Impact of liquidity on profitability on Nepalese finance company

Abstract

The purpose of this study is to evaluate the impact of liquidity on the financial performance of Nepalese finance firms. This study is being done to determine the connection between the finance industry's liquidity and profitability in Nepal. The findings highlight several key points. Firstly, liquidity management, as indicated by the Current Ratio (CR) and Loan to Deposit Ratio (LDR), plays a critical role in determining the financial health and stability of finance companies. Companies with higher liquidity ratios are better positioned to meet short-term obligations and withstand financial shocks. The comprehensive analysis conducted on the financial metrics and performance indicators of finance companies in Nepal provides valuable insights into the dynamics of the sector. Through descriptive statistics and regression analysis, we have gained a deeper understanding of the relationships between key financial metrics such as Return on Assets (ROA), Return on Equity (ROE), liquidity ratios, leverage ratios, capital adequacy ratios, and loan to deposit ratios. Secondly, leverage ratios, including Debt to Assets Ratio (DAR) and Debt to Equity Ratio (DER), demonstrate the extent to which finance companies rely on debt financing. While moderate leverage can enhance returns, excessive leverage increases financial risk and can erode profitability. Our analysis reveals a positive relationship between leverage ratios and performance indicators, suggesting that judicious use of leverage can contribute to higher returns on assets and equity. The regression analysis further reinforces these findings, revealing significant positive relationships between performance indicators (ROA and ROE) and liquidity ratios, leverage ratios, and capital adequacy ratios. These results underscore the importance of a balanced approach to financial management, where companies optimize liquidity, leverage, and capital structure to maximize returns while mitigating risks. In practical terms, the insights generated from this analysis have implications for strategic decision-making and risk management within finance companies in Nepal. Keywords: Current Ratio, Quick Ratio and Leverage Ratio, Insurance Premium, solvency Ratio, Liquidity, Profitability, ROA, ROE