Working capital management, COVID-19, and profitability of UK retail firms

This study examines the impact of working capital management and COVID-19 on the financial performance of UK retail firms over the period from 2001 to 2022. Employing a panel data analysis using ordinary least squares (OLS), fixed effects, and random effects, we analyze a sample of 27 firms to explain the relationship between working capital and financial performance. Our findings indicate that working capital variables, particularly inventory turnover days and receivables turnover days, significantly decrease the financial performance of these firms, highlighting the critical role of legal frameworks and regulatory quality in fostering business success. Additionally, we find that the high liquidity ratio is associated with lower profitability. This result suggests that excessive liquidity may not be in favor of business, as this process would result in inefficient asset utilization and missed promising investment opportunities. Regarding the leverage, results indicated that a high debt-to-equity (D/E) ratio leads to a decline in profitability, since firms with a higher debt ratio are more likely to expose financial risks and interest expenses. Finally, the COVID-19 pandemic has negatively affected the financial performance of UK retail companies. This research contributes to the understanding of how working capital factors affect financial outcomes in the UK retail sector, providing valuable insights for policymakers, regulators, and managers aiming to enhance financial performance.