The Effect Of Working Capital Management On Profit Ability

Working capital is not only an important part but also the most dynamic part of corporate assets. Therefore, only having an effective management of working capital can ensure that the operation of supply, production, and marketing can be aligned. Only by doing so, an enterprise can survive and develop. However, most of traditional theories on management of working capital simply divide working capital into three parts: inventory, account receivable, account payable, and neither consider other items involved in working capital, nor consider combining working capital with channel management and business processes. In this paper, the concept of working capital is proposed by Professor Wang Zhuquan. In his concept, the working capital is redefined according to channel management, and it also concerns about other factors. Although the cycle of working capital from operating activities, which derive from channel management is regarded as an important means respecting evaluating the performance of working capital management, and this index have not applied to other theoretical researches. In this paper, by analyzing impacts of the working capital of operating activities according to channels on corporate profitability, to replace the old theory so that the new indicators can be applied into much more academic researches and involved in corporate management.In this paper, there are some breakthrough on both research methods and classification. In terms of selection of dependent variable, using the principle component factor analysis to analyze six indicators, they are net profit margin of sales, the ratio of earning before interests and tax (EBIT) to total assets, return on total assets (ROA), return on equity (ROE), ratio of profits to costs, return on invested capital. After that, defining a new comprehend and reasonable index as dependent variable to analyze the impact of this new indicator on corporate profitability, thereby enhancing the evaluation system on working capital.