Muhamad Adhwa Zulkipli¹, Nik Anis Idayu Nik Abdullah² and Amrizah Kamaluddin<sup>3

1</sup>Banking Supervisor, Central Bank of Malaysia,
Jalan Dato’ Onn, 50929 Kuala Lumpur
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²Faculty of Accountancy, UiTM Selangor, Kampus Puncak Alam,
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³Associate Professor, Faculty of Accountancy, UiTM Selangor, Kampus Puncak Alam,
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This study examined the relationship between financial leverage and liquidity with firms’ profitability of the Malaysian agricultural industry between 2011 to 2015. Additionally, the study attempted to examine the ability of both financial leverage and liquidity in predicting firms’ profitability. Financial ratios of 40 agriculturural firms’ that were listed in the Bursa Malaysia Main Board were taken as the sample. The selected variables for the study were Debt Equity Ratio (DTE), Interest Coverage Ratio (ICR), Proprietary Ratio (PR), Current Ratio (CuR), Quick Ratio (QR) and Cash Ratio (CsR) as the independent variables whilst Return on Capital Employed (ROCE) was the dependent variable. The study discovered that significant relationships exists between both financial leverage and liquidity and firm profitability. In addition, both financial leverage and liquidity are also significant to explain and predict firms profitability. The results confirm the trade-off theory, which suggests that firm profitability would increase as the level of debt increases, but only to an optimal level where any subsequent increment in the firms’ debt level upon reaching its optimal level would result in the contraction of its profitability.

Keywords: financial leverage, liquidity ratio, firm’s profitability, agriculture firms