EFFECT OF WORKING CAPITAL MANAGEMENT ON PROFITABILITY OF MANUFACTURING FIRMS: Evidence from SAUDI ARABIA

Abstract

This study aimed to explore the impact of working capital management on the profitability of a sample of 45 companies listed in the Saudi Stock Market for the period 2008-2017. The variables of working capital management are: working capital turnover rate, the ratio of current assets to current liabilities, average collection period, inventory turnover in days and average payment period (independent variables). The profitability variables are represented by a single variable i.e. the ratio of net operating income (dependent variable). To achieve this objective, the Panel ARDL model for the self-regression of the delayed distribution time intervals of the data is implemented. Some of the variables of the study are stable at the level and others are stable at the first difference. These variables are combining with a single time lag. The results showed that there is a significant short- and long-term impact of working capital management on the profitability of companies under study. Based on the results of the study, we can recommend companies listed on the Saudi Stock Market to pay attention to and not neglect the details of working capital management, because due to their moral impact on the profitability of these companies in the short and long term. Also, Saudi manufacturing companies can boost their working capital more, but without focusing on it only as a reason to increase profitability, there is much to be done about increasing profits in Saudi Arabia in the future