Working Capital Management and Profitability: Evidence from Europe

The purpose of this study is to investigate the impact of working capital management on firms’ profitability. To achieve the study objective, two econometric model was developed to assess the relationship between dependent and independent variables based on the Ordinary Least Square (OLS) regression analysis. The panel data is obtained from the annual financial report of 42 non-financial listed companies on Frankfort and Oslo stock exchange over the period 2017-2021. Profitability is a dependent variable and measure by two indicators return on assets (ROA) and return on equity (ROE). WCM is independent variable and measured by five proxies; accounts payable (AP), accounts receivable (AR), cash conversion cycle (CCC), current ratio (CR) and cash holding (CH). The control variables are firm size (FS), dept to assets ratio (DTA) and debt to equity ratio (DTE). The results revealed that AR, CCC, CR have significant and positive relationship with ROA and ROE. However, AP has a negative and significant association with indicators of profitability. CH is negatively related with ROA and ROE, but the relationship is not significant in case of ROE. The finding also shows a positive and significant connection between firm size and profitability. DTA and DTE as a firm’s leverage are negatively related with ROA and ROE. Overall, managers should understand how to organize and control working capital because it is necessary for the firm’s profitability and performance.