Liquidity and solvency of a company and the rate of return – an analysis of the Warsaw Stock Exchange

Justyna Zalewska; Natalia Nehrebecka

Open Access

Liquidity and solvency of a company and the rate of return – an analysis of the Warsaw Stock Exchange

Justyna Zalewska

and

Natalia Nehrebecka

| Jun 06, 2020

Central European Economic Journal

Volume 6 (2019): Issue 53 (January 2019)

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Cite

Page range: 199 - 220

DOI: https://doi.org/10.2478/ceej-2019-0013

Keywords
liquidity, solvency, asset pricing models, CAPM, portfolio analysis

© 2019 Justyna Zalewska et al., published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

Liquidity ratios and the Altman Z-score. Source: Zalewska and Nehrebecka (2020).

Liquidity ratios and the leverage ratio. Source: Zalewska and Nehrebecka (2020).

Liquidity ratios and the fixed asset coverage ratio. Source: Zalewska and Nehrebecka (2020).

Liquidity ratios and the debt ratio. Source: Zalewska and Nehrebecka (2020).

Liquidity and solvency ratios versus monthly beta. Source: Zalewska and Nehrebecka (2020).

Portfolios created for the net working capital ratio: models estimated with the least-squares method (left) and quantile regression (right).

	1	2	3	4	5	6	7	8	9	10	1	2	3	4	5	6	7	8	9	10
α_CAPM	−0.01	−0.014	−0.006	0.006	−0.002	0.002	0.02**	0.014*	0.014	0.012	−0.005	−0.017*	−0.010	−0.002	−0.008	−0.002	0.008	0.009	0.013	0.018*
α_FF	−0.014	−0.013	−0.006	0.006	−0.001	0.004	0.021**	0.014	0.016	0.013	−0.008	−0.015	−0.010	0.005	−0.005	0.00	0.012*	0.016	0.017	0.016
α_Carhart	−0.015	−0.015	−0.002	0.006	−0.006	−0.003	0.018*	0.014*	0.009	0.012	−0.016	−0.017	−0.013	0.005	−0.01	0.002	0.007	0.017	0.001	0.021*
β_CAPM	1.206***	0.989***	1.042***	1.064***	1.025***	1.076***	1.151***	1.237***	1.147***	1.082***	1.083***	0.925***	1.026***	1.022***	0.928***	1.038***	1.183***	1.161***	1.133***	1.129***
l. quarter	71	70	70	70	70	70	70	70	70	70	71	70	70	70	70	70	70	70	70	70
The Sharpe ratio	−0.846	−0.994	−0.999	−0.917	−1.072	−0.799	−0.741	−0.924	−0.777	−0.791	−0.846	−0.994	−0.999	−0.917	−1.072	−0.799	−0.741	−0.924	−0.777	−0.791

Portfolios created for the quick ratio: models estimated with the least-squares method (left) and quantile regression (right).

	1	2	3	4	5	6	7	8	9	10	1	2	3	4	5	6	7	8	9	10
α_CAPM	−0.0050	0.0041	0.0013	0.0094	−0.0001	0.0068	0.0028	0.0269**	0.0023	−0.0133	−0.0149	0.0042	−0.0037	0.0075	−0.0111	0.0019	0.0102	0.0176	0.0021	−0.0153**
α_FF	−0.0082	0.0068	0.0001	0.0096	0.0001	0.0074	0.0054	0.0278**	0.0030	−0.0123	−0.0177**	0.0089	−0.0052	0.0083	−0.0070	0.0066	0.0088	0.0139	0.0025	−0.0207***
α_Carhart	−0.0154	0.0097	0.0005	0.0074	0.0061	0.0045	0.0014	0.0286**	−0.0026	−0.0129	−0.0171*	0.0083	−0.0062	0.0030	−0.0038	0.0014	−0.0044	0.0230**	0.0031	−0.0209**
β_CAPM	1.3159***	1.0246***	1.0082***	1.0067***	1.0928***	1.0718***	1.1985***	1.3046***	1.0950***	0.8759***	1.1322***	1.0193***	0.9580***	0.9929***	0.9824***	0.9910***	1.2822***	1.2463***	1.1132***	0.8773***
l. quarter	71	71	71	71	71	71	71	71	71	71	71	71	71	71	71	71	71	71	71	71
The Sharpe ratio	−0.8247	−0.7885	−1.0241	−0.8734	−0.9975	−0.9392	−0.9480	−0.6543	−0.9893	−0.9759	−0.8247	−0.7885	−1.0241	−0.8734	−0.9975	−0.9392	−0.9480	−0.6543	−0.9893	−0.9759

Portfolios created for the current ratio: models estimated with the least-squares method (left) and quantile regression (right).

