Working capital management and firm’s profitability - a case study of Vietnamese listed manufacturing companies during covid-19 pandemic

Abstract

Working capital management plays an important role in the operation process of enterprises. Working capital not only is a necessary element for the day-to-day operation of the company but also is a guarantee for the reproduction of the firms. This becomes even more urgent in the time of Covid-19. Therefore, managers need to have a clear understanding of working capital management policy and its impact on the firm’s profitability. A preparation about firm policy and financial conditions can help companies to overcome tough times or grow profits. This study is aimed at investigating the effect of working capital and its components on a firm's profitability before and during the Covid-19 pandemic. To explore this impact, the secondary data collected from 183 manufacturing companies in Vietnam from the first quarter of 2017 to the first quarter of 2021 are employed in the analysis. The research has examined working capital management situations through indicators such as cash conversion cycle (CCC), average collection period (DSO), inventory turnover in days (DIO), average payment period (DPO), working capital investment strategy (WCIS), and working capital financing strategy (WCFS). These indicators are the independent variables that have impacts on the dependent variables such as return on assets (ROA) and return on equity (ROE). Additionally, a dummy variable was also added to the regression model to discover the effect of the Covid-19 pandemic. The results from data analysis showed that working capital investment policy (WCIS) has a statistically significant positive impact on a firm's profitability before and during Covid, while the effect is negative between CCC, DSO with the firm's profitability. DPO has a statistically significant positive impact before Covid-19 but turned negative during Covid-19 with ROA and ROE, while DIO just has a negative relationship with ROE during Covid time. WCFS also has a negative impact on ROA during covid and has a significant positive effect with ROE before and during Covid. Based on these results, the study proposed some recommendations to the firm’s managers for using working capital more efficiently in normal and crisis situations.