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Evaluating the Impact of Working Capital Management Components on Corporate Profitability: Evidence from Indian Manufacturing Firms

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  • Sarbapriya Ray

    (University Of Calcutta)

Abstract

Working capital management is a vital issue in financial decision making since it is a part of investment in asset and it directly affects the liquidity and profitability of the company. The study tries to investigate the relationship between working capital management components and the profitability of a sample of Indian manufacturing firms using a sample of 311Indian manufacturing firms for a period of 14 years from 1996-97 to2009-10 and have studied the effect of different variables of working capital management including the average collection period, inventory turnover in days, average payment period, cash conversion cycle and current ratio,debt ratio, size of the firm and financial assets to total assets ratio on the net operating profitability of Indian firms. The result suggests a strong negative relationship between the measures of working capital management including the number of days accounts receivable and cash conversion cycle, financial debt ratio with corporate profitability. Previous studies regarding the average days of accounts payable reported negative correlation of this variable and the profitability of the firm. But, we have not found any statistically significant relationship between these variables. Finally, we found insignificant negative relationship between firm size and its net operating profit ratio.

Suggested Citation

  • Sarbapriya Ray, 2012. "Evaluating the Impact of Working Capital Management Components on Corporate Profitability: Evidence from Indian Manufacturing Firms," International Journal of Economic Practices and Theories, Academy of Economic Studies - Bucharest, Romania, vol. 2(3), pages 127-136, July.
    • Handle: RePEc:aes:ijeptp:v:2:y:2012:i:3:p:127-136
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    References listed on IDEAS

    as
    1. J P Singh & Shishir Pandey, 2008. "Impact of Working Capital Management in the Profitability of Hindalco Industries Limited," The IUP Journal of Financial Economics, IUP Publications, vol. 0(4), pages 62-72, December.
    2. Marc Deloof, 2003. "Does Working Capital Management Affect Profitability of Belgian Firms?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 30(3‐4), pages 573-588, April.
    3. Marc Deloof, 2003. "Does Working Capital Management Affect Profitability of Belgian Firms?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 30(3-4), pages 573-588.
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    Cited by:

    1. Augustina Kurniasih & Heliantono, 2018. "Company’s Efficiency and Its Impact on Performance: A Study on State Owned Non-Financial Company Listed on Indonesian Stock Exchange," European Research Studies Journal, European Research Studies Journal, vol. 0(Special 3), pages 211-226.
    2. Petrus Emanuel de & Rina Indiastuti & Erie Febrian, 2015. "The Integrated Measuring of Working Capital Management Efficiency on Financial Performance in Indonesia Stock Exchange," Information Management and Business Review, AMH International, vol. 7(3), pages 26-33.
    3. Kwadwo Boateng Prempeh Godfred Peprah-Amankona, 2020. "Does Working Capital Management Affect Profitability of Ghanaian Manufacturing Firms?," Zagreb International Review of Economics and Business, Faculty of Economics and Business, University of Zagreb, vol. 23(1), pages 1-18, May.
    4. Lee Hui Shan & Yow Taw Onn & Lee Sin Yee & Sim Kee Chuan, 2015. "Working Capital Management Effect on the Performance of Wholesale and Property Industry in Malaysia," Journal of Economics and Behavioral Studies, AMH International, vol. 7(5), pages 19-28.
    5. Mohammad Tahir & Melati Anuar, 2016. "The determinants of working capital management and firms performance of textile sector in pakistan," Quality & Quantity: International Journal of Methodology, Springer, vol. 50(2), pages 605-618, March.
    6. Sathyamoorthi C.R. & Mogotsinyana Mapharing & Popo Selinkie, 2018. "Analytical Procedures Phase of PCAOB Audits: A Note of Caution in Selecting the Forecasting Model," Applied Finance and Accounting, Redfame publishing, vol. 4(1), pages 82-94, February.
    7. Tapan P BAGCHI, 2013. "Working Capital and Profitability—Establishing the Causality," The Journal of Accounting and Management, Danubius University of Galati, issue 2, pages 27-52, August.
    8. Sumathi Kumaraswamy, 2016. "Impact of Working Capital on Financial Performance of Gulf Cooperation Council Firms," International Journal of Economics and Financial Issues, Econjournals, vol. 6(3), pages 1136-1142.
    9. Odunayo Magret Olarewaju & Mishelle Doorasamy & Titilayo Moromoke Oladejo, 2017. "Nexus of Working Capital Management and Firm Performance in Nigerian Food and Beverages Industries: A Link with Risk-Return Theory," Journal of Economics and Behavioral Studies, AMH International, vol. 9(1), pages 90-98.

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    More about this item

    Keywords

    working capital management; corporate profitability; Indian manufacturing;
    All these keywords.

    JEL classification:

    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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