Effect of Working Capital Management on the Profitability of European Pharmaceutical Companies

The main objective of the current study is to investigate the relationship between working capital and profitability on the example of pharmaceutical companies in Europe. For this purpose, the sample of 113 pharmaceutical companies located all over Europe has been collected. The time period of the research covers 10 years from 2009 until 2018. The data, collected from the Thomson Reuters Eikon database, was utilized in panel data analysis. As the measure of working capital, the cash conversion cycle was applied; its components were analyzed separately. The research revealed the significant negative influence of the cash conversion cycle on companies’ returns. Thus, profitability can be improved by managing the length of the cash cycle. The impact of individual components of the cycle varied in the sign of influence, for instance, inventory and receivables turnovers have significant negative effects, while payables turnover – significant positive effect. The value of the company measured by the market-to-book ratio is impacted by the cash to cash cycle as well. The nonlinear effect of working capital on the performance of pharmaceutical companies have also been investigated. The hypothesis of a significant non-linear relationship between CCC and ROA has been confirmed. However, the relationship appeared to be convex, rather than concave. The optimal interval of CCC has been suggested. The empirical results received in the thesis can be utilized by managers of pharmaceutical companies to improve the efficiency and optimize the investment in working capital.