DETERMINING WORKING CAPITAL SOLVENCY LEVEL AND ITS EFFECT ON PROFITABILITY IN SELECTED INDIAN MANUFACTURING FIRMS

Abstract

A well designed and implemented working capital management has a significant contribution for firms? profitability as well as to maintain liquidity powers. The purpose of this study is to assess working capital adequacy and its impact on profitability; to investigate the relationship between profitability and liquidity of firms. Natural logarithm of total current liabilities and Relative Solvency Ratio (RSR) are taken as dependent variables to measure the required size of current liabilities and firm?s solvency level respectively. Independent variables are sales, return on assets, current ratio, and cash conversion cycles. These are included in the panel data regression to assess for 250 firms for the period of 10 years. The regression result indicated that sales and cash conversion cycle have highly positive significant effect to determine required current liabilities (short term debt) whereas return on assets and current ratio have highly negative significant effect to determine required current liabilities. The result of negative association between profitability and liquidity is statistically insignificant. With the help of student t-test, the study also revealed that firms with adequate working capital achieved better performance than those firms which have less working capital in related to their operational sizes. Therefore, the null hypothesis that there is no difference between firms which have adequate working capital and less working capital in relation to their operational size on profitability is rejected as the p value is less than 0.05.