Profitability and working capital management: evidence from the Warsaw Stock Exchange
Abstract
The aim of this paper is to identify the relationships between measures of working capital management (cash conversion cycle /CCC/, working capital value /WC/ and the financial liquidity /CR/) and profitability of companies listed on the Warsaw Stock Exchange. The research material consisted of data of 326 companies from 1998–2016. The analysis revealed significant non-linear relationship between WC, CR and profitability. When WC and CR values grow, profitability increases, but at a slower pace. However, there is a linear negative relationship between CCC and profitability. The results are influenced by the industry and the GDP growth. This indicates that profit-driven entrepreneurs try to delay payments to suppliers. They pay off bank loans from the funds thus generated. This study contributes to the verification of theories linking profitability with working capital management with emphasis on the influence of the industry. The results have practical implications: companies with growing profitability should not lose sight of the shortening CCC when paying off short-term loans; in some industries decreasing profitability while CR values grow may mean problems with the efficient use of current assets.
Keyword : profitability, liquidity, working capital management, cash conversion cycle, current ratio, Warsaw Stock Exchange
How to Cite
Jaworski, J., & Czerwonka, L. (2022). Profitability and working capital management: evidence from the Warsaw Stock Exchange. Journal of Business Economics and Management, 23(1), 180–198. https://doi.org/10.3846/jbem.2022.15087
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Chang, C. C. (2018). Cash conversion cycle and corporate performance: Global evidence. International Review of Economics and Finance, 56, 568–581. https://doi.org/10.1016/j.iref.2017.12.014
Charitou, M., Lois, P., & Santoso, H. B. (2012). The relationship between working capital management and firm’s profitability: A empirical investigation for an emerging Asian country. International Business and Economics Research Journal, 11(8), 839–849. https://doi.org/10.19030/iber.v11i8.7162
Deloof, M. (2003). Does working capital management affect profitability of Belgian firms? Journal of Business Finance and Accounting, 30(3/4), 573–587. https://doi.org/10.1111/1468-5957.00008
Diakomihalis, M. N. (2012). The accuracy of Altman’s models in predicting hotel bankruptcy. International Journal of Accounting and Financial Reporting, 2(2), 96–113. https://doi.org/10.5296/ijafr.v2i2.2367
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Gołaś, Z. (2020). Impact of working capital management on business profitability: Evidence from the Polish dairy industry. Agricultural Economics / Zemedelska Ekonomika, 66(6), 278–285. https://doi.org/10.17221/335/2019-AGRICECON
Greene, W. H. (2003). Econometric analysis. Prentice Hall.
Jaworski, J., & Czerwonka, L. (2018a). Cykl operacyjny i jego elementy składowe a rentowność spółek notowanych na GPW w Warszawie. Prace Naukowe Uniwersytetu Ekonomicznego We Wrocławiu, 533, 110–118. https://doi.org/10.15611/pn.2018.533.11
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Khan, N., Bilal, M., Malik, I. R., Kashif, A. R., & Sajid, A. R. (2020). Relationship of working capital to corporate performance and stock price: Evidence from the manufacturing sector of Pakistan. International Transaction Journak of Engineering Management & Applied Sciences & Technologies, 11(13), 1–11. https://doi.nrct.go.th//ListDoi/listDetail?Resolve_DOI=10.14456/itjemast.2020.267
Kieschnick, R. L., Laplante, M., & Moussawi, R. (2011). Working capital management and shareholder wealth. Review of Finance, 17(5), 1827–1852. https://doi.org/10.1093/rof/rfs043
