The Impact of the Current Ratio and Profitability Ratio on Solvency Ratios: An Applied Study in the Tehran Stock Exchange

Abstract

The purpose of this study is to investigate the impact of liquidity ratio and profitability ratio on the solvency ratio of pharmaceutical companies, which are listed on the Tehran Stock Exchange (TSETMC) for the period (2011-2017). To arrive at this conclusion, the simple linear regression method, using the secondary data of 10 pharmaceutical companies in the annual financial statements of these companies, after auditing them into the analysis program (SPSS 22). where each liquidity ratio (LR) measured the by current ratio (CR) and profitability ratio (PR) measured by return on equity (ROE), as two independent variables - based on liquidity ratio index (SR) used as the dependent variable used are evaluated. The results revealed that there is a statistically significant positive relationship between the solvency ratio (SR) and liquidity ratio (LR) in pharmaceutical companies. However, there is a statistically significant negative relationship between the profitability ratio (PR) and the debt-to-asset ratio, which serves as a measure of the solvency ratio (SR). Thus, the results of the study showed that each of the independent variables has an impact on the solvency ratio (SR) in the Iranian pharmaceutical sector. The study suggested that future research should examine the impact of liquidity ratio (LR) and profitability ratio (PR) on solvency ratio (SR) in other sectors and industrial establishments, especially important to compare Iranian firms with the same developing country firms in a situation financial are similar.

Keywords

• Liquidity Ratio, current ratio, Profitability Ratio, return on equity, Solvency Ratio, Debit Ratio.