Relationship between liquidity & profitability position and financial

performance

After analyzed the liquidity and profitability position by calculated the

item such as current ratio, acid ratio, current cash debt coverage, profit
margin, return on assets and return on equity for both liquidity and
profitability ratios. We can see clearly the relationship between liquidity &
profitability position and lead to whether have a good performance of
financial or not.

From the calculation, in the liquidity part shows banks do well

insolvency because banks more liquid in 2015 compared to 2016. This shows
banks can highly liquidate its currents assets well. Unfortunately, in term of
profitability, banks did not do great in gaining profit. Its show 2015 a much
better 2016. This show a negative relationship because in general if banks in
liquid so banks also more profitable.

There is a reason why it shows that kind of relationship. Normally, a

high liquidity is considered to be a sign of financial strength, however high
liquidity also can be undesirable as low and did not gain profit. This would be
a consequence of the fact that current assets are usually less profitable then
fixed assets. Banks only good in current assets that why is show a good in
liquidity ratios but not in non-current assets. Another reason is the amount
employed in current assets also generates additional cost of maintenance
and it will reducing the profitability of the banks.

In conclusion, the greater amount of funds invested in current assets,

lower the profitability because of it less risk. As we know, lower the risk
lowers the profit. That why, Maybanks Islamic bank shows a good in liquidity
but not give much in profitability. So to fixed this, Maybanks Islamic bank
should balance their current assets and non-current asset to get desire profit.

Summary

After evaluate Maybank Islamic bank by calculating liquidity and

profitability ratios, we know the banks financial performance whether good
or not. Purpose of doing this is for customer benefits which is to choose a
bank that have good financial and can give more profit to customer. We have
highlighted four key points. Firstly, in term of liquidity, banks show a good
performance. We can see that in current ratio, shows a bank efficiency
operating circle. It is because the higher the ratio, higher the capable banks
to settle its short term obligation. Secondly, for profitable ratio, it shows a
declining from 2015 to 2016 means bank did not performed well in gaining
income because of banks only focused on current assets. It is because
current assets mean low risk rather than fixed assets. Thirdly, of course the
relationship between liquidity and profitability did not tally and shows a
negative relationship. In general, if banks a liquid stated so banks
automatically should gain more profit. Lastly, we highlighted banks should
maintain or balance between its current asset and non-current assets. It is to
make banks generated more income for the next years. Banks should faces
more risk in order to get more profit. In a nutshell, customer will review
banks financial performance before they want to invest with those banks.

Vieira, R. S. (2010). The relationship between liquidity and profitability (Doctoral dissertation, PhD Thesis.
UMEA University, Sweden).