An impact analysis of working capital management on profitability of working capital entensive companies listed on the Johannesburg stock exchange

Nakale, Mansueta Maria Nandjila (2009-12)

Thesis (MBA)--Stellenbosch University, 2009.

Thesis

ENGLISH ABSTRACT: The purpose of this report is to establish whether a statistically significant relationship exists between a company's profitability and its working capital management. Profitability is measured by the return on assets, return on equities and Tobin's q ratio - the dependent variables in the report. Working capital management is assessed by inventory period, receivable period, payable period, operating cycle, cash conversion cycle and operating cash flow to total assets ratio - the independent variables in the report. Other independent variables applied are leverage and real gross domestic product growth rate. The report used a sample of working capital intensive companies listed on the Johannesburg Stock Exchange for the period of 1995-2005. These companies are divided into four sub-samples based on their working capital intensiveness. Companies with a ratio of current assets to total assets ranging from 0% to 24,99%, and from 25,00% to 49,99% are regarded as less working capital intensive. Companies with a ratio of current assets to total assets ratio ranging from 50,00% to 74.99%, and from 75,00% to 100.00% are considered high working capital intensive. The results of this research reveal that there is a positive statistically significant relationship between profitability and operating cash flow to total assets ratio. Therefore, companies with positive operating cash flow figures are likely to be profitable. The results exhibit a negative relationship between profitability and leverage. This is an indication that in order to increase its profitability, a company needs to reduce its debt ratio and keep it within the optimum capital structure level. The relationship between profitability and other independent variables is not consistent, indicating variation in working capital policies across industries. There is also a positive relationship between profitability and real GDP growth rate, although this is reflected during 2000 only. This indicates that companies' profitability is influenced by the overall economic performance. The report further evaluates whether less working capital intensive companies are more profitable as compared to high working capital intensive companies. Evidence shows that there is no difference in the profitability of less working capital intensive companies and high working capital intensive companies. However, there is confirmation that less working capital intensive companies have a high Tobin's q ratio as compared to high working capital intensive companies. This means that the percentage difference between the market value and assets is higher for less working capital intensive companies as compared to that of high working capital intensive companies.

AFRIKAANSE OPSOMMING: Die doel van hierdie verslag is om vas te stel of 'n statisties betekenisvolle verhouding tussen die winsgewendheid en die bedryfskapitaal bestuur van 'n maatskappy bestaan. Winsgewendheid word gemeet aan die opbrengs op bates, opbrengs op aandeelhouersbelang en Tobin se q-verhouding - die afhanklike veranderlikes in die verslag. Bedryfskapitaal bestuur word gemeet deur voorraadperiode, debiteursperiode, krediteursperiode, operasionele siklus, kontantomsettingsilkus en kontantvloei uit bedryfsaktiwiteite tot totale bates-verhouding - die onafhanklike veranderlikes in die verslag - te bepaal. Ander onafhanklike veranderlikes aangewend is skuldkapitaal verhouding en groei-tempo van die reele binnelandse produk. Die verslag het gebruik gemaak van 'n seleksie van bedryfskapitaal intensiewe maatskappye wat op die Johannesburgse Aandelebeurs genoteer was vir die tydperk 1995-2005. Hierdie maatskappye is in vier sub-groepe verdeel volgens bedryfskapitaal intensiwiteit. Maatskappye met 'n verhouding van bedryfsbates tot totale bates tussen 0% en 24,99%. en 25,00% tot 49,99% word as minder bedryfskapitaal intensief beskou, terwyl maatskappye waar hierdie verhouding tussen 50,00% en 74,99%, en 75,00% en 100,00% Iê as hoogs bedryfskapitaal intensief beskou word. Die resultate van hierdie navorsing dui op 'n statisties betekenisvolle verhouding- tussen winsgewendheid en die verhouding van kontantvloei uit bedryfsaktiwiteite tot fatale bates. Dus is maatskappye met positiewe kontantvloei-syfers uit bedryfsaktiwiteite waarskynlik winsgewend. Die resultate dui op 'n negatiewe verhouding tussen winsgewendheid en skuldkapitaal-verhouding, wat daarop dui dat 'n maatskappy die skuld-verhouding moet verminder en binne die optimale kapitaalstruktuur vlak te bly om winsgewendheid te vcrbeter. Die verhouding tussen winsgewendheid en ander onafhanklike veranderlikes is nie konstant nie, wat op beleidsverskille dui ten opsigte van bedryfskapitaal tussen verskillende nywerhede. Daar is 'n positiewe verhouding tussen winsgewendheid en groei in reele binnelandse produk, selfs al word hierdie verhouding slegs gedurende 2000 gesien. Dit dui daarop dat die winsgewendheid van maatskappye beinvloed word deur die algehele ekonomiese toestand. Die navorsing ondersoek verder of minder bedryfskapitaal intensiewe maatskappye meer winsgewend is as meer bedryfskapitaal intensiewe maatskappye. Resultate dui geen verskil tussen die winsgewendheid van minder bedryfskapitaal intensiewe maatskappye en meer bedryfskapitaal intensiewe maatskappye aan nie, maar bevestig wel dat minder bedryfskapitaal intensiewe maatskappye 'n hoër Tobin se q-verhouding toon. Dit beteken dat die persentasie verskil tussen markwaarde en totale bates hoër is vir minder bedryfskapitaal intensiewe maatskappye as vir meer bedryfskapitaal intensiewe maatdkappye.

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