The Effect of Working Capital Management on Profitability

Abstract

This study investigates the effect of company characteristics on the working capitalmanagement. We employed quantitative method to examine the relationship betweencompany characteristics and the cash conversion cycle as a measure of working capitalmanagement in Swedish listed companies. The company characteristics includeprofitability, operating cash flow, company size, sale growth, current ratio and debtratio. The sample consists of 40 companies in the large cap investment segment listedon {NASDAQ} {OMX} Stockholm Exchange. Financial data are extracted from companies’annual reports of year 2007 and 2008 in order to calculate financial ratios used in thestudy.Using regression analysis, our results indicate that profitability, operating cash flow,company size and sale growth affect the company’s working capital management. First,we find that there is a significant positive association between profitability and the cashconversion cycle. Second, we find that the cash conversion cycle have significantnegative relationship with operating cash flow, company size and sale growth. Further,we examined the industry effect and find significant positive relations with the cashconversion cycle in four industry classifications as follows: materials, industrials, healthcare and information technology.