Liquidity and Financial Performance in Industry Firms Steel listed in the Ha

Noi Securities Exchange in Viet Nam

Goup:….
National Economics University (NEU-VN)

Email:
info@vietstock.vn

Abstract
Liquidity management is vital to make decision in financial management. The purpose of the research paper is to
examine the financial performance of selected units in the steel company in Vietnam in terms of financial ratios
such as liquidity and profitability position. The data was extracted from the audited financial statement for the
period 2011 to 2020. The study sample comprises of 20 companies having high market capitalization and some of
which do not have data for the study period. The study is divided into these sections: section 1 demonstrates the
steel industry, section 2 reviews the literature, section 3 illustrates research methodology, section 4 discusses the
data used and section 5 concludes.
Keywords: Liquidity, financial performance, Industry firms steel , Ha Noi Securities Exchange, return on
assets, return on equity, earnings per share
1. Introduction
Steel is considered crucial to the development of any modern economy all over the world because of the role
played in infrastructional. The steel industry grew out of the need for stronger and more easily produced metals.
Technological advances in steelmaking during the last half of the 19 th century helped steel industry become the
backbone of the economic growth. Before 1850, steel was an expensive product, made in small quantities and
used mostly for swords, tools and cutlery. History of the modern steel industry began in the late 1850s and since
then steel has been basic to the world’s industrial economy. Since 2002, China has become the world’s steel
exporting power. In 2003, China accounted for one third of the world production (300 million tons) and at present
it’s the most powerful producing country in the world (over 50%).
Vietnam’s economy has been rapidly increasing for many years, but wages of the manufacturing are still at a low
level, which was less than 50% in China and far below that of the developed countries in 2018. In fact, the living
standards of residents rise and the demand for steel in the industries such as construction, automobiles and home
appliances is also going up. The rapid development of steel demand has attracted many steel enterprises to build
new steel capacity in Vietnam.
In 2020, Viet Nam has a development platform with high growth rate, good quality assurance, sufficient quantity
and variety of products to meet the needs of economic growth. Thus, the demand for steel in 2010, 2015 and 2020
was 10 million tons, 16 million tons and 20 million tons respectively . There are many small steel companies in
Vietnam with the leadership Hoa Phat company having more than 154 thousand of billions market capitalization.
Vietnam’s steel industry in 2020 also recorded positive sign in the situation that the Covid 19 epidemic is still
affecting many economic sectors in the world in general and Vietnam in particular. According to the numbers
accumulating in the whole year 2020, Vietnam produced 17,219 million tons of crude steel, up 14% over the same
period in 2019. Sales reached 3,236.794 tons which was 3.55 times higher than that of 2019.
Studies has been conducted locally to examine the factors affecting the performance of steel firms listed in the
stock exchange. The existence of a trade-off between liquidity and profitability has been referred to their
significant signs of companies Raheman &Nasr (2007). Liquidity management plays an important role in a firm’s
profitability and risk as well as its value Smith (1980). According to theory of risk and return, investment with
more risk will result to more return. Thus, firms with high liquidity of working capital may have low risk then low
profitability. For that reason, an enterprise has to seek an optimal level of liquidity and profitability and maintain
its position around this level in order to ensure long term success of the business. Liquidity management ensures
that the firm has the ability to meet current obligations and profitability management makes sure that the firm is
able to earn revenue that exceeds its cost. In the financial analysis , profitability is measured through profitability
ratios including net profit margin, ROA, ROE and EPS. While liquidity is measured by a set of ratios which are
current ratio, quick ratio and inventory turnover ratio.
2.0. Theoretical Review
A theory is required in guiding research in the identification of the variables to measure and the statistical
relationships to look for in the context of the study (Trochim, 2006). Therefore, this study was informed by the
liquidity preference theory. According to Jhingan (2004), this theory was envolved after the great depression in
the 1930’s by Keynes. Keynes outlined three motives for holding money as: (i) transaction motive- for bridging
the receipt and expenditure gap; (ii) the precautionary motive-to provide a reservoir of purchasing power that can
be used to finance unanticipated expenditures, and (iii) the speculative motive-to satisfy the desire to hold wealth
in the most liquid form if one expects interest rates on alternative assets to rise, thereby causing capital losses. The
liquidity preference theory is related to this study because it explains the link between liquidity and financial
performance. 20 steel-producing companies listed on the stock exchange may sometimes prefer to hold cash,
which entails less risk. The more liquid an investment, the easier it is to dispose for its full value. Liquidity
preference theory will determine the amount of capital which is available for investment and spending and as a
result, affecting financial performance of the firms.

