Please use this identifier to cite or link to this item: https://ir.iimcal.ac.in:8443/jspui/handle/123456789/951
Title: Measuring impact of working capital efficiency on financial performance of a firm: An alternative approach
Authors: Prasad, Punam
Sivasankaran, Narayanasamy
Paul, Samit
Kannadhasan, Manoharan
Keywords: Direct profitability measure
WCEM
WCM
Working capital efficiency
Issue Date: 2018
Publisher: SCOPUS
Journal of Indian Business Research
Emerald Group Publishing Ltd.
Abstract: Purpose: The purpose of this study is to introduce working capital efficiency multiplier (WCEM) as a direct profitability measure of working capital management. The existing accounting measures in the literature establish an indirect approach to study the relationship between working capital efficiency and profitability of the firms. Design/methodology/approach: Using the help of a set of companies from CMIE Prowess database, the study introduces WCEM as a direct profitability measure of working capital efficiency. Findings: In this study, a new direct measure of working capital efficiency is introduced which is multiplicative in nature. WCEM is a product of three components, namely, WACC, ratio of the sum of trade receivables and inventories to trade payables and ratio of net working capital (NWC) to net sales. Practical implications: The importance of direct measure like WCEM could be enormous in performance evaluation of a firm. It can be used as an indicator for choosing a suitable investment opportunity by an investor. This is due to the fact that the firm that is highly efficient in managing working capital is less exposed to liquidity risk. At the same time, the firm is less dependent on external financing. Therefore, such firms eventually create more value for their shareholders. Another indication that WCEM provides is to gauge the bargaining power of the firm and its competitive position in the market. Lower WCEM indicates higher bargaining power of a firm across the value chain, and its superior position relative to its competitors. Originality/value: Most of the studies on WCM are of the empirical type and there is a complete dearth on theoretical framework. Researchers hereafter can consider WCEM as one of the financial performance variables in place of the existing measures such as return on asset (ROA), return on invested capital (ROIC), return on equity (ROE), gross operating income (GOI) and net operating income (NOI) and thereby can contribute new empirical insights through their research outcomes. � 2019, Emerald Publishing Limited.
Description: Prasad, Punam, Indian Institute of Management Ranchi, Suchana Bhawan, India; Sivasankaran, Narayanasamy, Indian Institute of Management Ranchi, Suchana Bhawan, India; Paul, Samit, Indian Institute of Management Calcutta, Joka Kolkata, West Bengal, India; Kannadhasan, Manoharan, Indian Institute of Management Raipur, Sejbahar, Raipur, India
ISSN/ISBN - 17554195
DOI - 10.1108/JIBR-02-2018-0056
URI: https://www.scopus.com/inward/record.uri?eid=2-s2.0-85061029510&doi=10.1108%2fJIBR-02-2018-0056&partnerID=40&md5=840ebd12503b9b1445199d08163a3912
https://ir.iimcal.ac.in:8443/jspui/handle/123456789/951
Appears in Collections:Finance and Control

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