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The Relationship between Working Capital Management Efficiency and EBIT

Author

Listed:
  • Azhagaiah Ramachandran

    (Kanchi Mamunivar Centre for Post Graduate Studies, India)

  • Muralidharan Janakiraman

    (Kanchi Mamunivar Centre for Post Graduate Studies, India)

Abstract

This paper is aimed at analyzing the relationship between Working Capital Management Efficiency (WCME) and Earnings before Interest&Taxes (EBIT) of the Paper Industry in India during 1997–1998 to 2005–2006. Tomeasure the WCME three index values viz., Performance Index (PI), Utilization Index (UI), and Efficiency Index (EI) are computed, and are associated with explanatory variables, viz., Cash Conversion Cycle (CCC), Accounts Payable Days (APDAYS), Accounts Receivables Days (ARDAYS), Inventory Days (INVDAYS). Further, Fixed Financial Assets Ratio (FIXDFARA), Financial Debt Ratio (FINDBTRA) and Size (Natural log of Sales) are considered as control variables in the analysis, and are associated with the EBIT. The study reveals that the Paper Industry has managed the WC satisfactorily. The APDAYS has a significant (–)ve relationship with EBIT, which indicates that by deploying payment to suppliers they improve the EBIT. The Paper Industry in India performs remarkably well during the period, however, less profitable firms wait longer to pay their bills, and pursue a decrease in CCC.

Suggested Citation

  • Azhagaiah Ramachandran & Muralidharan Janakiraman, 2009. "The Relationship between Working Capital Management Efficiency and EBIT," Managing Global Transitions, University of Primorska, Faculty of Management Koper, vol. 7(1), pages 61-74.
    • Handle: RePEc:mgt:youmgt:v:7:y:2009:i:1:p:061-074
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    References listed on IDEAS

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    1. Marc Deloof, 2003. "Does Working Capital Management Affect Profitability of Belgian Firms?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 30(3‐4), pages 573-588, April.
    2. Marc Deloof, 2003. "Does Working Capital Management Affect Profitability of Belgian Firms?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 30(3-4), pages 573-588.
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    2. Tarik Hossain, 2020. "The effect of working capital management on profitability: A study on manufacturing companies in Bangladesh," International Journal of Research in Business and Social Science (2147-4478), Center for the Strategic Studies in Business and Finance, vol. 9(6), pages 114-122, October.
    3. Lupu Dan, 2013. "Financial Micromanagement For Bse Firms," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 5, pages 5-9, October.
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    5. Shikha Bhatia & Aman Srivastava, 2016. "Working Capital Management and Firm Performance in Emerging Economies: Evidence from India," Management and Labour Studies, XLRI Jamshedpur, School of Business Management & Human Resources, vol. 41(2), pages 71-87, May.
    6. Talwar SHALINI, 2018. "Analysis of Working Capital, ROA and Business Turnover for Firms in the FMCG, Manufacturing and Infrastructure Sectors in India," Economics and Applied Informatics, "Dunarea de Jos" University of Galati, Faculty of Economics and Business Administration, issue 3, pages 22-28.
    7. Godfred Adjapong Afrifa, 2013. "Working Capital Management Practices of UK SMEs: The Role of Education and Experience," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 3(4), pages 185-196, October.
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    More about this item

    Keywords

    Working Capital Management Efficiency; Earnings before Interest and Taxes; Current Assets; Current Liabilities; Performance Index; Utilization Index; Efficiency Index;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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