The Effect of Cash Conversion Cycle on Profitability in Omani Companies

  • Ilker Yilmaz Dhofar University, Oman
  • Goksel Acar Dhofar University, Oman
Keywords: Cash conversion cycle, Working capital management, Liquidity, Oman

Abstract

This article investigates the relationship between working capital management (WCM) and several profitability measures. We used cash conversion cycle (CCC) and its components as the measure of working capital management and used different profitability ratios such as gross profit margin, EBIT margin, and return on assets (ROA). By using the data from 66 non-financial companies for a four-year period from 2013 to 2016, we performed dynamic panel data analyses. We applied the generalized method of moments (GMM) to test how WCM affects profitability. Results revealed that CCC has nonlinear significant effect on GPM and EBITM, whereas, among its components, only Accounts Payable Days (APD) has significant effect on GPM and EBITM. However, ROA is not influenced by CCC and its components.

References

Abuzayed, B. “Working Capital Management and Firms’ Performance in Emerging Markets: The Case of Jordan.” International Journal of Managerial Finance 8, no. 2 (2012): 155-79.

Adekola, A., M. Samy, and D. Knight. “Efficient Working Capital Management as The Tool for Driving Profitability and Liquidity: A Correlation Analysis of Nigerian Companies.” International Journal of Business and Globalisation 18, no. 2 (2017): 251-75.

Altaf, N., and F.A. Shah. "How Does Working Capital Management Affect the Profitability of Indian Companies?" Journal of Advances in Management Research 15, no. 3 (2018): 347-66.

Baltagi, Badi H. Econometric Analysis of Panel Data 3rd Edition. England: John Wiley and Sons, 2005.

Ba˜nos-Caballero, S., P.J. García-Teruel., and P. Martínez-Solano. “Working Capital Management, Corporate Performance, and Financial Constraints.” Journal of Business Research 67, no. 3 (2013): 332-8.

_______. “Net Operating Working Capital and Firm Value: A Cross-Country Analysis.” BRQ Business Research Quarterly, Article in press (2019).

Ben Le. “Working Capital Management and Firm’s Valuation, Profitability and Risk: Evidence from A Developing Market.” International Journal of Managerial Finance 15, no. 2 (2019): 191-204.

Chang, C.C. “Cash Conversion Cycle and Corporate Performance: Global Evidence.” International Review of Economics and Finance 56, (2018): 568-81.

Ching, H.Y., M.S.A. Novazzi, and F. Gerab. “Relationship Between Working Capital Management and Profitability in Brazilian Listed Companies.” Journal of Global Business and Economics 3, no.1 (2011): 74-86.

Deloof, M. “Does Working Capital Management Affect Profitability of Belgian Firms?” Journal of Business Finance & Accounting 30, no. 3-4 (2003): 573-88.

Enqvist, J., M. Graham, and J. Nikkinen. “The Impact of Working Capital Management on Firm Profitability in Different Business Cycles: Evidence from Finland.” Research in International Business and Finance 32 (2014): 36-49.

Keown, Arthur. J., John. D. Martin, J. William. Petty, and David. F. Scott, Foundations of Finance. 4th ed. New Jersey: Pearson Education, 2003.

Lazaridis, I., and T. Tryfonidis. “Relationship Between Working Capital Management and Profitability of Listed Firms In The Athens Stock Exchange.” Journal of Financial Management and Analysis 19, no. 1 (2006): 26-35.

Marttonen, M., S. Monto, and T. Kärri. "Profitable Working Capital Management in Industrial Maintenance Companies." Journal of Quality in Maintenance Engineering 19, no. 4 (2013): 429-46.

Mathuva, D. "The Influence of Working Capital Management Components on Corporate Profitability: A Survey On Kenyan Listed Firms." Research Journal of Business Management 4, no.1 (2010): 1-11.

Moussa, A.A. “Determinants of Working Capital Behavior: Evidence from Egypt.” International Journal of Managerial Finance 15, no.1 (2019): 39-61.

Padachi, K. “Trends in Working Capital Management and its Impact On Firms’ Performance: An Analysis of Mauritian Small Manufacturing Firms.” International Review of Business Research Papers 2, no. 2 (2006): 45-58.

Pass, C.L., and R.H. Pike. “An Overview of Working Capital Management and Corporate Financing.” Managerial Finance 10, no. 3 (1984): 1–11.

Paul, S., and N. Wilson. “Trade Credit Supply: An Empirical Investigation of Companies Level Data.” Journal of Accounting, Business and Management 13 (2006): 85-113.

Richards, V.D., and E.J. Laughlin. “A Cash Conversion Cycle Approach to Liquidity Analysis.” Financial Management 9, no. 1 (1980): 32-8.

Singhania, M., and P. Mehta. “Working Capital Management and Firms’ Profitability: Evidence from Emerging Asian Countries.” South Asian Journal of Business Studies 6, no.1 (2017): 80-97.

Smith, K. Profitability Versus Liquidity Tradeoffs in Working Capital Management, In Readings on the Management of Working Capital, New York: West Publishing Company, 1980.

Tran, H., M. Abbott, and C.J. Yap. “How Does Working Capital Management Affect the Profitability of Vietnamese Small- And Medium-Sized Enterprises?” Journal of Small Business and Enterprise Development 24, no. 1 (2017): 2-11.

Wooldridge, Jeffrey. M, Introductory Econometrics, A Modern Approach. Mason, Ohio: South-Western Cengage Learning, 2012.

Yazdanfar, D. and P. Öhman. “The Impact of Cash Conversion Cycle On Firm Profitability.” International Journal of Managerial Finance 10, no. 4 (2014): 442-52.

Published
2019-12-31
How to Cite
Yilmaz, I., & Acar, G. (2019). The Effect of Cash Conversion Cycle on Profitability in Omani Companies. International Journal of Economics, Management and Accounting, 27(2), 269-290. Retrieved from https://journals.iium.edu.my/enmjournal/index.php/enmj/article/view/654
Section
Articles