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The relation between working capital, companies’ profitability and shareholder value creation: evidence from Brazilian listed industrial companies

The main goal of this study was to evaluate to what extent working capital management mesasured through the Cash Conversion Cycle is related to a higher profitability and to a higher creation of value for the shareholders measured through the Tobin’s Q. The central hypoteshis are that (1) firms' with lower Cash Conversion Cycle present higher profitability and (2) companies with lower Cash Conversion Cycle show higher value generation for shareholders. This study used a database extracted from Economática, with financial details from 46 different companies listed within the INDX (BM&FBOVESPA Industrials Index as of April 18th 2018), which represents the most representative traded stocks among industrial companies in Brazil. The regressions shown herein were built using the Panel Dataset Methodology, estimated on a quarterly basis from the period between 1986 to 2017, totaling 31 years. Regression analysis were made in order to assess the relation between variables, using both Multiple OLS (Ordinary Least Square) and Fixed Effects models. The results show strong evidences that industrial companies in Brazil that have a lower cash conversion cycle also present (1) higher profitability and (2) higher creation of value for its shareholders. Breaking down the Cash Conversion Cycle into its components (Days Sales Outstanding, Days Payables Outstanding, Days Inventory Outstanding), the study found negative and significant relation between profitability and generation of value with the Days Inventory Outstanding, suggesting that companies with lower average inventory days presents higher profitability and generates more value to shareholders. The results showed a positive and significant relation between the Days Payables Outstanding with both the Gross Operating Profit and Tobin’s Q, indicating that companies that have more extended payment terms present higher profitability and higher generation of value for the shareholders. The research also found a statistically significant negative relationship between the Days Sales Outstanding and the and the Tobin’s Q, suggesting that firms with lower average collection period shows higher creation of value. The study did not find a statistically significant relation between the DSO and the GPO.According to the research, from the three components of the cash conversion cycle, the Days Payables Oustanding was the one with the higher relation with both profitability and creation of value, followed by the Days Inventory Outstanding and Days Sales Outstanding.