The Relationship between Working Capital Management Efficiency and EBIT

This paper is aimed at analyzing the relationship between Working Capital Management Efficiency (WCME) and Earnings before Interest&Taxes (EBIT) of the Paper Industry in India during 1997–1998 to 2005–2006. Tomeasure the WCME three index values viz., Performance Index (PI), Utilization Index (UI), and Efficiency Index (EI) are computed, and are associated with explanatory variables, viz., Cash Conversion Cycle (CCC), Accounts Payable Days (APDAYS), Accounts Receivables Days (ARDAYS), Inventory Days (INVDAYS). Further, Fixed Financial Assets Ratio (FIXDFARA), Financial Debt Ratio (FINDBTRA) and Size (Natural log of Sales) are considered as control variables in the analysis, and are associated with the EBIT. The study reveals that the Paper Industry has managed the WC satisfactorily. The APDAYS has a significant (–)ve relationship with EBIT, which indicates that by deploying payment to suppliers they improve the EBIT. The Paper Industry in India performs remarkably well during the period, however, less profitable firms wait longer to pay their bills, and pursue a decrease in CCC.