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The Impact of Long-Term Solvency on the Profitability of Nifty 50 Companies

Authors: Rujuta S. Arondekar, Shailesh Rastogi

Journal: TEST Engineering & Management

Publication date: 2020 May/June

Publisher: TEST Engineering & Management

URL: click here


Abstract:

This paper examines the existence of the impact of long term solvency parameters on the companies’ profitability listed on the NSE and forming the Nifty50 Index. While liquidity is an important and well-established factor to gauge a company’s profits, it only considers the short-term consequences. In the complex VUCA world, a firm will not be able to survive perpetually if it is not sound in all financial respects. A holistic perspective of the company’s financial health in the longer time frame is obtained by monitoring solvency indicators. Profitability ratios assess the survival capacity of the company. This research, thus, uses secondary data on the fundamental financials of the companies listed on the National Stock Exchange (NSE) and analyses this relation for the companies which form the Nifty 50 index. Panel data for the companies was constructed and a panel data regression experiment was applied to analyze the extent of the solvency impact on profitability. The degree to which the former explained the latter showed significant results with regards to a very few indicators.
This paper, therefore concludes that the two are mildly linked and profitability ratios might show the combined effects of liquidity and debt on operating results.