THE EFFECT OF WORKING CAPITAL POLICY ON PROFITABILITY (STUDY OF MANUFACTURING COMPANIES LISTED IN THE INDONESIA STOCK EXCHANGE)

Abstract

This study examines the causal relationship between the probability of a company's failure in generating profitability, because there is a risk and return trade-off from a working capital management policy. The probability of failure of company management in making financial policies for an investment in current assets and sources of financing current liabilities. Analysis technique, using Smart PLS3. The unit of analysis is 80 manufacturing industry companies listed on the Indonesia Stock Exchange from 2010-2021, using panel data, namely time series and cross-sectional data with a total of observations of 960 financial reports.

The findings of this study prove that working capital management policies have a significant effect on company profitability. Current asset turnover, current asset to total asset ratio, age of trade payables and taxes payable, ratio of cash to total current assets have a positive relationship with ROA and ROE. Meanwhile, Age of accounts receivable, ratio of inventory to total current assets, current asset to total asset ratio, and Cash conversion cycle have a negative relationship with ROA and ROE. This research is expected to contribute to the development of financial management science, particularly working capital management policies as a source of value creation, ensuring sufficient working capital to maintain financial stability and profit growth that ensures financial performance remains in a healthy condition.

Keywords: Working Capital Management Policy, Profitability

DOI: 10.7176/RJFA/15-10-03

Publication date: November 30th 2024