Original Research

Measuring associations between working capital and return on investment

M. Beaumont Smith, E. Begemann
South African Journal of Business Management | Vol 28, No 1 | a783 | DOI: https://doi.org/10.4102/sajbm.v28i1.783 | © 2018 M. Beaumont Smith, E. Begemann | This work is licensed under CC Attribution 4.0
Submitted: 15 October 2018 | Published: 31 March 1997

About the author(s)

M. Beaumont Smith, Department of Business Management, Vista University, South Africa
E. Begemann, Department of Business Management, University of South Africa, South Africa

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Abstract

The two conflicting goals of working capital management are profitability and liquidity. This article looks at return on investment as a measure of profitability and some traditional and more recently developed working capital concepts as liquidity measures. Associations were measured between profitability and the liquidity concepts by using chi-square analysis and stepwise forward regression. The statistical test results showed that a traditional working capital leverage ratio, current liabilities divided by funds flow, displayed the greatest associations with return on investment. Well-known liquidity concepts such as the current and quick ratios registered insignificant associations whilst only one of the newer working capital concepts, the comprehensive liquidity index, indicated significant associations with return on investment.

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