	1	2	3	4	5	6	7	8	9	10	1	2	3	4	5	6	7	8	9	10
α_CAPM	−0.019	0.008	−0.004	0.009	0.02**	0.006	0.009	0.018*	−0.003	−0.006	−0.018**	0.001	−0.008	0.013**	0.020	−0.006	0.004	0.012	−0.005	−0.007
α_FF	−0.022	0.008	−0.005	0.011	0.022**	0.008	0.009	0.015	−0.001	−0.004	−0.020**	−0.003	−0.012**	0.023***	0.031	−0.007	0.005	0.008	−0.005	−0.004
α_Carhart	−0.023	0.004	−0.004	0.016	0.022**	0.005	0.004	0.013	−0.006	−0.005	−0.011	−0.001	−0.011**	0.024***	0.033	−0.009	−0.001	0.007	−0.006	−0.001
β_CAPM	1.116***	1.120***	1.036***	1.09***	1.191***	1.042***	1.106***	1.179***	1.052***	0.954***	1.006***	1.087***	1.014***	1.162***	1.14***	0.966***	1.119***	1.169***	1.008***	0.889***
l. quarter	71	71	71	71	71	71	71	71	71	71	71	71	71	71	71	71	71	71	71	71
The Sharpe ratio	−0.981	−0.810	−1.083	−0.819	−0.746	−1.002	−0.89	−0.735	−0.939	−0.945	−0.982	−0.811	−1.083	−0.819	−0.746	−1.002	−0.89	−0.735	−0.939	−0.945

Portfolios created for the leverage ratio: models estimated with the least-squares method (left) and quantile regression (right).

	1	2	3	4	5	6	7	8	9	10	1	2	3	4	5	6	7	8	9	10
α_CAPM	−0.01	−0.014	−0.006	0.006	−0.002	0.002	0.02**	0.014*	0.014	0.012	−0.005	−0.017*	−0.010	−0.002	−0.008	−0.002	0.008	0.009	0.013	0.018*
α_FF	−0.014	−0.013	−0.006	0.006	−0.001	0.004	0.021**	0.014	0.016	0.013	−0.008	−0.015	−0.010	0.005	−0.005	0.00	0.012*	0.016	0.017	0.016
α_Carhart	−0.015	−0.015	−0.002	0.006	−0.006	−0.003	0.018*	0.014*	0.009	0.012	−0.016	−0.017	−0.013	0.005	−0.01	0.002	0.007	0.017	0.001	0.021*
β_CAPM	1.206***	0.989***	1.042***	1.064***	1.025***	1.076***	1.151***	1.237***	1.147***	1.082***	1.083***	0.925***	1.026***	1.022***	0.928***	1.038***	1.183***	1.161***	1.133***	1.129***
l. quarter	71	70	70	70	70	70	70	70	70	70	71	70	70	70	70	70	70	70	70	70
The Sharpe ratio	−0.846	−0.994	−0.999	−0.917	−1.072	−0.799	−0.741	−0.924	−0.777	−0.791	−0.846	−0.994	−0.999	−0.917	−1.072	−0.799	−0.741	−0.924	−0.777	−0.791

