Working capital as a determinant of firm performance

Abstract

The objective of this study is to examine the relationship between firm’s working capital and financial performance across three distinct sectors namely services sector, food and agro sector, and real estate sector. Using three different datasets for the three sectors spanning a period of ten years from 2011 to 2020, we found a positive and statistically significant relationship between working capital and financial performance across all sectors. The magnitude of the relationship is strongest in the food and agro sector, followed by the services sector and the real estate sector. The net working capital is the highest in the real estate sector, which is unsurprising given its capital intensive nature. Surprisingly, the proportion of debt to total assets is the highest in the services sector. The constituent components of net operating cycle are statistically significant for all the sectors but with varying degree. Promoter’s holding is more than 50% across all sectors and the promoters’ composition (predominance of Indian versus foreign promoter) is largely statistically insignificant in determining the return on assets (ROA) for the services and real estate sector.