IDEAS home Printed from https://ideas.repec.org/a/gam/jrisks/v10y2022i12p236-d1000884.html
   My bibliography  Save this article

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

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2227-9091/10/12/236/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/2227-9091/10/12/236/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Houshang Habibniya & Suzan Dsouza & Mustafa Raza Rabbani & Nishad Nawaz & Rezart Demiraj, 2022. "Impact of Capital Structure on Profitability: Panel Data Evidence of the Telecom Industry in the United States," Risks, MDPI, vol. 10(8), pages 1-19, August.
    2. Tomas Kliestik & Alena Novak Sedlackova & Martin Bugaj & Andrej Novak, 2022. "Stability of profits and earnings management in the transport sector of Visegrad countries," Oeconomia Copernicana, Institute of Economic Research, vol. 13(2), pages 475-509, June.
    3. Hakim Lyngstadaas & Terje Berg, 2016. "Working capital management: evidence from Norway," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 12(3), pages 295-313, June.
    4. Greg Filbeck & Thomas M. Krueger, 2005. "An Analysis of Working Capital Management Results Across Industries," American Journal of Business, Emerald Group Publishing, vol. 20(2), pages 11-20.
    5. Hakim Lyngstadaas & Terje Berg, 2016. "Working capital management: evidence from Norway," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 12(3), pages 295-313, June.
    6. Suzan Dsouza & Mustafa Raza Rabbani & Iqbal Thonse Hawaldar & Ajay Kumar Jain, 2022. "Impact of Bank Efficiency on the Profitability of the Banks in India: An Empirical Analysis Using Panel Data Approach," IJFS, MDPI, vol. 10(4), pages 1-18, October.
    7. Hakim Lyngstadaas & Terje Berg, 2016. "Working capital management: evidence from Norway," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 12(3), pages 295-313, June.
    8. Vikash Ramiah & Yilang Zhao & Imad Moosa, 2014. "Working capital management during the global financial crisis: the Australian experience," Qualitative Research in Financial Markets, Emerald Group Publishing Limited, vol. 6(3), pages 332-351, November.
    9. A.K. Sharma & Satish Kumar, 2011. "Effect of Working Capital Management on Firm Profitability," Global Business Review, International Management Institute, vol. 12(1), pages 159-173, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Hong, Seock-Jin & Farris, Martin Theodore & Pohlen, Terrance L. & Idug, Yavuz, 2023. "Exploring the impact of working capital in the U.S. aviation industry for profitability and shareholder value," Transport Policy, Elsevier, vol. 144(C), pages 90-101.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Burney, Robert B. & James, Hui Liang & Wang, Hongxia, 2021. "Working capital management and CEO age," Journal of Behavioral and Experimental Finance, Elsevier, vol. 30(C).
    2. Mafumbate J & Ndlovu U & Mafuka A & Gavhure P, 2017. "The Influence of Firm Specific Determinants on Financial Performance in the Power Industry," Journal of Economics and Behavioral Studies, AMH International, vol. 9(5), pages 18-28.
    3. Sumathi Kumaraswamy, 2016. "Impact of Working Capital on Financial Performance of Gulf Cooperation Council Firms," International Journal of Economics and Financial Issues, Econjournals, vol. 6(3), pages 1136-1142.
    4. Muhammad Azeem Naz & Rizwan Ali & Ramiz Ur Rehman & Collins G. Ntim, 2022. "Corporate governance, working capital management, and firm performance: Some new insights from agency theory," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(5), pages 1448-1461, July.
    5. Najib H. S Farhan & Faozi A. Almaqtari & Ebrahim Mohammed Al-Matari & Nabil Ahmed M. SENAN & Waleed M. Alahdal & Saddam A. Hazaea, 2021. "Working Capital Management Policies in Indian Listed Firms: A State-Wise Analysis," Sustainability, MDPI, vol. 13(8), pages 1-25, April.
