Working Capital Management and the Financial Health of Retail Companies in India: An Empirical Analysis

Abstract

This study investigates the impact of working capital management on the profitability of prominent Indian retail companies, focusing on Aditya Birla Fashion & Retail Ltd., Avenue Supermarts Ltd., Future Enterprises Ltd., Future Lifestyle Fashions Ltd., and Future Retail Ltd. The primary objectives are to assess the relationships between Return on Assets (ROA) and key working capital components, specifically Account Receivable Days (ARD) and Account Payable Days (APD). Altman’s Z-score model is employed to gauge the financial health of these companies over a seven-year period (2014-15 to 2020-21). Findings indicate a significant positive correlation between ROA and ARD, emphasizing the importance of efficient receivables management for enhanced profitability. Conversely, a negative correlation is observed between ROA and APD, highlighting the potential adverse effects of prolonged payment periods to suppliers on profitability. Altman’s Z-score analysis reveals fluctuating financial conditions, with certain years indicating uncertainty and distress. However, the one sample t-test suggests overall stability in the financial strength of the selected companies. Implications of the study underscore the critical role of working capital management in influencing profitability within the dynamic retail sector. Monitoring and optimizing working capital components are essential for sustained financial health, emphasizing the need for proactive strategies to navigate uncertainties. These insights contribute to informed decision-making for both industry stakeholders and policymakers, fostering a resilient and thriving retail ecosystem in India.