Does Efficient Working Capital Management Enhance Profitability Resilience? Evidence from Indian Listed Firms

Abstract

Efficient working capital management (WCM), which enables a business to manage its cash flows more efficiently, is a crucial determinant of a company's profitability. However, relatively little empirical work has examined whether the effect of effective working capital management (WCM) enhances the resilience of a firm's profitability — that is, whether it provides the firm with greater long-term stability of its earnings — as well as the extent to which this relationship may vary between developed and developing economies. This paper examines the impact of augmentations to working capital management (WCM) on the profitability and long-term earnings stability of public companies in India. In order to answer the above-mentioned research question, the study employed pooled ordinary least squares (OLS) estimators, two-way fixed effects estimators, quantile regression estimators, volatility-based estimators for measuring profitability resilience, and sector-wise fixed effects estimators to examine data collected in an unbalanced panel format from publicly traded firms operating in India from 2016 to 2025. The study's results indicated a trade-off between the level of profitability and the stability of earnings for firms operating in India. Working capital efficiency was shown to be positively related to a firm's return on assets (ROA); specifically, the positive relationship was stronger for firms with higher profit margins. However, improved working capital efficiency was also shown to result in increased earnings volatility. Consequently, the volatility in earnings resulted in lower levels of profitability resilience.

Additionally, the results revealed that the relationship between working capital efficiency and profitability level varied depending on the type of industry in which the firm operates. More specifically, improvements to working capital efficiency had a significantly larger effect on increasing ROA in industries characterised as being highly capitalised or operationally complex (e.g., automobiles, healthcare/pharmaceuticals, defence/aerospace, and infrastructure). Conversely, the effect of working capital efficiency on increasing ROA was significantly smaller in industries considered asset-light or regulated (e.g., utilities, consumer packaged goods). The study further found that the effect of working capital efficiency on increasing ROA in these types of industries can be attributed to the fact that these firms do not require large amounts of working capital to finance their operations. As such, they were able to achieve improved levels of return on assets (ROA) with less efficient use of working capital. The findings underscore the importance of companies developing sector-specific working capital strategies. The paper contributes to the literature by providing an integrated empirical model to assess profitability, resilience, and sectoral heterogeneity.