Working Capital Management and Profitability: A Sensitivity Analysis

This paper analyzes the effect of working capital management on the profitability of manufacturing firms. The data analysis was carried for 1198 manufacturing firms listed in Centre for Monitoring Indian Economy for a period of 5 years. The relationship of debtor’s days, inventory days, creditor’s days, current ratio, ratio of current liability to total assets, assets turnover ratio, financial assets to total assets, and size with return on assets employed is analyzed in this study. The authors apply correlation analysis and group wise weighted least squares regression analysis to identify the effects of these variables on profitability. The correlation analysis shows that the firms’ profitability is highly influenced by the variables relating to assets. We find a positive relationship between profitability and debtors’ days and inventory days. Creditor’s days shows a significant positive relationship. We conduct sensitivity analysis to find out the range of return on assets to the given level of independent variables