Providing a New Model for Assessment of Working Capital Management:Evidence from Tehran Stock Exchange

Abstract

Working Capital Management (WCM) is one of the key facets of financial management and organization management, for the direct effect it has on company liquidity and profitability. There is a probability of bankruptcy for companies with poor working capital management despite generation of positive return. Current paper explains the relationship of WCM with profitability-based indicators at the hand of a new model. For this purpose, 90 listed companies on Tehran Stock Exchange whose financial data for the period 2008 through to 2012 was available were selected. The results do not confirm significant inverse U-shape relationship of Cash Conversion Cycle (CCC) and Net Working Capital to Total Assets (NWC/TA) as indicators (predictors) of working capital with Return on Assets (ROA), but do indicate a significant inverse U-shape relationship of current ratio and quick ratio with ROA. From the findings, one might infer that each industry has its own optimum current and quick ratios maximizing its return.