Cash Conversion Cycle and Return on Assets of Russian Food Companies: the Empirical Analysis of the Relationship

Abstract

The goal of this paper is to analyze the relationship between the managerial decisions in working capital management and the return on assets of Russian food companies. Cash conversion cycle is chosen as a criterion of working capital management decisions effectiveness. The dependence of the return on assets both on cash conversion cycle and on each of its elements, and additionally, the dependence of cash conversion cycle on current ratio of companies belonging to food industry. The choice of industry is determined both by its importance for national economy and the large contribution of working capital management to the profit-ability growth of food companies. The research is performed by means of regression analysis. The sample consists of 282 companies and the period of data collection is 2009-2013. The inverse relationship is proven between the cash conversion as a whole and the return on assets, also between each element of cash conversion cycle (inventories, receivables, and payables) and the return on assets as well. This result differs from previous results (in earlier studies a direct relationship between payables and return on assets was revealed) and could be explained by specifics of business environment where Russian companies operate. The direct relationship between cash conversion cycle and current ratio is also revealed. Besides the margins for minimal and maximal cash conversion cycle are defined. Within these margins, companies are matching to the requirements of current ratio and thus, they can meet both the long-term and short-term managerial goals - value creation and sustainability. The research findings can help to get deeper insight of trade policy and working capital management of Russian food companies. They also provide financial managers with information that may help them to reconsider their managerial decisions in a way that promotes better performance. The paper considers the specifics of the industrial environment that affects financial decisions. It is important for the exploration of managerial decisions on working capital management.