Cash conversion cycle and firms’ profitability – a study of cement manufacturing companies of India

Cash conversion cycle (CCC) has been considered a useful measure of firm’s effective working capital management and especially the cash management. This study was conducted with the aim to look into the association of the cash conversion cycle with the size and profitability of the firm. The present study is concerned about evaluating how cash conversion cycle affects the profitability of cement manufacturing companies in India. The specific research objective of the study is to investigate the existing literature on the role of cash conversion cycle in enhancing return on assets and equity of the companies and to measure the impact of cash conversion cycle on profitability of the manufacturing companies. The results of the study will be helpful for academics and industry experts for policy making and control purposes. The study takes return on equity and return on assets as measures of profitability to represent dependent variables. Firm size and debt ratio are taken as control variables. Cash conversion cycle is considered as independent or explanatory variable. Study takes into consideration top five Indian cement companies for a period of 10 years starting from 2001 to 2010. Results showed that the selected companies are having low average return on asset and return on equity with significantly negative cash conversion cycle. Regression results after adjusting for heteroskedasticity of data to minimize the effects of outliers showed that cash conversion cycle is having significantly positive association with both return on assets and equity indicating that it is not necessary that always there must be lesser the cash conversion cycle greater would be the profitability measured through return on assets and equity. If the firm is able to sell the inventory and collect the receivables before it pays to the payables, then the situation would be little bit different. As happened in our case, firms are not under pressure to reduce the receivable collection period and inventory selling period along with the extension of payment period to increase the profitability.