The Relationship between Working Capital Management and Profitability: Evidence from Saudi Cement Companies

Abstract

Aims: This paper investigated the relationship between the working capital management (WCM) and the firms' profitability for the Saudi cement manufacturing companies. Methodology: There are 13 Saudi cement manufacturing companies operating in the market. Only eight companies were included which are listed in the Saudi stock exchange market (Tadawul) and were established before the year 2005, and the rest were excluded for the period of 5 years from 2008-2012. Results: The study results showed that, Saudi cement industry current ratio is the most important liquidity measure which effected profitability, therefore, the cement firms must set a trade-off between these two objectives so that, neither the liquidity nor profitability suffers. It was also found, as the size of a firm increases, profitability increased. Besides, when the debt financing increased, profitability declined. Linear regression tests confirmed a high degree of association between the working capital management and profitability. Conclusion: The Saudi cement firms could strengthened their working capital in more efficient ways by adopting more advanced financial devices which will help them to manage cash, accounts receivables and inventories, and will ultimately increase their profitability. There is much to be done about working capital in Saudi Arabia in future.