Working Capital Management and Corporate Profitability: Empirical Evidences from Indian Cement Companies

Abstract

The current study examines the relationship between working capital management strategies of a firm and its profitability. Cash conversion cycle has been utilized as a measure of the working capital management, whereas gross operating profit is used as a proxy for a firm's profitability. 35 Indian cement companies are considered for the study for a period 5 years (2010–2014) which results in 175 total observations. Relevant secondary data for the study were obtained from ACE analyser Database. The objectives of the current study is firstly to identify the relationship between effective working capital management (cash conversion cycle) and profitability (GOP) of the Indian cement companies during the period of study. Secondly, to analyze the effect of different components of cash conversion cycle on the profitability of the Indian cement companies during the period of study. And to conclude the study what extent every variable is influencing the profitability during the study period. The results reveals that cash conversion cycle of a company has a negative correlation with its profitability. Our results also suggest that managers can improve the profitability by decreasing the number of day's receivables and increasing the inventory turnover in days. The finding highlights the importance of efficient working capital management practices to improve the profitability of companies.