Working Capital Management and Firm‘s Financial Performance (ROCE)

Abstract

This undertaking study investigated the relationship between working capital management as an independent variable operationalized by ITO, DTO, and CTO, and the firms’ profitability measured by Return on Capital Employed (ROCE) as the dependent variable. Sample of 69 non-financial sector firms of Pakistan which are listed in the Pakistan Stock Exchange for 11 years (2007-2017) was taken. PLS-SEM was used for the first time to examine the relationship. The relationship was examined by descriptive statistics, correlation, path analysis, including path coefficient, P-value, t-value, and path coefficient confidence interval. The path coefficient shows the existence of the relationship, P-value shows its significance, the t-value shows the level of relationship, and the confidence interval shows the significance of the relationship. The results show that without the moderating effect of firm size, overall working capital management has a positive impact on ROCE. Firm size has a significant moderating effect on the relationship between DTO-ROCE and CTO-ROCE. While the effect of firm size as a moderator on the relationships between ITO-ROCE and CCC-ROCE is not significant. This study concluded that to enhance the profitability of the firm, and to get the best results from ROCE, the managers should focus on the efficient management of working capital components (ITO, DTO, and CTO). The limitation of the study is that the samples used are only from the non-financial sector firms of one specific country (Pakistan), using only one ratio (in this case, ROCE) for measuring profitability. Future studies should consider other ratios such as ROE, ROA, and EVAM by using the same model of PLS-SEM.