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Working Capital Management Impact on Profitability: Pre-Pandemic and Pandemic Evidence from the European Automotive Industry

Author

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  • Rezart Demiraj

    (Accounting Department, College of Business Administration, American University of the Middle East, Egaila 54200, Kuwait)

  • Suzan Dsouza

    (Accounting Department, College of Business Administration, American University of the Middle East, Egaila 54200, Kuwait)

  • Mohammad Abiad

    (Mathematics and Statistics Department, College of Business Administration, American University of the Middle East, Egaila 54200, Kuwait)

Abstract

Efficient management of working capital is essential for firms to avoid overinvesting in short-term assets for maximum profitability while guaranteeing much-needed liquidity to run their operations. This study examines the impact of working capital management on firms’ profitability in the automotive industry in Europe before and during the COVID-19 pandemic period. The automotive industry is vital to the European economy, being a major component of the total industrial value added to the GDP of the continent. Existing research on this topic is inconclusive, and there is a gap in the literature exploring the working capital management effect on firm performance in periods of crisis. Unlike most research, this study focuses on a single industry to better capture the impact of working capital management on firm profitability. It also adds the COVID-19 dimension to stress the importance of proper working capital management, especially in periods of economic distress. The results show that the receivables collection period, inventory conversion period, accounts payable period, and cash conversion cycle have a significant negative impact on ROA for both the pre-pandemic and pandemic period, suggesting that managers must be prudent regarding their firm’s credit policy by not being overly generous with credit terms and making every effort to promptly collect their receivables. Moreover, excessive levels of inventory impair profitability by locking up valuable cash reserves, which are vital, especially in periods of crisis. Though seemingly counterintuitive, being profitable also means not postponing payables settlement unnecessarily.

Suggested Citation

  • Rezart Demiraj & Suzan Dsouza & Mohammad Abiad, 2022. "Working Capital Management Impact on Profitability: Pre-Pandemic and Pandemic Evidence from the European Automotive Industry," Risks, MDPI, vol. 10(12), pages 1-21, December.
    • Handle: RePEc:gam:jrisks:v:10:y:2022:i:12:p:236-:d:1000884
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    References listed on IDEAS

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