Le, B. (2019). Working capital management and firm’s valuation, profitability and risk: Evidence from a developing market. International Journal of Managerial Finance, 15(2), 191–204. https://doi.org/10.1108/IJMF-01-2018-0012
Li, C. G., Dong, H. M., Chen, S., & Yang, Y. (2014). Working capital management, corporate performance, and strategic choices of the wholesale and retail industry in China. Scientific World Journal, 2014, 1–16. https://doi.org/10.1155/2014/953945
Lynch, S. M. (2013). Comparing means across multiple groups: Analysis of variance (ANOVA). In Using statistics in social research (pp. 117–126). Springer. https://doi.org/10.1007/978-1-4614-8573-5_8
Mun, S. G., & Jang, S. C. S. (2015). Working capital, cash holding, and profitability of restaurant firms. International Journal of Hospitality Management, 48, 1–11. https://doi.org/10.1016/j.ijhm.2015.04.003
Notoria Serwis. (n.d.). Dane finansowe dla inwestorów. https://ir.notoria.pl/
Opler, T., Pinkowitz, L., Stulz, R., & Wiliamson, R. (1999). The determinants and implications of corporate cash holdings. Journal of Financial Economics, 52(1), 3–46. https://doi.org/10.1016/S0304-405X(99)00003-3
Paszko, D., & Pawlak, J. (2014). Rentowność kapitału własnego a poziom płynności i warzyw. Roczniki Naukowe Ekonomii Rolnictwa i Rozwoju Obszarów Wiejskich, 101(3), 162–170. http://sj.wne.sggw.pl/article-RNR_2014_n3_s162/
Perković, G. (2012). The impact of working capital management on profitability of manufacturing firms in Bosnia and Herzegovina. Sarajevo Business and Economics Review, 32, 117–138.
Raheman, A., Afza, T., Qayyum, A., & Bodla, M. (2010). Working capital management and corporate performance of manufacturing sector in Pakistan. International Research Journal of Finance and Economics, 47(1), 156–169. https://www.researchgate.net/publication/50341524_Working_Capital_Management_and_Corporate_Performance_of_Manufacturing_Sector_in_Pakistan
Ren, T., Liu, N., Yang, H., Xiao, Y., & Hu, Y. (2019). Working capital management and firm performance in China. Asian Review of Accounting, 27(4), 546–562. https://doi.org/10.1108/ARA-04-2018-0099
Smith, K. (1980). Profitability versus liquidity tradeoffs in working capital management. In K. Smith (Ed.), Readings on the management of working capital (pp. 549–562). West Publishing Company.
Singh, H. P., Kumar, S., & Colombage, S. (2017). Working capital management and firm profitability: A meta-analysis. Qualitative Research in Financial Markets, 9(1), 34–47. https://doi.org/10.1108/QRFM-06-2016-0018
Singhania, M., & Mehta, P. (2017). Working capital management and firms’ profitability: Evidence from emerging Asian countries. South Asian Journal of Business Studies, 6(1), 80–97. https://doi.org/10.1108/SAJBS-09-2015-0060
Thapa, P. (2013). How does profitability get affected by working capital management in food and beverages industry? Munich Personal RePEc Archive, IV(50926), 1–15. https://mpra.ub.uni-muenchen.de/50926/1/MPRA_paper_50865.pdf
Wawryszuk-Misztal, A. (2007). Zależność między zarządzaniem kapitałem obrotowym netto a rentownością na przykładzie spółek notowanych na Giełdzie Papierów Wartościowych w Warszawie. Annales Universitatis Mariae Curie-Skłodowska. Sectio H: Oeconomica, 41(20), 277–287. http://yadda.icm.edu.pl/yadda/element/bwmeta1.element.ekon-element-000171331433
Yilmaz, I., & Acar, G. (2019). The effect of cash conversion cycle on profitability Omani companies. International Journal of Economics Management and Accounting, 27(2), 269–290. https://journals.iium.edu.my/enmjournal/index.php/enmj/article/view/654
