Working capital management, liquidity and profitability relationship in Indian realty sector- A VECM approach

Working Capital Management is an integral part of financial performance of every organization. The working capital management can have significant effect on profitability and liquidity can affect the profitability of the organization. This study mainly aims to examine the relationship between working capital management, liquidity and profitability in Indian Realty Sector using econometric models.

To examine the relationship between working capital management, liquidity and profitability, the study employed econometric models such as panel unit root stationery test, panel co-integration test, VECM model and Wald test using panel data of 13 Indian real estate firms listed in National Stock Exchange for a period of 2012 to 2021. Cash cycle, return on assets, current ratio and debt equity variables were used.

The findings indicate both the long run and short run relationship between working capital management, liquidity and profitability. It is evident from the study that the working capital management has strong relationship with current ratio and return on assets in both short run and long run as indicated by the VECM model and Wald test from both the models. The other findings indicate that the optimal policies of working capital management can boost both the liquidity and profitability. It was suggested that the firms should concentrate more on efficient management of working capital to improve liquidity and profitability.

The studies in the past have mainly focused on examining the relationship of working capital management with liquidity and profitability using traditional method of analysis such as ratio analysis, correlation, simple regression model etc. In comparison, the previous studied were not comprehensive in the use of advanced econometric tools for the analysis of the relationship between working capital management and profitability, relationship between liquidity and profitability. It is also worth mentioning that the working capital plays very vital role in real estate sector. The uniqueness of this study is that there are not studies on working capital management of Indian realty sector for the study period using econometric models.