Profitability drivers in Malaysian timber trading firms: the role of leverage and liquidity

Understanding the connection between leverage and liquidity on profitability is crucial for businesses to optimize financial strategies, manage risks, and enhance performance. While this relationship has been widely studied across different firms, industries and regions, there is limited research on Malaysian wood-based industries. This study aims to fill this gap by investigating how leverage and liquidity impact the profitability of timber trading firms in Malaysia. The study analyzed data from ten timber trading firms listed in Bursa Malaysia, using financial statements from 2013 to 2022. The results of the regression analysis revealed that both leverage (measured by the debt-to-equity ratio, DER) and liquidity (measured by the current ratio, CR) have a significant relationship with profitability (measured by return-on-assets, ROA). However, liquidity (CR) alone does not significantly affect profitability, while leverage (DER) significantly impacts profitability. These findings suggest that financial managers of timber trading firms can improve their operational funding and achieve higher profitability and efficiency by adopting a lower DER. This study emphasizes the importance of managing financial indicators to enhance a firm's performance in the wood-based industry.

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