The Relationship Between Working Capital Management And Profitability Of Listed Companies In China

Working capital management both has an impact on a company’s liquidity and on its profitability. This study selected all listed companies in the Shenzhen Stock Exchange and the Shanghai Stock Exchange from2007to2011as the object to study the relationship between working capital management and the firm’s profitability. The study tested the industry’s influence on working capital management first. The results found significant differences among the working capital investment policy, financing policy and working capital management efficiency across different industries. Moreover, these significant differences were remarkably stable over the period of five years. The study also showed that conservative working capital investment policy was accompanied by aggressive working capital financing policy during the five years.Then the study chose manufacturing industry as an example to investigate the relationship between firm’s profitability and the following factors on behalf of capital management, including: current assets/total assets ratio on behalf of the working capital investment policy, liabilities/total assets ratio on behalf of the working capital financing policy, the cash cycle and its component (inventory days, receivable days and payable days) on behalf of the working capital management efficiency. Meanwhile, the paper chose operating income growth rate, asset-liability ratio and natural logarithm of firm’s total asset as control variables. The results showed that current assets/total assets ratio was positively correlated with firm’s profitability, current liabilities/total assets ratio was negatively related with firm’s profitability. So the more loose the working capital investment policy was, the more conservative the working capital financing policy was, the higher the firm’s profitability would be. The cash cycle was negatively related with firm’s profitability, its component inventory days, receivable days and payable days were negatively related with firm’s profitability. The cash cycle can be reduced to a minimum level to increase the firm’s profitability. Operating income growth rate and natural logarithm of firm’s total asset were positively related with firm’s profitability, asset-liability ratio was negatively related with firm’s profitability. The paper also verified the validity of zero working capital management.