Definitions of liquidity and solvency ratios used in the empirical study

Solvency/liquidity ratio	Definition
Quick ratio	$\frac{Current assets - Inventory}{Current liabilities}$ {{{\rm{Current}}\,{\rm{assets}} - {\rm{Inventory}}} \over {{\rm{Current}}\,{\rm{liabilities}}}}
Current ratio	$\frac{Current assets}{Current liabilities}$ {{{\rm{Current}}\,{\rm{assets}}} \over {{\rm{Current}}\,{\rm{liabilities}}}}
Net Working Capital Ratio	$\frac{Current assets - Current liabilities}{Total assets}$ {{{\rm{Current}}\,{\rm{assets}} - {\rm{Current}}\,{\rm{liabilities}}} \over {{\rm{Total}}\,{\rm{assets}}}}
Leverage ratio	$\frac{Total liabilities}{Total liabilities + Market value of equity}$ {{{\rm{Total}}\,{\rm liabilities}} \over {{\rm{Total}}\,{\rm{liabilities}} + {\rm{Market}}\,{\rm{value}}\,{\rm{of}}\,{\rm{equity}}}}
Debt ratio	$\frac{Total liabilities}{Total assets}$ {{{\rm{Total}}\,+{\rm liabilities}} \over {{\rm{Total}}\,{\rm assets}}}
Altman Z-score	$Z - Score = 6.56 * \frac{Working capital}{Total assets} + 3.26 * \frac{Retained earnings}{Total assets} + 6.72 * \frac{Earnings before interest and tax}{Total assets} + 1.05 * \frac{Market value of equity}{Total liabilities} + 3.25$ {\rm{Z}} - {\rm{Score}} = 6.56{{{\rm{Working}}\,{\rm{capital}}} \over {{\rm{Total}}\,{\rm{assets}}}} + 3.26{{{\rm{Retained}}\,{\rm{earnings}}} \over {{\rm{Total}}\,{\rm{assets}}}} + 6.72{{{\rm{Earnings}}\,{\rm{before}}\,{\rm{interest}}\,{\rm{and}}\,{\rm{tax}}} \over {{\rm{Total}}\,{\rm{assets}}}} + 1.05{{{\rm{Market}}\,{\rm{value}}\,{\rm{of}}\,{\rm{equity}}} \over {{\rm{Total}}\,{\rm{liabilities}}}} + 3.25
Fixed asset coverage ratio	$\frac{Equity capital}{Fixed assets}$ {{{\rm{Equity}}\,{\rm{capital}}} \over {{\rm{Fixed}}\,{\rm{assets}}}}

Portfolios created for the Altman Z-score: models estimated with the least-squares method (left) and quantile regression (right)

	1	2	3	4	5	6	7	8	9	10	1	2	3	4	5	6	7	8	9	10
α_CAPM	−0.019	0.008	−0.004	0.009	0.02	0.006	0.009*	0.018**	−0.003	−0.006	−0.018**	0.001	−0.008	0.013	0.020**	−0.006	0.004	0.012	−0.005	−0.007
α_FF	−0.023	0.008	−0.005	0.012	0.022	0.008	0.009**	0.015**	−0.001	−0.004	−0.020**	−0.003	−0.012	0.023**	0.031***	−0.007	0.005	0.008	−0.005	−0.004
α_Carhart	−0.024	0.004	−0.004	0.016	0.022	0.005	0.004**	0.013	−0.006	−0.005	−0.011	−0.001	−0.011	0.024**	0.033***	−0.009	−0.001	0.007	−0.006	−0.001
β_CAPM	1.116***	1.120***	1.036***	1.09***	1.191***	1.042***	1.106***	1.179***	1.052***	0.954***	1.006***	1.087***	1.014***	1.162***	1.14***	0.966***	1.119***	1.169***	1.008***	0.889***
l. quarter	71	71	71	71	71	71	71	71	71	71	71	71	71	71	71	71	71	71	71	71
The Sharpe ratio	−0.982	−0.811	−1.083	−0.819	−0.746	−1.002	−0.89	−0.735	−0.939	−0.945	−0.982	−0.811	−1.083	−0.819	−0.746	−1.002	−0.89	−0.735	−0.939	−0.945

Portfolios created for the fixed asset coverage ratio: models estimated with the least-squares method (left) and quantile regression (right).

	1	2	3	4	5	6	7	8	9	10	1	2	3	4	5	6	7	8	9	10
α_CAPM	0.001	−0.006	−0.007	−0.021**	0.009	0.005	0.01	0.009	0.020**	0.019**	0.0009	−0.0060	−0.0066	−0.0146**	−0.0056	0.0076	0.0035	0.0068	0.0029	0.0226***
α_FF	0.000	−0.008	−0.008	−0.022**	0.009	0.007	0.01	0.012	0.021**	0.019**	0.0060	0.0003	−0.0062	−0.0144	−0.0032	0.0085	−0.0061	0.0081	0.0017	0.0230*
α_Carhart	−0.010	0.000	−0.006	−0.02*	0.006	0.003	0.003	0.006	0.016*	0.019**	0.0017	−0.0093	−0.0036	−0.0168	−0.0003	0.0050	0.0039	0.0029	0.0020	0.0193*
β_CAPM	1.124***	1.222***	0.991***	0.79***	1.206***	1.115***	1.036***	1.178***	1.146***	1.140***	0.9565***	1.1808***	0.9423***	0.8546***	1.0591***	1.0635***	1.0244***	0.9384***	0.9605***	1.2871***
l. quarter	71	71	71	71	71	71	71	71	71	71	68	68	68	68	68	68	68	68	68	68
The Sharpe ratio	−0.804	−0.964	−1.176	−1.078	−0.934	−0.943	−0.857	−0.874	−0.749	−0.751	−0.7080	−0.8980	−1.0539	−0.9753	−0.8742	−0.8429	−0.7425	−0.7612	−0.6419	−0.6570

Portfolios created for the debt ratio: models estimated with the least-squares method (left) and quantile regression (right).

