Impact of Working Capital Management on Profitability: The Case of Selected Private Real Estate Companies in Addis Ababa, Ethiopia
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2021-04
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Abstract
Working capital management refers to management of current assets and current liabilities. Firms may have an optimal level of working capital that maximizes their value. This study examined the impact of working capital management on a company’s performance by using audited financial statements a sample of 15 selected private real estate companies in Addis Ababa Ethiopia for the period of 2015 to 2019 G.C. The performance was measured regarding profitability by return on assets and return equity as dependent variables. The working capital management measured by the average collection period, inventory conversion period, average payment period, cash conversion cycle, and the net trading cycle used as independents variables. Sales growth, debt ratio, current ratio, and company size uses as control variables. The data has been analyzing using STATA version 14.2 software and examined by computing coefficient of correlation regression analysis between profitability ratio and some key working capital management indicator ratios. The result revealed that operating profitability measures as return on asset and return on equity is negatively associated with the measure of working capital management average collection period, inventory conversion cycle, cash conversion cycle, net trade cycle and positively associated with the average payment period. The correlation coefficients for all measures of WCM are significant with the company’s profitability measure as return on asset except for the inventory conversion cycle, but the correlation coefficients for all measures of working capital management are not significant with the company’s profitability measure as return on equity except for the average payment period. According to the results of the study suggested that companies can increase profitability by maintaining an optimal level of working capital.
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private real estate companies, working capital management