3.0. Methodology
The research design was descriptive and explanatory to bring out the correlation of variables consistent with
Saunders, Lewis & Thornhill (2012). Secondary data was extracted from the audited financial statements of the 20
listed steel-producing companies for the period 2011 to 2020. Liquidity ratios and financial performance measures
(ROA, ROE, and EPS) were calculated. Diagnostic tests were conducted to confirm the assumptions of the OLS.
A pooled OLS regression model was used to estimate the relationship between liquidity and financial
performance using the following model in Eviews software
Y =β0 + β1X + µ
Where;
Y = Financial performance as proxied by return on assets (ROA), return on assets (ROE) and earnings per share
(EPS).
X= Liquidity (Liquidity ratios)
The specific models are as
follows; ROA =β0 + β1 Liquidity +
µ
ROE = β0 + β1 Liquidity + µ
EPS = β0 + β1 Liquidity + µ
In the model, β0 = the constant term. While the coefficient β ii= 1 measures sensitivity of Financial performance to
unit change in liquidity to; µ = error term the model significance test using ANOVA and coefficient of
determination was calculated. Significance was determined using a critical p value of 0.05.
4.1. Findings
4.2. Descriptive Statistics and trend analysis
4.2.1 Current Ratio (CR)
 Curent Ratio Mean
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
2010 2012 2014 2016 2018 2020 2022

As Figure 1 and table 1 shows the CR trend for the 20 companies from the year 2011 to 2020. The trend indicates
that CR has been did not change. Almost every year the Current Ratio is greater than 1 and rate peaked at 1,6 in
2020

Figure 1 CR Trend
 Table 1: Trend analysis for CR
N Mean Std. Std. Error Minimum Maximum
Deviation
2011 12 1.19017 .31923 .56500 .87500 1.99200
2012 13 1.08677 .23220 .48187 .74322 1.49897
2013 18 1.01991 .26579 .51555 .46795 1.60960
2014 20 1.06030 .23569 .48548 .59554 1.48307
2015 20 1.13828 .47820 .69152 .16918 2.29944
2016 20 1.29434 .53631 .73233 .45509 2.64174
2017 19 1.29434 .66630 .81627 .24255 3.48962
2018 20 1.31135 .38359 .61934 .31020 2.00158
2019 19 1.05911 .51649 .71867 .37662 2.78549
2020 12 1.51450 .16313 .07849 .58107 4.87072
4.2.2 Return on Assets (ROA)

Mean of ROA
0.14

0.12

0.1

0.08

0.06

0.04

0.02

0
2010 2012 2014 2016 2018 2020 2022

Figure 1 and table 1 shows the ROA trend for about the 20 companies from the year 2011 to 2020. Overall, the
trend indicates that ROA has been fluctuated even through 2010 to 2021. The typical there was a great drop in the
year 2013 and 2019. There was a significant increase in the ROA 2015 to 2017 and then decline drammatically in
2019
Figure 2 ROA Trend
 Table 2: Trend Analysis for ROA
N Mean Std. Std. Error Minimum Maximum
Deviation
2011 12 .09798 .15738 .39671 -.07026 .47257
2012 13 .04308 .12650 .35566 -.13046 .31726
2013 18 .02972 .12607 .35506 -.16640 .36176
2014 20 .04090 .12243 .34991 -.14346 .27739
2015 20 .04296 .18158 .42612 -.36448 .39260
2016 20 .11524 .18773 .43328 -.24988 .51334
2017 19 .12139 .19900 .44610 -.26767 .61241
2018 20 .09156 .17068 .41314 -.17217 .45595
2019 19 .05290 .21681 .46563 -.28320 .58049
2020 12 .12766 .26117 .51105 -.25551 .73324
4.2.3 Return on Equity (ROE)

