Author : Maeenuddin, lenny yusrini, dr annuar md nassir, muhammad hafeez, muhammad salman chughtai, altaf hussain
Keyword : Working capital management (wcm), return on equity (roe), cash conversion cycle (ccc), average inventory turnover (ito), days debtors turnover (dto), days creditor turnover (cto), profitability, short term investment.
Subject : Finance and accounting
Article Type : Original article (research)
Article File : Full Text PDF
Abstract : A well-managed working capital could reduce the possibility of a firm’s future financial constraints and be the sign of a firm’s value. Working capital management is important because it enables firms to free up cash and improve liquidity. Therefore, the main objective of this study is to examine the relationship between working capital management components (inventory, receivable, and payable turnover) and the firm’s profitability measured by return on equity. We used the cash conversion cycle, a comprehensive measure for working capital management, and assess the firm’s performance with a return on equity ratio. We evaluated the cash conversion cycle with the help of three accounting ratios: creditor’s turnover, debtor’s turnover, and inventory turnover. The empirical evidence is based on non-financial firms listed in the Pakistan Stock Exchange from period of 10 years. PLS-SEM was used for analysis, by examining descriptive statistics, correlations coefficient, path coefficient, t-statistic, P-value, confidence interval, and R-square. From the multivariate analysis, we found that without any moderating effect, all the components of working capital management have significant positive relationships with the profitability of the firm. From univariate analysis by using firm size as moderator, it was found that firm size moderating the relationship between debtor’s turnover and return on equity ratio, while it has no significant moderating effect on the relationship between inventory turnover, creditor’s turnover, and overall cash conversion cycle ratio with firm’s profitability. This study suggests that management must pay attention to every component of the working capital management altogether, to increase the profitability of the firm. The firm’s managers must seriously consider the efficient management of all of the components of working capital such as inventory, receivable, and payable.
Article by : Maeenuddin
Article add date : 2020-08-04
How to cite : Maeenuddin, lenny yusrini, dr annuar md nassir, muhammad hafeez, muhammad salman chughtai, altaf hussain. (2020-August-04). An empirical investigation of working capital management components and its association with firm’s profitability (roe). retrieved from https://openacessjournal.com/abstract/67