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The Impact of Working Capital Management upon Companies’ Profitability: Evidence from European Companies

Author

Listed:
  • Joana Filipa Lourenço Garcia

    (Faculdade de Economia, Universidade do Porto)

  • Francisco Vitorino da Silva Martins

    (Faculdade de Economia, Universidade do Porto)

  • Elísio Fernando Moreira Brandão

    (Faculdade de Economia, Universidade do Porto)

Abstract

Companies can use working capital management as an approach to influence their profitability. This paper studies the impact of working capital management and its components upon the profitability of European companies. Cash Conversion Cycle is used as a comprehensive measure for working capital management and Gross Operating Profitability used as a measure for profitability. This study is based on a sample of 2,974 non - financial companies listed in 11 European Stock Exchanges for a period of 12 years: 1998 - 2009. The results of GLS and OLS regression analysis found a significant negative relationship between Receivables Collection Period, Inventory Conversion Period, Payables Deferral Period, Cash Conversion Cycle and profitability. This suggests that companies can improve their profitability by reducing the time span during which working capital is tied up within the company. An inverse relationship between liquidity measured by Current Ratio and profitability was also found and an additional analysis revealed that different levels of liquidity lead to differentiated impacts of the Cash Conversion Cycle upon operating profitability.

Suggested Citation

  • Joana Filipa Lourenço Garcia & Francisco Vitorino da Silva Martins & Elísio Fernando Moreira Brandão, 2011. "The Impact of Working Capital Management upon Companies’ Profitability: Evidence from European Companies," FEP Working Papers 438, Universidade do Porto, Faculdade de Economia do Porto.
    • Handle: RePEc:por:fepwps:438
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    References listed on IDEAS

    as
    1. 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.
    2. Michael S. Long & Ileen B. Malitz & S. Abraham Ravid, 1993. "Trade Credit, Quality Guarantees, and Product," Financial Management, Financial Management Association, vol. 22(4), Winter.
    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, April.
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    Cited by:

    1. Markus Mättö & Mervi Niskanen, 2021. "Role of the legal and financial environments in determining the efficiency of working capital management in European SMEs," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(4), pages 5197-5216, October.

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    More about this item

    Keywords

    Working Capital Management; Corporate Profitability; Cash Conversion Cycle; European Countries;
    All these keywords.

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