Abstract
Article history: Received December 2, 2013 Accepted 8 May 2014 Available online May 29 2014 This paper presents an empirical investigation to study the effect of working capital management on profitability on Cement and Petrochemical industries. The study uses the information of 24 firms from Cement industry and 19 firms from Petrochemical industry listed on Tehran Stock Exchange. There are two independent variables including the ratio of current assets on total assets as well as the ratio of current liabilities on total assets in this survey. In addition, there are two dependent variables including return on assets (ROA) and Tobin’s Q. The study also considers firm size, sales’ growth, financial leverage, gross domestic product growth as control variables. Using stepwise regression technique, the study confirms a positive and meaningful relationship between working capital criteria and profitability. In addition, the study confirms that as the ratio of current assets to total assets increases, ROA and Tobin’s Q will be reduced, which means lower profitability would be resulted. In addition, as financial leverage increases, ROA in both industries will reduce while Tobin’s Q will increase in Cement industry and will reduce in Petrochemical industry. © 2014 Growing Science Ltd. All rights reserved.
Highlights
Working capital management plays essential role on corporate finance because it directly influences the liquidity and profitability of the firm (Raheman et al, 2010)
This paper presents an empirical investigation to study the effect of working capital management on profitability on Cement and Petrochemical industries
There is a meaningful relationship between Aggressive Investment Policy (AIP) of working capital and return on assets (ROA)
Summary
Working capital management plays essential role on corporate finance because it directly influences the liquidity and profitability of the firm (Raheman et al, 2010). Deloof (2003) investigated the relationship between working capital management and corporate profitability for a sample of 1,009 large Belgian non-financial companies over the 1992-1996 They measured trade credit policy and inventory policy by number of days accounts receivable, accounts payable and inventories, and used the cash conversion cycle as a measure of working capital management. García-Teruel and Martínez-Solano (2007) provided some empirical evidence on the impacts of working capital management on the profitability of a sample of small and medium-sized Spanish companies They reported that shortening the cash conversion cycle could improve the firm's profitability. Nazir and Afza (2009) studied the traditional relationship between working capital management policies and a firm's profitability They gathered some panel data set for the period 1998-2005 and evaluated the effect of aggressive working capital investment and financing policies using return on assets as well as Tobin's q. Companies with more growth opportunities, and with higher leverage, investment in fixed assets and return on assets had a more aggressive working capital policy
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