Liquidity, cash conversion cycle and financial performance: case of Russian companies

Abstract

Managing liquidity and the cash conversion cycle play an important role in running a business successfully. Company officials must be confident that their organization does not suffer a shortage or a surplus of payment means and they must be ready to cover current liabilities when necessary. At the same time, the management’s aim is an increase in the company’s returns. The research covers the influence of the current liquidity ratio and cash conversion cycle on financial performance (as a return on net operating assets, RNOA) of Russian companies. A regression analysis of 720 Russian companies engaged in various economic activities for the period 2001 to 2012 was performed with Stata 12.0. The companies in the sample represent the following industries: telecommunications, transport, electric power industry, trade, metallurgy, mechanical engineering, chemical and petrochemical, oil and gas. The authors find an inverse relation between the Russian companies’ cash conversion cycle and RNOA. Further research revealed that companies should seek to obtain a zero cash conversion cycle in order to increase their rate of return. The study also indicated a positive relation between companies’ current liquidity ratio and RNOA. This means that Russian companies should augment their current liquidity ratio in order to increase the RNOA, but the ratio should only be augmented to a defined value. In the paper we also present the calculations of the recommended intervals of current ratio for the analyzed economic sectors for the contemporary economic situation in Russia.