0.3
Mean of ROE
0.25

0.2

0.15

0.1

0.05

0
2010 2012 2014 2016 2018 2020 2022

Figure 2 and table 2 shows the ROE trend for the 20 companies from the year 2011 to 2020. The trend indicates
that ROE has been fluctuated. In the year 2010 to 2015 there was a strong downward trend and in the following 5
years it increased sharply, reaching its peak in 2016
Figure 3 ROE Trend
Table 3 Trend Analysis for ROE Trend
N Mean Std. Std. Error Minimum Maximum
Deviation
2011 12 .21488 .39693 .63003 -.30179 .90380
2012 13 .08696 .44759 .66902 -.57849 .87117
2013 18 .04663 .40512 .63649 -.91460 .88980
2014 20 .06524 .39158 .62576 -.73004 .86528
2015 20 .05186 .36267 .60222 -.52772 .77339
2016 20 .24661 .31016 .55692 -.29452 .92326
2017 19 .24520 .37181 .60976 -.56006 .96793
2018 20 .18800 .42030 .64831 -.60905 99076
2019 19 .16866 .87357 .93465 -.32589 3.20939
2020 12 .24005 .38946 .62407 -.31906 1.07766
4.2.4 Earnings per Share (EPS)

Mean of EPS
4
3.5
3
2.5
2
1.5
1
0.5
0
2010
-0.5 2012 2014 2016 2018 2020 2022
-1

Figure 4 and table 4 shows the EPS trend for the 20 companies from the year 20011 to 2020. The trend illustrate
that EPS has been on the rise with the year 2016 registering the highest mean. And three years later, it plummed,
reaching the lowest value in 2019.

