International Journal of Academic Research in Accounting, Finance and Management Sciences Vol. 6, No.1, January 2016, pp. 35–40 E-ISSN: 2225-8329, P-ISSN: 2308-0337 © 2016 HRMARS www.hrmars.com Does Liquidity and Solvency Affect Banks Profitability? Evidence from Listed Banks in Jordan Ahmad DAHIYAT Department of Accounting, Amman College-Al Balqa Applied University, Jordan E-mail: adahiyat@hotmail.com Abstract This paper examines the impact of liquidity and solvency on banks profitability. All banks listed in Amman exchange were selected (15 banks) for the period 2012- 2014. To measure the liquidity the quick ratio was calculated, Debt ratio was calculated to measure the solvency, whereas return on assets ratio was calculated to measure the profitability. Simple regression was used to examine the relations; the results showed that the liquidity has a negative (inverse) significant impact on profitability, whereas the solvency has a no impact on profitability. Key words Liquidity, Solvency, profitability, Return on Assets, Quick Ratio, Debt ratio DOI: 10.6007/IJARAFMS/v6-i1/1954 URL: http://dx.doi.org/10.6007/IJARAFMS/v6-i1/1954 1. Introduction Liquidity and solvency are two important aspects of overall banks management, liquidity refers to the balance between assets in the form of cash or readily convertible into cash (current assets) and current liabilities, whereas solvency states the relationship between borrowed funds and owner’s funds in the capital structure of a bank. It includes debt, common equity that are used to finance the bank’s total assets, operations and financial growth (Goel et al., 2015). Liquidity is essential in all banks to meet customer withdrawals, and provide funds for growth, so Banks must maintain sufficient levels of cash, liquid assets, and prospective borrowing lines to meet expected and contingent liquidity demands. Liquidity can be defined as the ability to provide cash to meet day-to-day needs as they arise (Walsh, 2008). Therefore, organization must be able to generate enough money to cover short-term obligations to become liquid organization. Liquidity ratios are a set of ratios that are used to calculate the liquidity position of an entity. These ratios help to determine whether an entity will be able to meet its financial obligations in the short- term, whereas solvency indicates the ability to meet long term financial obligation, Solvency is traditionally viewed as arising from financing activities: firms borrow to raise cash for operations. Solvency ratios are used to measure the ability of a company to meet its long term debts. Moreover, the solvency ratios provide an assessment of the likelihood of a company to continue congregating its debt obligations. The quick ratio will be calculated as a measure of liquidity, quick ratio also known as the acid- test ratio, which is more refined and more stringent than the current ratio. Instead of using current assets in the numerator, the quick ratio uses a figure that focuses on the most liquid assets. So it is more conservative than the current ratio and focuses on cash, short-term investments and accounts receivable. The formula is as follows: Quick Ratio = (Cash & Equivalents + Short-term Investments + Accounts Receivable) ÷ Current Liabilities (Gibson, 2009) (1) Debt ratio will be calculated as a measure of solvency through measuring debt level of a business as a percentage of its total assets. It is calculated by dividing total debt of a business by its total assets, if the percentage is too high, it might indicate that it difficult for the business to pay off its debts and continue operations (Walsh, 2008). Return on Assets (ROA) will be calculated to measure the profitability, which indicates the net income produced by total assets during a period by comparing net income to the average total assets (Gibson, 2009).