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Working Capital Management Literature Review

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1.8 Literature Review
Under this section, I will discuss past literature resulting from studies of working capital management and capital structure across the globe. Section 1.8.1 discusses key findings pertaining to working capital management. In this section working capital, components are discussed with relation as to how they affect profitability in other geographic jurisdictions and finally section 1.8.2 addresses key findings relevant to capital structure and its relation to profitability.
1.8.1 Working Capital Management
The literature review on working capital management is presented in this section. Shin and Soenen (1998) in their research paper titled “Efficiency of Working Capital Management and Corporate Profitability” have shown …show more content…

In his research, he points out that there are two distinct schools of thought on the correlation between profitability and working capital. In one school of thought, profitability cannot be improved by managing working capital and that; they may be a negative relationship between them. The second school of thought states that investment in working capital has a pivotal role in improving firm profitability. This school of thought further states that output and sales cannot be maintained unless there is a minimal level of investment in working capital. The inadequate management of working capital would make Non-current assets inoperative.
Pandeys & Singh, 2008 state that the management of working capital is pivotal as it directly influences liquidity and profitability for a company. They go on further to suggest that for a business to be successful, fixed and current assets play a vital role in a firm’s profitability and liquidity. They studied Hind Alco Industries Ltd in India and they found out that there is a significant impact of working capital management on Hind Alco Industries Ltd.’s profitability. The study involved looking in detail the components of working …show more content…

Brabete and Nimalathasan (2010) hold an opposing view, for firms in Sri Lanka, for which their study is based, debt to assets ratio is strongly and positively correlated to profitability. Thus from the review of literature there is no clear cut association between profitability and capital structure between countries. Because of the lack of evidence of the relationship between profitability and capital structure for Engen Botswana (Pty) Ltd and for listed companies in Botswana, this research paper will attempt to determine how capital structure affects profitability of Engen Botswana (Pty)

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