The Relationship between Working Capital Management and Profitability

Abstract

Working capital management is an important concept that could influence companies in many ways. An efficient management of working capital can help a company to manage its finances and increases its profitability. This study investigates the relationship between working capital management and profitability in non-financial companies listed in the Saudi Stock Exchange. A sample of 67 companies is used for a period of ten years (2007-2016). Quantitative method using multiple linear regression and pooled data set is used for analysis. The results indicate a positive relationship between working capital management and profitability. However, each company could have a different optimal level of working capital and could require different strategies to increase profitability. This study is limited to non-financial companies listed in the Saudi Stock Exchange. This study is a positive contribution to working capital management literature as it uses a relatively large sample, a longer time period, and multiple profitability proxies in the context of Saudi Arabia which has few researches in this area.