Investigating the Effects of Working Capital Management on Firm’s Profitability: An Empirical Evidence from Egyptian Firms.

Abstract

To run the company successfully, the fixed and the current assets play a commendable role. Managing the working capital is mandatory because it has a major significance on profitability and liquidity of the business concern. Usually, it is observed that, if a firm wants to take a bigger risk for bumper profits and losses, it minimizes the dimension of its working capital in relation to the revenues it generates. If it is willing to improve its liquidity, that in turn raises the level of its working capital. This research has analysed the impact of working capital on the profitability of a sample of 25 Egyptian companies listed in the Egyptian stock exchange for a period of 10 years from 2012-2021. The various components for measuring working capital management include the Receivable days, Current ratio, and Quick ratio on the Net operating profitability of Egyptian companies. The controlled variables like; Fixed assets on total assets, the Debt ratio, and the size of the firm (measured in terms of the natural logarithm of assets) have also been used for measuring working capital management. Descriptive Statistics, Pearson’s Correlation, and Regression Analysis are used for analysing this research. All these tests are used to correlate the theories contributed by the literature by several authors with the statistical results. The results depict that, there is a positive relationship between the components of the working capital management and the profitability ratios of the Egyptian firms which indicate that, as the receivable days increase it would tend to reduce the profitability of the company. It is also observed that the negative relationship between the liquidity and the profitability of Egyptian firms.  There is a positive relationship between the size and the profitability of the firm. This indicates that, as the size of the firm increases the profitability of the firm also increases. Finally, a negative relationship is observed between the debt and profitability of the Egyptian firms. The results derived from this research signify that the managers might be able to raise their profits by reducing the time for the debtors and inventories so that, time for payables would increase