Improving firm value: The role of profitability-liquidity trade-off

Abstract

The purpose of this study is to investigate the firm value associated with profitability and liquidity trade-off. This study is different from previous studies that focus on the trade-off between liquidity and profitability, as well as the relationship between liquidity and profitability, partially with firm value. This study examines the liquidity and profitability trade-off and is associated with firm value in one model by adding the role of sales growth to the liquidity and profitability trade-off. The data used is data from manufacturing companies listed on the Indonesia Stock Exchange, with an observation period from 2016 to 2023. The results showed that liquidity has a partial and negative impact on profitability, profitability has a positive impact on firm value, increased sales moderate the trade-off of profitability and profitability, and profitability mediates liquidity on firm value when the liquidity and profitability trade-off is moderated by sales growth. The practical implications of this study are that in making decisions regarding liquidity, sales growth is an important aspect to consider; increasing company productivity, as indicated by sales growth, is an ideal condition to increase liquidity, which means the company uses internal funding rather than external funding, which is difficult to obtain and costly, so that profitability increases and company value will increase.