Abstract:
This master thesis researches the impact of working capital management on profitability for a sample of 54 German industrial companies in a period from 2013 to 2024. Given the significance of current (short-term) assets and liabilities, in addition to long-term assets, for industrial firms, the thesis uses empirical methods to decompose the effect of different measures of working capital components on the profitability of a firm as measured by return on assets. The research builds upon the results of previous studies in various markets and industries as well as theories regarding working capital management and various ways that managers may use to increase the profitability of a firm. The regression analysis is performed to separate the effects of individual components of the cash conversion cycle on return on assets, and the analysis shows a significant and negative impact of the days' inventories outstanding increase compared to the previous year's figure on profitability in a current period. Days' sales outstanding and the payables deferral period have not shown statistically significant results, although the direction of impact was in line with several other researches discussed in the literature overview. This research gives an insight into working capital management's potential to affect profitability and thus adds to the existing body of evidence that managerial decisions regarding resource management are meaningful for a company's performance and its profitability. The effect of DIO on profitability, although significant, is marginal and confirms that the profitability is still largely affected by other factors, mainly management's decisions involving optimization of costs and revenues. From a managerial perspective, the results presented in this thesis indicate that efficient management of inventories remains a focus area for improving firms' performance, reaffirming the need for a strategic and balanced approach to working capital where components are considered as part of the overall cash flow management strategy rather than in isolation.
