THE RELATIONSHIP BETWEEN WORKING CAPITAL MANAGEMENT AND PROFITABILITY: EVIDENCE FROM THE CZECH AGRIC AND FOREST INDUSTRY
Keywords:
Working Capital, Profitability, Firm SizeAbstract
Efficient working capital management plays a significant role in the profitability of companies and this paper analyses the relationship between working capital management and profitability of firms operating in the Czech Agric and Forestry sector for the period of 2005- 2014 using Net Operating Profitability (NOP).
For this study, strongly balanced panel data of 373 firms operating in the Czech Agric and Forestry sector obtained from Amadeus Bureau van Dijk is uesd. The main traditional working capital management indicators (Average Collection Period-ACP, Inventory Turnover Days-ITD, and Average Payment Period-APP) were used in the regression model. Cash Conversion Cycle-CCC was used as a proxy for measuring efficient working capital management as well as current ratio been used as an indicator for liquidity. Firm SIZE (measured in terms of natural logarithm of sales), ratio of Financial Assets to Total Assets-FATA and Leverage were also used as control variables. The results indicated that the indicators of working capital management rather does not affects profitability in the sector but firm size, ratio of financial assets to total assets, leverage and current ratio significantly affects profitability.
The study also concludes that firms operating in the Agric and Forest industry should focus more on increasing sales and reduce the ratio of debt in their capital structure composition.
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