Liquidity-Profitability Trade-off: Is it evident among Malaysian SMES?

The purpose of this study is to empirically examine the relation between liquidity and profitability on a sample of small and medium-sized enterprises (SMEs) in the Malaysian manufacturing sector. Using the nonparametric Spearman rank correlation coefficient analysis, the result, surprisingly, reveals that there is a moderate positive association between liquidity and profitability. This suggests that profitable firms tend to maintain higher liquidity levels. The same test is again employed to establish the association between liquidity and size of firms. The result indicates a weak positive correlation between the two variables, signifying, that larger small firms tend to maintain higher liquidity levels. Finally, Kruskal-Wallis test statistic was applied to investigate whether or not different industry sectors had different levels of liquidity. The outcome confirms that different industry sector do have different degree of liquidity.