The Impact of Working Capital Management Practices on the Profitability: A Comparative Study between Listed Capital Goods and Material Sector Companies in Sri Lanka

Abstract

Introduction – The documented evidence indicate that Working Capital Management Practices (WCMP) have a significant impact on the firm’s profitability. However, the WCMPs vary between industries. Accordingly, this study investigates whether the impact of WCMP on the profitability is different between CG sector and Material sector taking evidence from mid-cap and small cap the companies listed in the Colombo Stock Exchange. Methodology – This study has selected 16 listed companies from CG Sector and Material Sector. The data are collected using annual reports from 2014 to 2019. The Regression includes ROA as the dependent variable and the Working Capital measures as independent variables. Further, the model controls for size, sales growth and debt. Moreover, sector wise ranking is used to identify the industry wise differences of WCMP. Findings - The findings show that the WCMP has a statistically significant and a marginal impact on ROA. Further, the profitability of Material Sector is more negatively responsive to Debtors Conversion Period (DCP) and more positively responsive to Creditors Conversion Period (CCP). Furthermore, the Cash Conversion Cycle (CCC) is more negatively responsive to the profitability of CG Sector. According to sector wise ranking analysis, Material Sector manage the WCMP better overall due to the Conclusion – Material Sector is more responsive to DCP and CCP. Therefore, the managers should provide more attention towards better management of debtors and creditors. The CG sector required to pay attention towards the overall working capital management. Therefore, the managers should ensure the better working capital management practices are in place.