Figure 4 EPS Trend

Table 4 Trend Analysis for EPS
N Mean Std. Std. Error Minimum Maximum
Deviation
2011 12 2.20758 1.18162 1.08702 0.48 3.907
2012 13 .77338 1.78923 1.33762 -3.52 4
2013 18 .85311 1.97024 1.40365 -1.56 6
2014 20 .8192 1.97071 1.40382 -3.7 6.44
2015 20 .724 3.03182 1.74121 -6.643 7
2016 20 3.309 3.60285 1.89812 0.01 12.277
2017 19 3.10921 2.30535 1.51834 0.08 7.14
2018 20 .82485 2.26152 1.50384 -4.42 4.675
2019 19 -.36958 3.47147 1.86319 -13.25 2.73
2020 12 1.65608 1.29785 1.13923 0.56 4.932
4.3. Correlation Analysis
Table 5 presents the results of the correlation analysis between Lyquidity and ROA, ROE and EPS. The results
shows that Liquidity and ROA is positively and significantly related (r=0.900, p=0.0001), positively and
significantly related with ROE (r=0.775, p=0.0021) and positively and insignificantly related to EPS (r=0.546,
p=0.0033).
 Table 5: Correlation Analysis Results
ROA ROE EPS Liquidity
ROA Pearson Correlation 1.000
Sig. (2-tailed)
ROE Pearson Correlation .949** 1.000
Sig. (2-tailed) 0.000
EPS Pearson Correlation .760* .657* 1.000
Sig. (2-tailed) 0.001 0.0055
Liquidity Pearson Correlation .09** .775** .546 1.000
Sig. (2-tailed) 0.0001 0.0021 0.0033
** Correlation is significant at the 0.01 level (2-tailed).
* Correlation is significant at the 0.05 level (2-tailed).
4.4. Regression analysis
Regression analysis was conducted to empirically determine whether liquidity were a significant determinant of
performance which is measured in ROA, ROE and EPS. Regression results presented in table 6 below indicate the
goodness of fit for the regression between liquidity and ROA is 0.305. An R squared of 0.305 indicates that
30.5per cent of the variations in ROA are explained by liquidity. While 40.9 per cent of ROE is explained by
liquidity and 29.85 per cent of EPS is explained by liquidity. The overall model significance is also presented in
table 6. The overall model of ROA was significant with an F statistic of 3.5184. The overall model of ROE was
significant with an F statistic of 5.551 while for EPS was insignificant with F statistic of 34.045. The relationship
between liquidity and ROA is positive and significant (b1=0.2207, p value, 0.0004). Liquidity and ROE is
positive and significant (b1=0.367, p value, 0.0462). Liquidity and EPS is positive and insignificant (b1=4.0968, p
value, 0.1022).
Table 6: Regression Analysis for Liquidity and Financial Performance (ROA, ROE, and EPS)
ROA ROE EPS
Parameter estimate Coefficient(P value) Coefficient(P value) Coefficient(P value
Constant -0.187855 (0.0033) -0.276 (0.1799) -3.512(0.2259)
Liquidity 0.220730 (0.0004) 0.367 (0.0462) 4.0968(0.1022)
R Squared 0.305 0.409 0.2985
F statistic (ANOVA) 3.5184 5.551 34.045
The regression equation is as follows;
ROA = 0.053 + 0.014Liquidity
ROE = 0.090 + 0.017 Liquidity
The null hypothesis was that liquidity had no significant relationship with financial performance. The alternative
hypothesis was that liquidity had a significant relationship with financial performance. Since two attributes had a
p value of less than 0.05 (ROA had a p value of 0.0033 and ROE had a p value of 0.0462), the overall hypothesis
was rejected and the alternative hypothesis adopted. In conclusion, liquidity had a significant and positive
relationship with financial performance.
5.0. Discussion of the results
The objective of the study was to establish the effect of liquidity on the financial performance. The trend line
indicates that liquidity trend has been on the rise. The findings have revealed that liquidity has a positive influence
on return on assets (ROA). This finding is supported by the coefficient of determination which shows that the
variations in ROA are explained by liquidity. The influence of liquidity on ROA is also statistically significant
and hence the alternate hypothesis has been accepted. In addition, the findings revealed that liquidity had a
positive influence on return on equity (ROE). This finding is supported by the coefficient of determination which
shows that the variations in ROE are explained by liquidity. The influence of liquidity on ROE is also statistically
significant and hence the alternate hypothesis has been accepted. Further, the results indicated that liquidity had a
positive influence on earnings per share (EPS). The influence of liquidity on EPS is not statistically significant.
The correlation results show that liquidity and ROA is
positively and significantly related, positively and
significantly related with ROE and positively, and
insignificantly related to EPS. These findings agree with
those of Omondi and Muturi, (2013), whose findings
revealed that liquidity had a significant positive relationship
with financial performance. The study also provides
evidence to infer that liquidity plays an important role in
improving the firm’s financial performance. Thus, firms
with optimum levels of liquidity report better financial
performance as a result of the risk-return tradeoff. This is
consistent with Nyabwanga, Ojera, Otieno & Nyakundi
(2013); Myer, (2005) who stated that there is a trade-off
between liquidity and profitability; gaining more of one
ordinarily means giving up some of the other.
On the other hand, Shleifer and Vishny (1994) did a study
on liquidity of firms in Korea. According to the results
obtained from the hypotheses, generally, modern liquidity
criteria provide more accurate and more significant
influence on performance appraisal of profitable companies
in comparison to modern liquidity criteria of performance
appraisal in unprofitable companies for financial
information users to make optimally decisions. Further,
Abeysekera and Guthrie (2005) in a study entitled "working
capital management, operating cash flow and company
performance" studied the relationship between working
capital management, company performance and cash
activation among 5802 companies from 1990 to 2004. The
results indicated that managers could increase profitability
and cash flow through shortening cash conversion cycle and
collection period of receivable accounts and they could
decrease profitability and cash flow via prolonging due date
of payable accounts. The findings are also consistent with
Liargovas & Skandalis, (2008); Lamberg, & Vålming,
(2009); Chandran, (2008), who concluded that liquidity had
a positive relationship with financial performance.
Although there are different approaches to evaluation of
liquidity profitability trade-off, most authors use panel data
regressions with profitability measure as a dependent
variable and liquidity indicators as explanatory variables.
Commonly used liquidity ratios are the current ratio and the
quick (or acid test) ratio (Vishnani & Bhupesh, 2007;
Bhunia &Khan, 2011). This is consistent with this study.
6.0. Conclusion
This article aimed to investigate the relationship between
liquidity and financial performance of steel firms listed on
Vietnam Stock Exchange using financial statement of 20
companies for the period of 10 years from 2011 to 2020.
From the study, we show that higher liquidity leads to better
performance. Current ratio and quick ratio are taken for
measuring firms’ liquidity while return on assets for
measuring firms’ performance. This paper found that
current liquidity ratio and quick ratio have a positive and
significant impact on the profitability of steel sector
measured by return on assets. This topic has attracted many
researchers to identify the association between liquidity and
profitability, because of the special importance that liquidity
has. This paper will be useful for scholars, finance
managers and other people concerned about liquidity in
order to understand its importance.
7.0. Recommendation and Areas for further research
The study was limited to one variable (liquidity) that affects
the financial performance of the listed steel companies in
the securities market. Thus, more research should be carried
out to determine how other variables affect financial
performance.
This study is limited to listed 20 steel companies in Vietnam
and it is confined to a 10-year period from 2011 to 2020. It
was also based on secondary data obtained from the annual
reports of the sampled firms. Therefore, further research can
be conducted on other sectors or industries of the economy
and a detailed analysis covering a longer period of time may
give a varying result. In addition, analysis using both
quantitative and qualitative data may improve the quality of
the result.
Conflicts arise always between liquidity of a firm and its
profitability. The conflict arises because the maximization
of firm’s returns could seriously threaten the liquidity and
on the other hand, the pursuit of liquidity has a tendency to
dilute returns. The study therefore recommends that
financial managers should ensure that there is no mismatch
between the current assets and current liability.

