The impact of working capital on the profitability and liquidity risk of Greek companies

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Abstract

The main purpose of this paper is to investigate whether working capital management (WCM) has a significant impact on the profitability of small and medium-sized enterprises (SMEs). This study intends to contribute to the existing literature by examining further whether there is a linear and a no-linear relationship (concave) between WCM and the profitability of Greek SMEs and by focusing on the economic crisis period that has a significant effect on the financial data of the Greek SMEs. The sample consists of 101 Greek SMEs from various industries (e.g., consumer goods, industrials, and healthcare) for the period between 2014 and 2020. The results led to the conclusion that the fixed effects model was appropriate for our data. Regarding the utilized indicators, the cash conversion cycle (CCC) is used as a proper indicator for the WCM while return on asset (ROA), return on equity (ROE), and return on capital employed (ROCE) are considered for profitability. Furthermore, this paper innovates, since each working capital factor was examined separately to identify to what extent they can affect profitability indicators on a stand-alone basis. According to the empirical results considering ROA there exists a concave relationship between profitability and WCM.

Keywords: Working Capital Management, Cash Conversion Cycle, Return on Assets, Concave Relationship, Profitability, Panel Data, Hausman Test

Authors’ individual contribution: Conceptualization — M.P. and E.N.; Methodology — E.N. and S.K.; Validation — M.P. and S.K.; Formal Analysis — G.L.; Investigation — E.N.; Resources — E.N.; Data Curation — M.P. and E.N.; Writing — Original Draft — G.L. and E.N.; Writing — Review & Editing — M.P. and S.K.; Visualization — G.L.; Supervision — M.P. and S.K.; Project Administration — M.P.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: D81, G31

Received: 06.04.2024
Accepted: 09.09.2024
Published online: 12.09.2024

How to cite this paper: Pazarskis, M., Kourtesi, S., Lazos, G., & Ntagia, E. (2024). The impact of working capital on the profitability and liquidity risk of Greek companies. Risk Governance and Control: Financial Markets & Institutions, 14(3), 96–110. https://doi.org/10.22495/rgcv14i3p10