	1	2	3	4	5	6	7	8	9	10	1	2	3	4	5	6	7	8	9	10
α_CAPM	−0.0040	−0.0062	−0.0101	−0.0014	0.0124	0.0028	−0.0008	0.0186*	0.0036	0.0035	−0.0111	−0.0148	−0.0014	−0.0045	0.0107	0.0021	−0.0025	0.0091	−0.0043	−0.0049
α_FF	−0.0032	−0.0046	−0.0084	−0.0038	0.0135	0.0023	−0.0014	0.0200**	0.0036	0.0029	−0.0061	−0.0090	−0.0010	−0.0080	0.0068	0.0036	−0.0064	0.0082	0.0027	0.0134
α_Carhart	−0.0059	−0.0072	−0.0082	−0.0022	0.0081	0.0104	−0.0050	0.0129	0.0024	0.0012	−0.0135	−0.0090	−0.0028	−0.0111**	0.0100	0.0030	−0.0061	0.0005	−0.0031	0.0174
β_CAPM	1.0274***	0.9973***	0.9592***	1.1079***	1.2111***	0.8735***	0.9950***	1.2436***	1.1069***	1.0808***	0.9783***	0.9398***	0.9674***	1.0267***	1.0622***	0.9840***	0.9401***	1.1629***	1.0532***	0.9523***
l. quarter	71	71	71	71	71	71	71	71	71	71	71	71	71	71	71	71	71	71	71	71
The Sharpe ratio	−1.1344	−0.8753	−1.0406	−0.8507	−0.7772	−0.8391	−1.1745	−0.7841	−0.9350	−0.7692	−1.1344	−0.8753	−1.0406	−0.8507	−0.7772	−0.8391	−1.1745	−0.7841	−0.9350	−0.7692

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Liquidity and solvency of a company and the rate of return – an analysis of the Warsaw Stock Exchange

Published Online: Jun 06, 2020

Page range: 199 - 220

DOI: https://doi.org/10.2478/ceej-2019-0013

Keywords
liquidity, solvency, asset pricing models, CAPM, portfolio analysis

© 2019 Justyna Zalewska et al., published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

Fig. 1

Fig. 2

Fig. 3

Fig. 4

Fig. 5

Portfolios created for the net working capital ratio: models estimated with the least-squares method (left) and quantile regression (right).

Portfolios created for the quick ratio: models estimated with the least-squares method (left) and quantile regression (right).

Portfolios created for the current ratio: models estimated with the least-squares method (left) and quantile regression (right).

Portfolios created for the leverage ratio: models estimated with the least-squares method (left) and quantile regression (right).

Definitions of liquidity and solvency ratios used in the empirical study

Portfolios created for the Altman Z-score: models estimated with the least-squares method (left) and quantile regression (right)

Portfolios created for the fixed asset coverage ratio: models estimated with the least-squares method (left) and quantile regression (right).

Portfolios created for the debt ratio: models estimated with the least-squares method (left) and quantile regression (right).

Liquidity and solvency of a company and the rate of return – an analysis of the Warsaw Stock Exchange

Published Online: Jun 06, 2020

Page range: 199 - 220

DOI: https://doi.org/10.2478/ceej-2019-0013

Keywordsliquidity, solvency, asset pricing models, CAPM, portfolio analysis

© 2019 Justyna Zalewska et al., published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

Fig. 1

Fig. 2

Fig. 3

Fig. 4

Fig. 5

Portfolios created for the net working capital ratio: models estimated with the least-squares method (left) and quantile regression (right).

Portfolios created for the quick ratio: models estimated with the least-squares method (left) and quantile regression (right).

Portfolios created for the current ratio: models estimated with the least-squares method (left) and quantile regression (right).

Portfolios created for the leverage ratio: models estimated with the least-squares method (left) and quantile regression (right).

Definitions of liquidity and solvency ratios used in the empirical study

Portfolios created for the Altman Z-score: models estimated with the least-squares method (left) and quantile regression (right)

Portfolios created for the fixed asset coverage ratio: models estimated with the least-squares method (left) and quantile regression (right).

Portfolios created for the debt ratio: models estimated with the least-squares method (left) and quantile regression (right).

Keywords
liquidity, solvency, asset pricing models, CAPM, portfolio analysis