The Relationship between Corporate Financial Performance and Working Capital Efficiency: Evidence from Agro-Based Industries in Rajasthan

Abstract

In agro-based industries, which are typically seasonal in nature, involve high inventories and fluctuating market conditions, working capital efficiency is a crucial measure of the financial performance of a company. The present study investigates the relationship of working capital efficiency and financial performance of selected agro-based industries of Rajasthan. The quantitative longitudinal research design was followed with secondary financial data for five companies from the five-year period FY2019-FY2024 (30 firm-year observations). The financial performance measure was Return on Assets and the measure of working capital efficiency was Days Sales Outstanding, Days Inventory Outstanding, Days Payable Outstanding, Working Capital Turnover Ratio, Cash Conversion Cycle ratio and Financial Leverage ratio. The IBM SPSS Statistics Version 26 software was used for data analysis including descriptive statistics, correlation analysis and Principal Component Analysis (PCA). Results show that the most important dimensions of working capital efficiency are those of inventory management and the cash conversion cycle (CCC), comprising 70.95% of the total variance. There was a strong positive correlation between Days Inventory Outstanding and Cash Conversion Cycle while the Cash Conversion Cycle had a moderate negative correlation with profitability. Strong positive correlation was found between DIO and Cash Conversion Cycle while moderate negative correlation was found between leverage and profitability. Based on the study, it is concluded that appropriate inventory, receivables and payables management along with liquidity can improve the efficiency of the agro-based industries and increase the long-term financial sustainability and competitiveness of the industries in the state of Rajasthan.