Impact of working capital on firms' profitability: Evidence from construction and building material sector of Vietnam

Abstract

Working capital is an important aspect of corporate profitability that managers of every firm must understand in order to maximize firm’s value. The main objective of this study is to investigate the relationship between working capital and firms’ profitability in the context of Vietnam. The study used Cash Conversion Cycle and its components

(Average Collection Period, Inventory Turnover in Days, and Average Payment Period)

as measures of working capital and Return on Assets as a measure of profitability. Using panel data methodology for 50 listed companies that manufacture building materials in Construction and Building-material sector of Vietnam for the 2009 – 2011 period, the study has provided empirical evidence that there was a significant positive relationship between Average Collection Period and Return on Assets; there were negative relationships between Inventory Turnover in Days, Average Payment Period, Cash Conversion Cycle and Return on Assets. From these results, managers can increase credit payment to customers or lower the amount of inventories or delay debt payments to maximize firms’ profit and hence increase firms’ value.