative relationship between  liquidity and profitability have been established among sample units- higher the cash levels lower the profitability and vice-versa.