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The Relationship Between Working Capital Management And The Profitability

1142 words - 5 pages

The topic of the relationship between working capital management and the profitability has the attention of the financial researchers in the recent past years. As the working capital management has an effect on the profitability of a firm. To examine that relation, researchers have used many approaches and methodologies. Moreover, they have used different data samples depending on the country or the region that they wanted to study. In this paper, five of those researches are going to be reviewed.
In the first research, Hyun-Han Shin and Luc Soenen (1998) studied the relationship between the working capital management efficiency and the profitability of the firms. Their hypothesis ...view middle of the document...

In addition, they chose to examine the non financial small and medium sized firms for the years between 2002 and 2007 and they remove any firm that has issues in its data. They got their data form a database that has the financial statements of the Spanish companies. This data base is called the SABI. The main finding was that the relationship between the working capital management and the profitability is positive and that was due to their different method of approaching the study, as they hypothesis that the relationship between working capital management and the profitability is not liner, it is a concave relationship.
In the third paper, Ioannis Lazaridis and Dimitrios Tryfonidis (2006) tested the relationship between the working capital management and the profitability of the Athens firms. The reason for their study was to build a statistically significant relationship between the CCC and the profitability in the companies of Athens. Additionally, they used the CCC as measurement of the working capital. The other variables are No of Days A/R, No of Days Inventory, No of Days A/P, Fixed Financial Assets Ratio and Financial Debt Ratio. Furthermore, they got their data from the Athens Stock Exchange Market from 2001 to 2004 and they removed companies that have insufficient data. Their main finding was that there are a negative relationship between the CCC and the profitability in the companies in Athens
In the fourth research, Faris Alshubiri (2011) has used a different approach than the previous literature and examined the relationship between profitability and working capital management in the aggressive and conservative way. The author has many hypotheses in his paper as the following. First, there is no relationship between return on assets and the working capital management. Second, there is no relationship between return on equity and the working capital management. Third, there is no relationship between Tobin`s (Q) and the working capital management. Forth, there is no relationship between return on investment and working capital management. Fifth, there is no relationship between return on capital and the working capital management. Lastly, there is no relationship between risk management and the working capital management. For the variables, he used many financial ratios to test his hypotheses. The dependent variables to test his first five hypotheses were return on assets,...

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