Working Capital Management and Profitability of Listed Companies in Zambia

Abstract

The purpose of this study was to examine the effect of working capital management on the profitability of selected listed companies in Zambia. The primary research question was: To what extent does working capital management affect the profitability of listed companies in Zambia? To address the research question, return on assets was computed as the dependent variable to measure company profitability. Independent variables such as inventory turnover period, receivable collection period, payables payment period, cash conversion cycle, and other factors that affect company profitability such as company size, leverage and growth were also computed. The analysis included descriptive statistics, multicollinearity analysis, and fixed effects regression modeling using dummy variables, based on panel data from eight listed companies in Zambia for the period 2017 to 2022. The findings of the study indicate that effective working capital management positively influences the profitability of listed companies in Zambia. Specifically, the inventory turnover period had a negative and statistically significant relationship with return on assets. Similarly, payables payment period and the cash conversion cycle showed a negative correlation with profitability, although these were not statistically significant. Conversely, the receivables collection period had a positive, but not statistically significant, effect on profitability. Furthermore, the study found that using the receivables collection period and payables payment period as working capital variables, instead of the cash conversion cycle, resulted in a higher R-square change and squared multiple partial R when regressed on return on assets. Therefore, managing receivables and payables as distinct components of working capital is more effective for listed companies in Zambia than focusing on the cash conversion cycle.

Keywords: cash conversion cycle, payables payment period, receivables collection period, return on assets, working capital management.

DOI: 10.7176/RJFA/15-8-07

Publication date: September 30th 2024