References
Abeysekera, I. & Guthrie, J. (2005). An empirical
investigation of annual reporting trends of
intellectual capital in Sri Lanka. Critical
Perspectives on accounting, 16(3), 151-163.
Amadi, S. N. & Akani, W. H. (2005). Interest rate and
private domestic investment in Nigeria (1993-
2004). Niger Delta University Press.
Bhunia, A. & Khan, I.U. (2011). Liquidity Management Efficiency of Indian Steal
Companies: A Case Study. Far East Journal of Psychology and Business, 3(3), 3-13.
Chandran, E. (2008). Research Methods: A Quantitative Approach with Illustrations from
Christian Ministries.
Nairobi, KE: Daystar University.
Jhingan, M. L. (2004). Advanced Economic Theory (Micro & Macroeconomics). 12th Ed.
New Delhi, India: Vrinda Publications (P) Ltd.
Lamberg, S., & Vålming, S. (2009). Impact of Liquidity Management of Profitability: A
Study of the Adaptation of Liquidity Strategies in a Financial Crisis. Umea School
of Business, MX: USBE
Liargovas, P., & Skandalis, K. (2008). Factor affecting firm’s financial performance: The Case of
Greece.
Athens, GR: University of Peloponnese Press.
Myers, S. (2005). Financing of Corporations. In: Handbook of the Economics and Finance,
Constantinides, GM, M Harris and R. Stulz (Eds.). Journal of Finance and
Economics, 1, 215-253.
Nyabwanga, R. N., Ojera, P., Otieno, S. & Nyakundi, F. N. (2013). An Empirical Analysis
of the Liquidity, Solvency and Financial Health of Small and Medium Sized
Enterprises in Kisii Municipality, Kenya. European Journal of Business and
Management, 5(8), 1- 4.
Omondi, M. M., & Muturi, W. (2013). Factors Affecting the Financial Performance of
Listed Companies at the Nairobi Securities Exchange in Kenya Research Journal of
Finance and Accounting. Operations Management Journal, 12, 297-310.
Raheman, A., & Nasr, M. (2007). Working capital management and profitability case of
Pakistani firms. International Review of Business Research Papers, 3(1), 279-300.
Shleifer, A. & Vishny, R.W. (1994). Politicians and Firms. The Quarterly Journal of Economics,
109(4), 995.
Smith, K. (1980). Profitability versus Liquidity Tradeoffs in Working Capital Management,
in Readings on the Management of Working Capital. New York: St. Paul, West
Publishing Company.
Saunders M., Lewis P., & Thornhill, A. (2012). Research methods for business students. 6th
Ed. Pearson professional Limited.
Trochim, William M.K. (2006, October 20). Research Methods Knowledge Base. Retrieved
from http://www.socialresearchmethods.net/kb/scallik.php.
Vishnani, S. & Bhupesh, K.S. (2007). Impact of Working Capital Management Policies on
Corporate Performance: An Empirical Study. Global Business Review Journal, 8,
267.