The impact of working capital management upon Chinese manufacturing companies’ profitability

Abstract

The purpose of this study is to investigate the impact of working capital management and its components upon the profitability of Chinese manufacturing companies. The impact of working capital management upon corporate profitability is assessed by the pooled regression type of panel data analysis. The cash conversion cycle is used as a comprehensive measure for working capital management, while the gross operating profitability is used as a measure for profitability. Using a sample of 874 Chinese manufacturing firms listed on Shanghai Stock Exchange for a period of six years from 2012 – 2017, the results of the regression analysis showed a significant negative relationship between the receivables collection period, inventory conversion period, payables deferral period, cash conversion cycle, and profitability. An inverse relationship between liquidity, which measured by current ratio, and profitability was also found. This suggests that manufacturing firms can improve their profitability by reducing the period during which working capital is tied up within the firm, and by keeping each different component to an optimum level.