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Firm Profitability and Economic Crises: The Non-Linear Role of the Cash Conversion Cycle

Author

Listed:
  • Agim Kukeli

    (College of Business, Lamar University, Beaumont, TX 77705, USA)

  • Benjamin Widner

    (College of Business, New Mexico State University, Las Cruces, NM 88003, USA)

  • Fitim Deari

    (Faculty of Business and Economics, Southeast European University, Tetovo 1200, North Macedonia)

  • Gevorg Sargsyan

    (College of Business, Lamar University, Beaumont, TX 77705, USA)

  • Nicoleta Barbuta-Misu

    (Faculty of Economics and Business Administration, “Dunarea de Jos” University of Galati, 47 Domneasca Street, 800008 Galati, Romania)

Abstract

This study investigates the non-linear effect of the cash conversion cycle (CCC) on a firm’s profitability for a sample of 6072 firms from five countries (Germany, Spain, France, Great Britain, and Italy) from 2006 to 2015. Additionally, this study explores the sensitivity of economic crises to the non-linear effect of the CCC on a firm’s performance. This study employs fixed-effects unbalanced panel data and weighted least squares (due to heteroscedasticity) to examine a firm’s performance, using return on assets (ROA) to measure profitability. The cash conversion cycle, financial leverage, size, and tangibility are independent variables. The results of this study show that the effect of the cash conversion cycle on firms’ performance is an inverted U-shape (non-linear). It also shows that the economic conditions vis-à-vis crises influence firm performance. This study found the optimal number of the CCC to be 90 days for the entire sample, 85 days for the non-crisis period, and 92 days for the crisis period. It also finds that the marginal effect of the CCC on ROA is 3.9 times higher during economic crises versus non-economic crisis periods. This study contributes to the existing working capital management literature by examining the non-linear effect of the cash conversion cycle on profitability and the sensitivity of these effects during economic crises. Thus, empirical evidence can serve scholars, business policymakers, and corporate finance professionals in managing their working capital strategically.

Suggested Citation

  • Agim Kukeli & Benjamin Widner & Fitim Deari & Gevorg Sargsyan & Nicoleta Barbuta-Misu, 2025. "Firm Profitability and Economic Crises: The Non-Linear Role of the Cash Conversion Cycle," IJFS, MDPI, vol. 13(2), pages 1-17, May.
    • Handle: RePEc:gam:jijfss:v:13:y:2025:i:2:p:86-:d:1655670
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    References listed on IDEAS

    as
    1. Chang, Chong-Chuo, 2018. "Cash conversion cycle and corporate performance: Global evidence," International Review of Economics & Finance, Elsevier, vol. 56(C), pages 568-581.
    2. Nguyen, Ha & Qian, Rong, 2014. "Demand collapse or credit crunch to firms? Evidence from the World Bank's financial crisis survey in Eastern Europe," Journal of International Money and Finance, Elsevier, vol. 44(C), pages 125-144.
    3. Carnes, Christina Matz & Cavanaugh, Jeffrey & David, Parthiban & O'Brien, Jonathan, 2023. "Cash creates value for supply chain systems, but who appropriates that value?," Journal of Business Research, Elsevier, vol. 161(C).
    4. Nufazil Altaf & Farooq Ahmad Shah, 2018. "How does working capital management affect the profitability of Indian companies?," Journal of Advances in Management Research, Emerald Group Publishing Limited, vol. 15(3), pages 347-366, March.
    5. Chen, Catherine Huirong & Choy, Siu Kai & Tan, Yongxian, 2022. "The cash conversion cycle spread: International evidence," Journal of Banking & Finance, Elsevier, vol. 140(C).
    6. Chen, Xin & Zheng, Gaoping & Chai, Daniel, 2022. "The cash conversion cycle spread in China," Pacific-Basin Finance Journal, Elsevier, vol. 73(C).
    7. Nufazil Altaf & Farooq Ahmad Shah, 2018. "How does working capital management affect the profitability of Indian companies?," Journal of Advances in Management Research, Emerald Group Publishing Limited, vol. 15(3), pages 347-366, March.
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    Cited by:

    1. Dorota Czerwinska-Kayzer & Joanna Florek, 2025. "Empirical Analysis of Working Capital Behavior: The Case of the Polish Food Manufacturing Industry," European Research Studies Journal, European Research Studies Journal, vol. 0(2), pages 885-906.

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