A study on impact of working capital on profitability of indian corporate sector

Abstract

The main objective of this study is to examine the Impact of Working Capital on Profitability of Indian Corporate Sector. Therefore, the efforts are made to analyses the impact of the Working Capital i.e., the working capital indicators on the profitability of the corporates. In this study, we examined the relationship between working capital management and the profitability indicators such as Gross Profit Ratio (GPR), Net Profit Ratio (NPR), Return on Net worth (RONW), Return on Capital employed (ROCE) and Return on Assets (ROA). The study uses panel data from ten companies from four different sectors i.e., the Cement, FMCG, IT and Steel sector, for the period 2011-12 to 2020-21. Various econometric models were formulated to evaluate the relationship. The study employed the descriptive statistics such as mean, standard deviation, graphical analysis, ANOVA, Correlation analysis and multiple regression analysis such as Ordinary Least Square (OLS), fixed effects and random effect was used after confirmation from Hausman Test, to test the formulated hypotheses and tried to find the relationships between the working capital proxies and profitability proxies. The results showed that there is a significant negative relationship between working capital and profitability, meaning that higher levels of working capital reduce the profitability of the firms. Based on these findings, we suggest that managers should adopt efficient working capital policies that suit a particular sector and to the firm characteristics rather than randomly using of working capital. There is a low variation in Gross Profit Ratio (GPR), even when there is a significant difference in working capital and other proxies of working capital in various sectors. But, the Net Profit Ratio (NPR) showed significant difference between the companies in a sector which shows that with the different usage of the working capital significantly impacts the net profits. It has also been found that cement and steel sector are comparatively more sensitive than the IT