Zawadzka, D., Ardan, R., & Szafraniec-Siluta, E. (2011). Płynność finansowa a rentowność przedsiębiorstw rolnych w Polsce – ujęcie modelowe. Zeszyty Naukowe SGGW. Ekonomika i Organizacja Gospodarki Żywnościowej, 88, 195–207. http://yadda.icm.edu.pl/yadda/element/bwmeta1.element.ekon-element-000171375999
Akgün, A. I., & Karataş, A. M. (2021). Investigating the relationship between working capital management and business performance: Evidence from the 2008 financial crisis of EU-28. International Journal of Managerial Finance, 17(4), 545–567. https://doi.org/10.1108/IJMF-08-2019-0294
Alarussi, A. S., & Alhaderi, S. M. (2018). Factors affecting profitability in Malaysia. Journal of Economic Studies, 45(3), 442–458. https://doi.org/10.1108/JES-05-2017-0124
Baños-Caballero, S., García-Teruel, P. J., & Martínez-Solano, P. (2012). How does working capital management affect the profitability of Spanish SMEs? Small Business Economics, 39(2), 517–529. https://doi.org/10.1007/s11187-011-9317-8
Baser, F., Gokten, S., Kucukkocaoglu, G., & Ture, H. (2016). Liquidity-profitability tradeoff existance in Turkey: An empirical investigation under structural equation modeling. Copernican Journal of Finance & Accounting, 5(2), 27–43. https://doi.org/10.12775/CJFA.2016.013
Bieniasz, A., & Gołaś, Z. (2011). The influence of working capital management on the food industry enterprises profitability. Contemporary Economics, 5(4), 68–81. https://doi.org/10.5709/ce.1897-9254.29
Bolek, M., & Wiliński, W. (2012). The influence of liquidity on profitability of Polish construction sector companies. E-Finanse: Financial Internet Quarterly, 8(1), 38–52. https://www.econstor.eu/bitstream/10419/66742/1/721357075.pdf
Boțoc, C., & Anton, S. G. (2017). Is profitability driven by working capital management? Evidence for high-growth firms from emerging Europe. Journal of Business Economics and Management, 18(6), 1135–1155. https://doi.org/10.3846/16111699.2017.1402362
Brealey, R. A., Myers, S. C., & Allen, F. (2016). Principles of corporate finance (12th ed.). McGraw-Hill Education. https://www.amazon.com/Principles-Corporate-Finance-Connect-Richard/dp/1259692175
Capkun, V., Hameri, A. P., & Weiss, L. A. (2005). On the relationship between inventory and financial performance in manufacturing companies. International Journal of Operations & Production Management, 29(8), 789–806. https://doi.org/10.1108/01443570910977698
Chang, C. C. (2018). Cash conversion cycle and corporate performance: Global evidence. International Review of Economics and Finance, 56, 568–581. https://doi.org/10.1016/j.iref.2017.12.014
Charitou, M., Lois, P., & Santoso, H. B. (2012). The relationship between working capital management and firm’s profitability: A empirical investigation for an emerging Asian country. International Business and Economics Research Journal, 11(8), 839–849. https://doi.org/10.19030/iber.v11i8.7162
Deloof, M. (2003). Does working capital management affect profitability of Belgian firms? Journal of Business Finance and Accounting, 30(3/4), 573–587. https://doi.org/10.1111/1468-5957.00008
Diakomihalis, M. N. (2012). The accuracy of Altman’s models in predicting hotel bankruptcy. International Journal of Accounting and Financial Reporting, 2(2), 96–113. https://doi.org/10.5296/ijafr.v2i2.2367
Ding, S., Guariglia, A., & Knight, J. (2013). Investment and financing constraints in China: Does working capital management make a difference? Journal of Banking and Finance, 37(5), 1490–1507. https://doi.org/10.1016/j.jbankfin.2012.03.025
Ebben, J. J., & Johnson, A. C. (2011). Cash conversion cycle management in small firms: Relationships with liquidity, invested capital, and firm performance. Journal of Small Business and Entrepreneurship, 24(3), 381–396. https://doi.org/10.1080/08276331.2011.10593545
Gallinger, G. W. (1997). The current and quick ratios: Do they stand up to scrutiny. Business Credit, 99(5), 24–25.
