Liquidity management and profitability: evidence from small and medium-sized enterprises in China

This study examined the relationship between the profitability and liquidity of Chinese small and medium-sized enterprises (SMEs) and its effects by using ten-year data of 249 Chinese SMEs listed on the Shenzhen Stock Exchange from 2009 to 2018. A pooled regression analysis and a pairwise Granger causality test were performed to examine the relationship between the liquidity and profitability of these SMEs. Multiple proxies were utilised to measure SME performance, including: 1) return on asset (ROA); 2) return on equity; 3) net profit ratio (NPR). Results show cash conversion cycle (CCC) has a significantly negative relationship with SME performance. In the robustness test, results of a pairwise Granger causality test revealed that liquidity affects the profitability of Chinese SMEs, especially between ROA and cash ratio and between NPR and CCC. Regardless of the type of company, capital structures and working capital management are basic transactions in corporate finance. This research offers comprehensive information on the selected topic to compensate for the lack of evidence supporting the profitability and liquidity management of Chinese SMEs.