Working capital management and profitability : the relationship between the net trade cycle and return on assets

Abstract

It has long been argued that efficient working capital management should contribute to the creation of shareholder value. This study investigates the relationship between working capital management and firm profitability for a sample containing both listed and delisted South African industrial firms. The results obtained from the full sample revealed statistically significant negative relationships between a firm's profitability (as quantified by the return on assets in the narrower sense) and its net trade cycle (NTC), debt ratio and liquidity ratio. Similar results are observed if the listed firms are investigated separately. In the case of firms that delisted during the period under review, however, the liquidity and debt ratios appear to play a more important role than the NTC. Based on the results of this study, it would appear that management could attempt to improve firm profitability by decreasing the overall investment in net working capital.