The Relationship between Working Capital Management and Profitability: Evidence from Saudi Cement Companies

Abstract

Aims: This paper investigated the relationship between the working capital management (WCM) and the firms' profitability for the Saudi cement manufacturing companies. Methodology: There are 13 Saudi cement manufacturing companies operating in the market. Only eight companies were included which are listed in the Saudi stock exchange market (Tadawul) and were established before the year 2005, and the rest were excluded for the period of 5 years from 2008-2012. Results:The study results showed that, Saudi cement industry current ratio is the most important liquidity measure which effected profitability, therefore, the cement firms must set a trade-off between these two objectives so that, neither the liquidity nor profitability suffers. It was also found, as the size of a firm increases, profitability increased. Besides, when the debt financing increased, profitability declined. Linear regression tests confirmed a high degree of association between the working capital management and profitability. Conclusion:The Saudi cement firms could strengthened their working capital in more efficient ways by adopting more advanced financial devices which will help them to manage cash, accounts receivables and inventories, and will ultimately increase their profitability. There is much to be done about working capital in Saudi Arabia in future.

The Relationship between Working Capital Management and Profitability

“…After the final models had been obtained, repeated measures using Saudi Arabia GDP annual growth for each of the ten years of the study period were applied to identify any significant effect of GDP on the slope of the obtained model. These tests were sufficient and appropriate for this study, and they were comparable with a number of previous studies (Eljelly, 2004;Almazari 2013;Pais & Gama, 2015;Samiloglu & Akgün, 2016).…”

“…The author explained this weak relationship by highlighting the fact that the companies used for the study were from different industrial sectors. Almazari (2013) examined the relationship between WCM and companies profitability in a sample of eight Saudi-listed companies of the cement industry. His sample covered the period between 2008-2012.…”

“…GOP is the most commonly used in previous studies (Almazari, 2013;Deloof, 2003;Singhania et al, 2014). This is because GOP does not involve assets which are calculated by the historical costs like ROA.…”

“…Although CCC has been used extensively in previous studies, only components of CCC were included in this study's regression models because of the high collinearity between CCC and its components. CR has been identified as the most important liquidity measurement in previous studies in Saudi Arabia (Eljelly, 2004;Almazari, 2013). It has been used as a measurement of WCM because of the direct effect of WCM practices on companies' liquidity (Enqvist et al, 2014).…”

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“…SIZE refers to the scale of the firm and is represented by the natural logarithm of total assets. Firms that are large in scale generally have more working capital to satisfy their business (Almazari, 2014), Scale will directly lead to a decline in efficiency of working capital. Therefore, we predict this variable also to be negatively related to a firm's WCMP.…”