Open AccessMeasuring associations between working capital and return on investment
Author(s) -
M. Beaumont Smith,
E. Begemann
Publication year - 1997
Publication title -
south african journal of business management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.179
H-Index - 15
eISSN - 2078-5976
pISSN - 2078-5585
DOI - 10.4102/sajbm.v28i1.783
Subject(s) - working capital , market liquidity , profitability index , return on capital employed , current ratio , risk adjusted return on capital , current asset , return on investment , business , return on capital , finance , economics , econometrics , financial capital , microeconomics , capital formation , profit (economics) , production (economics)
The two conflicting goals of working capital management are profitability and liquidity. This article looks at return on investment as a measure of profitability and some traditional and more recently developed working capital concepts as liquidity measures. Associations were measured between profitability and the liquidity concepts by using chi-square analysis and stepwise forward regression. The statistical test results showed that a traditional working capital leverage ratio, current liabilities divided by funds flow, displayed the greatest associations with return on investment. Well-known liquidity concepts such as the current and quick ratios registered insignificant associations whilst only one of the newer working capital concepts, the comprehensive liquidity index, indicated significant associations with return on investment.