The Effect of Liquidity and Leverage on Company Profitability

Ernawati Ernawati; Delfian Zaman; PA Andiena Nindya Putri; Klemens Mere; Irwan Moridu

doi:10.55681/economina.v5i10.4587

Authors

Ernawati Universitas Sunan Giri Surabaya, Indonesia
Delfian Zaman Politeknik LP3I, Indonesia
PA Andiena Nindya Putri Institut Teknologi dan Bisnis STIKOM Bali, Indonesia
Klemens Mere Universitas Wisnuwardhana Malang, Indonesia
Irwan Moridu Universitas Muhammadiyah Luwuk, Indonesia

DOI:

https://doi.org/10.55681/economina.v5i10.4587

Abstract

Profitability is a central indicator of corporate financial health, yet the effect of liquidity and leverage on it remains debated. This study examines the effect of liquidity and leverage on company profitability using a literature review method. Secondary data were drawn from peer-reviewed journals and academic textbooks, retrieved from scholarly databases, and analyzed qualitatively through data reduction, data display, and conclusion drawing. The synthesis shows that liquidity is mostly negatively associated with profitability, since excess liquid assets earn lower returns than productive investments, although firms facing uncertain cash flows may rationally hold buffers. The effect of leverage is mixed: moderate debt, especially short-term debt, can support profitability through tax benefits and managerial discipline, whereas excessive or long-term debt may erode earnings and increase distress risk. The findings also suggest that liquidity and leverage are interdependent and should be analyzed jointly. Future research should test these propositions empirically using emerging-market.

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