Stocks that manage working capital efficiently [ET Wealth]: Low cash conversion cycle improves profitability and also aids in creating shareholder value.

The profitability of an organisation is a function of its revenue and expenses. However, working capital or liquidity position also has a significant role to play. Several studies conducted on stock markets of developed and emerging countries have concluded that efficient working capital management enhances a firm's value and leads to increased profitability.
Working capital measures the ability of a company to rely on its short-term assets to pay its short-term debt. Efficient working capital management ensures that the financial resources of the company are adequate to manage its day-to-day operations. The nature and size of the business, seasonal variations in sales, changes in input or raw material prices and length of the production cycle are some of the determinants of working capital.
Prudent management of working capital provides several advantages -- strengthening goodwill, better margins due to easy access to discounts from raw material suppliers and improvement in business health due to enhanced liquidity and solvency. Analysts use different ratios for analyzing the effectiveness of working...