Effects of working capital management on corporate profitability

The management of working capital has an important bearing on the profitability of an enterprise. Generally, the higher the working capital, the less the rate of return on capital employed while a lower value of working capital yields a higher rate of return. Hence, in this part of analysis, an attempt is made to study the association of profitability with working capital. The impact of working capital on profitability has been examined by regression between profitability ratio and working capital ratios. The study of the impact of working capital ratio on profitability of the whole industry showed both negative and positive impact. Two out of six working capital ratios viz., liquidity ratio and cash turnover ratio have shown negative association and remaining ratios have shown positive association with profitability. The pooled regression results of the model showing the impact of working capital ratios on profitability for Indian oil refineries as a whole are encouraging.