The Impact of Working Capital Management on Firm Profitability: Evidence from Egypt

Effective working capital management is crucial for any company in order to run its day-to-day operations and meet its short-term obligations. Given its vital role in maximizing operational efficiency, working capital management (WCM) is a critical factor in enhancing firm profitability. Companies operating in emerging markets face many challenges that make effective WCM essential for a company’s survival and continuity. This study aims to examine the impact of WCM on firm profitability in Egypt as an emerging market. The Generalized Least Squares (GLS) method is employed to analyze a sample of 29 Egyptian listed companies over the period 2019-2023. Return on assets (ROA), Tobin’s Q (TQ), and net profit margin (NPM) are used as firm profitability measures, while WCM is represented by the net working capital to sales ratio (NWCR). The findings of this study reveal a significant negative impact of NWCR on all firm profitability variables, suggesting that a decrease in net working capital will lead to an increase in firm profitability. The results highlight the important role that WCM can play in enhancing firm profitability, and encourage corporate managers to avoid allocating excessive investments in working capital. This research adds to the limited studies on WCM in emerging markets, and contributes to working capital literature by providing empirical evidence on the impact of WCM on firm profitability from Egypt.