Journal Article•
Working Capital Solvency Level and Profitability - Evidence from Iran
About: This article is published in Iranian Journal of Business and Economics.The article was published on 2014-12-28 and is currently open access. It has received 2 citations till now. The article focuses on the topics: Working capital & Solvency.
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TL;DR: The subject, importance, application, origin and discipline of accounting is grossly misunderstood in this modern age especially as the development and application of the computer and the internet seemed to have obscured the function and contributions of accountants or so it seemed to some.
Abstract: The subject, importance, application, origin and discipline of accounting is grossly misunderstood in this modern age especially as the development and application of the computer and the internet seemed to have obscured the function and contributions of accountants or so it seemed to some. However, this Inaugural Lecture delivered at Babcock University by Enyi Patrick Enyi, a professor of accounting and quantitative techniques explored and explained the subject of accounting from a historical, functional and technological perspective.
10 citations
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TL;DR: In this paper, the efficacy of fiscal health indicators of firms with their perceived going-concern with a view to introducing more robust measurement techniques was compared with the use of short and long-term solvency tools to gauge the financial health of prospective firms.
Abstract: Contemporary investors worry more about firms’ survival prospect than immediate financial gains. Analysts employ the use of short and long-term solvency tools to gauge the financial health of prospective firms. Often, these tools fail to generate the required information owing to their inherent defects. Specifically, going concern valuations and firms’ financial stability are corporate finance issues which have not been adequately addressed as present practice tends to align more to macroeconomic than individualized industrial analysis. This study aimed to compare the efficacy of fiscal health indicators of firms with their perceived going-concern with a view to introducing more robust measurement techniques. The study employed ex-post facto research design using 91 companies listed on the Nigerian Stock Exchange and the National Stock Exchange of India. Data analysis method includes multivariate regression analysis, one-way ANOVA and Pearson correlation coefficient. Results indicate the newly introduced going concern ratio has significant relationships with firms’ earning capacity, corporate financial stability ratio, Altman’s Z-score and Enyi’s relative solvency ratio (RSR). However, the current ratio (CR) has no significant relationship with the going concern ratio, implying that the current ratio is no longer effective in determining corporate solvency status in the face of changing financing paradigm.
3 citations
References
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TL;DR: In this paper, the relation between working capital management and corporate profitability is investigated for a sample of 1009 large Belgian non-financial firms for the 1992-1996 period, and the results suggest that managers can increase corporate profitability by reducing the number of days accounts receivable and inventories.
Abstract: The relation between working capital management and corporate profitability is investigated for a sample of 1009 large Belgian non-financial firms for the 1992-1996 period. Trade credit policy and inventory policy are measured by number of days accounts receivable, accounts payable and inventories, and the cash conversion cycle is used as a comprehensive measure of working capital management. The results suggest that managers can increase corporate profitability by reducing the number of days accounts receivable and inventories. Less profitable firms wait longer to pay their bills.
1,527 citations
TL;DR: In this article, the relation between working capital management and corporate profitablity is investigated for a sample of 1,009 large Belgian non-financial firms for the 1992-1996 period.
Abstract: The relation between working capital management and corporate profitablity is investigated for a sample of 1,009 large Belgian non-financial firms for the 1992-1996 period. Trade credit policy and inventory policy are measured by number of days accounts receivable, accounts payable and inventories, and the cash conversion cycle is used as a comprehensice measure of working capital management. The results suggest that managers can increase corporate profitablity by reducing the number of days accounts receivable and inventories. Less profitable firms wait longer to pay their bills.
1,400 citations
TL;DR: In this paper, the authors model the firm's decision to invest in liquid assets when external financing is costly, and the optimal amount of liquidity is determined by a tradeoff between the low return earned on liquid assets and the benefit of minimizing the need for costly external financing.
Abstract: We model the firm's decision to invest in liquid assets when external financing is costly. The optimal amount of liquidity is determined by a tradeoff between the low return earned on liquid assets and the benefit of minimizing the need for costly external financing. The model predicts that the optimal investment in liquidity is increasing in the cost of external financing, the variance of future cash flows, and the return on future investment opportunities, while it is decreasing in the return differential between the firm's physical assets and liquid assets. Empirical tests on a large panel of U.S. industrial firms support the model's predictions.
1,236 citations
01 Jan 2007
TL;DR: In this paper, the effect of different variables of working capital management including the average collection period, inventory turnover in days, average payment period, Cash conversion cycle and current ratio on the net operating profitability of Pakistani firms was studied.
Abstract: Working Capital Management has its effect on liquidity as well on profitability of the firm. In this research, we have selected a sample of 94 Pakistani firms listed on Karachi Stock Exchange for a period of 6 years from 1999 – 2004, we have studied the effect of different variables of working capital management including the Average collection period, Inventory turnover in days, Average payment period, Cash conversion cycle and Current ratio on the Net operating profitability of Pakistani firms. Debt ratio, size of the firm (measured in terms of natural logarithm of sales) and financial assets to total assets ratio have been used as control variables. Pearson’s correlation, and regression analysis (Pooled least square and general least square with cross section weight models) are used for analysis. The results show that there is a strong negative relationship between variables of the working capital management and profitability of the firm. It means that as the cash conversion cycle increases it will lead to decreasing profitability of the firm, and managers can create a positive value for the shareholders by reducing the cash conversion cycle to a possible minimum level. We find that there is a significant negative relationship between liquidity and profitability. We also find that there is a positive relationship between size of the firm and its profitability. There is also a significant negative relationship between debt used by the firm and its profitability.
886 citations
TL;DR: In this paper, the authors provide insights into the performance of surveyed firms across key components of working capital management by using the CFO magazine's annual Working Capital Management Survey, and discover that significant differences exist between industries in working capital measures across time.
Abstract: Firms are able to reduce financing costs and/or increase the funds available for expansion by minimizing the amount of funds tied up in current assets. We provide insights into the performance of surveyed firms across key components of working capital management by using the CFO magazine’s annual Working Capital Management Survey. We discover that significant differences exist between industries in working capital measures across time. In addition, we discover that these measures for working capital change significantly within industries across time.
320 citations