Components of working capital and profitability in Saudi Arabian companies

Abstract

The study examines the influence of the cash conversion cycle (one of the components of working capital) on the firm profitability measured in terms of return on equity (ROE), return on assets (ROA), Tobin's q, and gross operating profit (GROP) in the manufacturing sector of Saudi Arabia. The study selects a sample of 100 companies from nine industrial sectors listed on the Tadawul Stock Exchange starting from 2008 to 2019. A pooled regression is estimated to report the empirical results. The results report a positive and significant association between the components of working capital in terms of cash conversion cycle and the firm profitability in terms of ROA, ROE, and Tobin's q, except for the GROP, where there is a negative and significant relationship. The study reports that the growth in firm performance is associated with supplier's financing terms and inventory ordering cost. The results also show that larger firms are more profitable than smaller firms. Hence, the current study confirms the formulated hypothesis of having a significant association between the components of working capital and firm profitability.