Gentry, J. (1976). Management perceptions of the working capital process (Faculty Working Papers, 352). College of Commerce and Business Administration, University of Illinois at Urbana-Champaign, Illinois. https://core.ac.uk/download/pdf/4835142.pdf
Gill, A., Biger, N., & Mathur, N. (2010). The relationship between working capital management and profitability: Evidence from the United States. Business and Economics Journal, 2010(BEJ-10), 1–10. https://www.researchgate.net/publication/284875433_The_Relationship_Between_Working_Capital_Management_And_Profitability_Evidence_From_The_United_States
Gitman, L. J. (1974). Estimating corporate liquidity requirements: A simplified approach. Financial Review, 9(1), 79–88. https://doi.org/10.1111/j.1540-6288.1974.tb01453.x
Gołaś, Z. (2020). Impact of working capital management on business profitability: Evidence from the Polish dairy industry. Agricultural Economics / Zemedelska Ekonomika, 66(6), 278–285. https://doi.org/10.17221/335/2019-AGRICECON
Greene, W. H. (2003). Econometric analysis. Prentice Hall.
Jaworski, J., & Czerwonka, L. (2018a). Cykl operacyjny i jego elementy składowe a rentowność spółek notowanych na GPW w Warszawie. Prace Naukowe Uniwersytetu Ekonomicznego We Wrocławiu, 533, 110–118. https://doi.org/10.15611/pn.2018.533.11
Jaworski, J., & Czerwonka, L. (2018b). Relationship between profitability and liquidity of enterprises listed on Warsaw stock exchange. In H. Ribeira, D. Naletina, & A. L. da Silva (Eds.), Economic and Social Development. 35th International Scientific Conference on Economic and Social Development – “Sustainability from an Economic and Social Perspective” Book of Proceedings (pp. 326–334). Varazdin Development and Entrepreneurship Agency. https://www.esd-conference.com/upload/book_of_proceedings/Book_of_Proceedings_esdLisbon2018_Online.pdf
Jaworski, J., Czerwonka, L., & Mądra-Sawicka, M. (2018). Zależność między rentownością a płynnością finansową w sektorze przetwórstwa spożywczego w Polsce. Roczniki Naukowe Stowarzyszenia Ekonomistów Rolnictwa i Agrobiznesu, 20(1), 58–63. https://doi.org/10.5604/01.3001.0011.7229
Kayani, U. N., De Silva, T.-A., & Gan, Ch. (2020). Working capital management and firm performance relationship: An empirical investigation of Australasian firms. Review of Pacific Basin Financial Markets and Policies, 23(3), 20500265. https://doi.org/10.1142/S0219091520500265
Khan, N., Bilal, M., Malik, I. R., Kashif, A. R., & Sajid, A. R. (2020). Relationship of working capital to corporate performance and stock price: Evidence from the manufacturing sector of Pakistan. International Transaction Journak of Engineering Management & Applied Sciences & Technologies, 11(13), 1–11. https://doi.nrct.go.th//ListDoi/listDetail?Resolve_DOI=10.14456/itjemast.2020.267
Kieschnick, R. L., Laplante, M., & Moussawi, R. (2011). Working capital management and shareholder wealth. Review of Finance, 17(5), 1827–1852. https://doi.org/10.1093/rof/rfs043
Le, B. (2019). Working capital management and firm’s valuation, profitability and risk: Evidence from a developing market. International Journal of Managerial Finance, 15(2), 191–204. https://doi.org/10.1108/IJMF-01-2018-0012
Li, C. G., Dong, H. M., Chen, S., & Yang, Y. (2014). Working capital management, corporate performance, and strategic choices of the wholesale and retail industry in China. Scientific World Journal, 2014, 1–16. https://doi.org/10.1155/2014/953945
