The Relationship Between Working Capital Management and Profitability: Evidence from South African Retail and Construction Firms

Abstract

This article examines and contrasts the long-run relationship between the working capital management and profitability of South African firms in the retail and construction industries over the period 2004–2015. Techniques used in the study included the cointegration technique as well as a Granger causality test. The study found evidence of a long-run relationship between working capital management and the profitability of a firm in most of the cases. Further to this, the presence of both unidirectional and bidirectional causality between working capital management and profitability was found. In addition, results presented in this study indicate that working capital management has a greater impact on the profitability of retail firms than construction firms. The value of the study lies in the fact that management in different industries should realize that working capital management will have an impact on different profitability measures, for example, inventory management in the construction industry will have the biggest impact on return on assets, whilst in the retail industry the impact of inventory management will be most significantly on the gross profit margin compared to other profitability ratios.