They found a negative relationship between Return on Assets and Inventory turnover and Cash conversion cycle for the trading firms listed in Colombo Stock Exchange. Rathiranee and Sangeetha examine the impact of working capital on financial performance in select trading firms where the regression analysis results showed that the high investment in inventories and receivables is associated with lower financial performance i.e., Return on Assets (ROA). The impact of liquidity and management efficiency on the profitability of select power sectors using different ratios as independent variables, where debtor turnover ratio, collection efficiency, and interest coverage showed a significant impact. Many prior studies have been conducted to measure the relationship between working capital and profitability as examined by Azhar. The collection period, payment period, inventory days and cash conversion cycle has been used as a measure of working capital. The working capital which consists of current assets and current liabilities which measure the liquidity has been chosen as the main independent variable to study its relationship with the profitability. The crucial functions of financial managers to ensure the liquidity of a firm, that it must be in a position to meet its short-term obligation without which it cannot survive. Liquidity plays an important role in the successful running of a business. The success of any business depends on its profitability, liquidity, and solvency. The firm may not be able to pay its day-to-day expenses which creates inefficiencies and reduces profits. On the other hand, with the inadequate working capital, the firm will not be in a position to pay short-term liabilities. The large debtors indicate the defective credit policy which might lead to bad debts. The working capital should be maintained at a desired level depending upon the size of the firm, excessive working capital leads to the unnecessary accumulation of inventories causing losses and wastages. If working capital is not managed perfectly it will reduce the liquidity of the company and ultimately effects profitability. The regression analysis showed the value for the R-squared in the model is 0.584, i.e., 58.4% of the variation in the dependent variable Net Profitability is explained by the independent variables.Īn attempt has been made in this empirical study to know the impact of working capital management on profitability, both the factors are important concerns of management. Thirdly the cash conversion cycle decreases it will lead to an increase in profitability of the firm, and managers can create a positive value for the shareholders which indicates that it has been maintained. This implies that the longer a firm makes the payment to its creditors, the more profitable it is. ![]() ![]() Secondly there is a highly significant positive relationship between average payment period and profitability. ![]() The key points in this study are firstly there exists a negative relationship between the profitability and the average collection period, the lower the average collection period higher will be the profitability, indicating that a decrease in the number of days a firm receives payment from sales affects the profitability of the firm positively. This study examines the association between the profitability and working capital using the data of 15 US trading companies for the period of 2015 to 2019. They found a negative relationship between Return on Assets and Inventory turnover and Cash conversion cycle the present study is designed to know the direct impact of working capital on profitability by choosing the days of collection, days of payment, days inventory converts to sales and finally the cash conversion cycle. The results showed that the high investment in inventories and receivables is associated with lower financial performance. Many prior studies have been conducted to measure the relationship between working capital and profitability.
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