The Impact of Leverage on Trade Firms’ Profitability and Liquidity Measures
Halil D. Kaya

Abstract
In this study, I compare the financials of high-leverage and low-leverage U.S. trade firms during the 2000-2005 period. I focus on firms’ profitability and liquidity values. My objective here is to see if leverage helps retailers and wholesalers in terms of profitability and liquidity. My results show that highly levered trade firms (i.e. both retailers and wholesalers) tend to suffer in terms of liquidity. On the other hand, while highly levered retailers tend to suffer across all three measures of profitability (i.e. profit margin, return on assets, and return on equity); the results for highly levered wholesalers are mixed. In contrast to retailers, highly levered wholesalers tend to have higher return on equity values when compared to low leverage wholesalers. I conclude that the finding of a higher return on equity value here for highly levered wholesalers is due to the severely depressed equity values for wholesalers.

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