Lynch, S. M. (2013). Comparing means across multiple groups: Analysis of variance (ANOVA). In Using statistics in social research (pp. 117–126). Springer. https://doi.org/10.1007/978-1-4614-8573-5_8
Mun, S. G., & Jang, S. C. S. (2015). Working capital, cash holding, and profitability of restaurant firms. International Journal of Hospitality Management, 48, 1–11. https://doi.org/10.1016/j.ijhm.2015.04.003
Notoria Serwis. (n.d.). Dane finansowe dla inwestorów. https://ir.notoria.pl/
Opler, T., Pinkowitz, L., Stulz, R., & Wiliamson, R. (1999). The determinants and implications of corporate cash holdings. Journal of Financial Economics, 52(1), 3–46. https://doi.org/10.1016/S0304-405X(99)00003-3
Paszko, D., & Pawlak, J. (2014). Rentowność kapitału własnego a poziom płynności i warzyw. Roczniki Naukowe Ekonomii Rolnictwa i Rozwoju Obszarów Wiejskich, 101(3), 162–170. http://sj.wne.sggw.pl/article-RNR_2014_n3_s162/
Perković, G. (2012). The impact of working capital management on profitability of manufacturing firms in Bosnia and Herzegovina. Sarajevo Business and Economics Review, 32, 117–138.
Raheman, A., Afza, T., Qayyum, A., & Bodla, M. (2010). Working capital management and corporate performance of manufacturing sector in Pakistan. International Research Journal of Finance and Economics, 47(1), 156–169. https://www.researchgate.net/publication/50341524_Working_Capital_Management_and_Corporate_Performance_of_Manufacturing_Sector_in_Pakistan
Ren, T., Liu, N., Yang, H., Xiao, Y., & Hu, Y. (2019). Working capital management and firm performance in China. Asian Review of Accounting, 27(4), 546–562. https://doi.org/10.1108/ARA-04-2018-0099
Smith, K. (1980). Profitability versus liquidity tradeoffs in working capital management. In K. Smith (Ed.), Readings on the management of working capital (pp. 549–562). West Publishing Company.
Singh, H. P., Kumar, S., & Colombage, S. (2017). Working capital management and firm profitability: A meta-analysis. Qualitative Research in Financial Markets, 9(1), 34–47. https://doi.org/10.1108/QRFM-06-2016-0018
Singhania, M., & Mehta, P. (2017). Working capital management and firms’ profitability: Evidence from emerging Asian countries. South Asian Journal of Business Studies, 6(1), 80–97. https://doi.org/10.1108/SAJBS-09-2015-0060
Thapa, P. (2013). How does profitability get affected by working capital management in food and beverages industry? Munich Personal RePEc Archive, IV(50926), 1–15. https://mpra.ub.uni-muenchen.de/50926/1/MPRA_paper_50865.pdf
Wawryszuk-Misztal, A. (2007). Zależność między zarządzaniem kapitałem obrotowym netto a rentownością na przykładzie spółek notowanych na Giełdzie Papierów Wartościowych w Warszawie. Annales Universitatis Mariae Curie-Skłodowska. Sectio H: Oeconomica, 41(20), 277–287. http://yadda.icm.edu.pl/yadda/element/bwmeta1.element.ekon-element-000171331433
Yilmaz, I., & Acar, G. (2019). The effect of cash conversion cycle on profitability Omani companies. International Journal of Economics Management and Accounting, 27(2), 269–290. https://journals.iium.edu.my/enmjournal/index.php/enmj/article/view/654
Zawadzka, D., Ardan, R., & Szafraniec-Siluta, E. (2011). Płynność finansowa a rentowność przedsiębiorstw rolnych w Polsce – ujęcie modelowe. Zeszyty Naukowe SGGW. Ekonomika i Organizacja Gospodarki Żywnościowej, 88, 195–207. http://yadda.icm.edu.pl/yadda/element/bwmeta1.element.ekon-element-000171375999