    6. Odunayo Magret Olarewaju & Mishelle Doorasamy & Titilayo Moromoke Oladejo, 2017. "Nexus of Working Capital Management and Firm Performance in Nigerian Food and Beverages Industries: A Link with Risk-Return Theory," Journal of Economics and Behavioral Studies, AMH International, vol. 9(1), pages 90-98.
    7. Dalci, Ilhan & Ozyapici, Hasan, 2018. "Working capital management policy in health care: The effect of leverage," Health Policy, Elsevier, vol. 122(11), pages 1266-1272.
    8. Dina Korent, 2021. "Target adjustment model and new working capital management performance measure: Evidence from Croatia," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics and Business, vol. 39(1), pages 135-162.
    9. Wetzel, Philipp & Hofmann, Erik, 2019. "Supply chain finance, financial constraints and corporate performance: An explorative network analysis and future research agenda," International Journal of Production Economics, Elsevier, vol. 216(C), pages 364-383.
    10. Nitya Nand Tripathi & Naseem Ahamed, 2017. "Time Taken to Reach the Performance Summit: Nature of Relation Between Working Capital Management and Firm Performance in the Indian Context," International Journal of Economics and Financial Issues, Econjournals, vol. 7(4), pages 530-536.
    11. Minhas Akbar & Ahsan Akbar & Muhammad Umar Draz, 2021. "Global Financial Crisis, Working Capital Management, and Firm Performance: Evidence From an Islamic Market Index," SAGE Open, , vol. 11(2), pages 21582440211, May.
    12. ManYing Kang & Marcel Ausloos, 2017. "An Inverse Problem Study: Credit Risk Ratings as a Determinant of Corporate Governance and Capital Structure in Emerging Markets: Evidence from Chinese Listed Companies," Economies, MDPI, vol. 5(4), pages 1-23, November.
    13. Lupu Dan, 2013. "Financial Micromanagement For Bse Firms," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 5, pages 5-9, October.
    14. Zheng, Xiaotian & Zhou, Youcheng & Iqbal, Sajid, 2022. "Working capital management of SMEs in COVID-19: role of managerial personality traits and overconfidence behavior," Economic Analysis and Policy, Elsevier, vol. 76(C), pages 439-451.
    15. Abudu Braimah & Yinping Mu & Isaac Quaye & Alhassan Abubakar Ibrahim, 2021. "Working Capital Management and SMEs Profitability in Emerging Economies: The Ghanaian Case," SAGE Open, , vol. 11(1), pages 21582440219, February.
    16. Małgotrzata B. Okręglicka, 2014. "The Economic Recession And Working Capital Management Of Companies In Poland," Economy & Business Journal, International Scientific Publications, Bulgaria, vol. 8(1), pages 696-706.
    17. Ajaya Kumar Panda & Swagatika Nanda & Pradiptarathi Panda, 2021. "Working Capital Management, Macroeconomic Impacts, and Firm Profitability: Evidence from Indian SMEs," Business Perspectives and Research, , vol. 9(1), pages 144-158, January.
    18. Padachi Kesseven D & Carole Howorth, 2014. "Focus on working capital management practices among Mauritian SMEs: Survey evidence and empirical analysis," E3 Journal of Business Management and Economics., E3 Journals, vol. 5(4), pages 097-108.
    19. Chauhan, Gaurav Singh, 2019. "Are working capital decisions truly short-term in nature?," Journal of Business Research, Elsevier, vol. 99(C), pages 238-253.
    20. Pejman Peykani & Mostafa Sargolzaei & Mohammad Hashem Botshekan & Camelia Oprean-Stan & Amir Takaloo, 2023. "Optimization of Asset and Liability Management of Banks with Minimum Possible Changes," Mathematics, MDPI, vol. 11(12), pages 1-24, June.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jrisks:v:10:y:2022:i:12:p:236-:d:1000884. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.