The Dynamic Interplay between Working Capital Management and Profitability: Empirical Insights from European Markets

Abstract This study aims to investigate the effect of working capital management on the profitability of manufacturing firms in Europe. To achieve the purpose of this research, we used a multiple regression approach on a balanced panel dataset of 39 European manufacturing firms listed on the Frankfurt and Oslo stock markets between 2017 and 2021. The findings illustrated that both return on assets (ROA) and return on equity (ROE) are negatively affected by days sales outstanding. Days payable outstanding have a negative and insignificant effect on ROA, but positive on ROE. Liquidity has a positive impact on both ROA and ROE. Debt to equity has a significant and negative effect on ROA, but a positive on ROE. Overall, managers should understand how to organize and manage working capital because it can be considered a crucial factor in determining the profitability of manufacturing firms.