The Relationship between Working Capital Efficiency and Profitability

Abstract

Working Capital Management has its effect on liquidity as well on profitability of the firm. In this paper a sample of the 16 Indian firms, listed on BSE including firms from different sectors of our economy for a period which extends to five years starting from 2006 to 2011 has been taken. An attempt has been made to examine the effect of different variables of working capital management including the Debt ratio, Average collection period, Inventory turnover in days, Average payment period, Cash conversion cycle and Current ratio on the Net operating profitability of sample firms. Descriptive and Regression are used for analysis. The results show that there is a strong negative relationship between variables of the working capital management and profitability of the firm except the sales (Size of the company). We also find that there is a positive relationship between size of the firm and its profitability. There is also a significant negative relationship between debt used by the firm and its profitability.

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