The Relationship between Working Capital Management Efficiency and EBIT

Azhagaiah Ramachandran and Muralidharan Janakiraman
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Azhagaiah Ramachandran: Kanchi Mamunivar Centre for Post Graduate Studies, India
Muralidharan Janakiraman: Kanchi Mamunivar Centre for Post Graduate Studies, India

Managing Global Transitions, 2009, vol. 7, issue 1, 61-74

Abstract: This paper is aimed at analyzing the relationship between Working Capital Management Efficiency (WCME) and Earnings before Interest&Taxes (EBIT) of the Paper Industry in India during 1997–1998 to 2005–2006. Tomeasure the WCME three index values viz., Performance Index (PI), Utilization Index (UI), and Efficiency Index (EI) are computed, and are associated with explanatory variables, viz., Cash Conversion Cycle (CCC), Accounts Payable Days (APDAYS), Accounts Receivables Days (ARDAYS), Inventory Days (INVDAYS). Further, Fixed Financial Assets Ratio (FIXDFARA), Financial Debt Ratio (FINDBTRA) and Size (Natural log of Sales) are considered as control variables in the analysis, and are associated with the EBIT. The study reveals that the Paper Industry has managed the WC satisfactorily. The APDAYS has a significant (–)ve relationship with EBIT, which indicates that by deploying payment to suppliers they improve the EBIT. The Paper Industry in India performs remarkably well during the period, however, less profitable firms wait longer to pay their bills, and pursue a decrease in CCC.

Keywords: Working Capital Management Efficiency; Earnings before Interest and Taxes; Current Assets; Current Liabilities; Performance Index; Utilization Index; Efficiency Index (search for similar items in EconPapers)
JEL-codes: G30 G32 (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (16)

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