Capital Budgeting

Topics: Working capital, Accounts receivable, Inventory Pages: 4 (1095 words) Published: January 25, 2013

A lot of investigators have studied working capital from different perspective and in different Surroundings. The subsequent ones were quite appealing and constructive for our study. The connection between profitability and liquidity was observed, as calculated by Current ratio on a section of joint stock businesses in Saudi Arabia via correlation and regression analysis. The learning established that the cash adaptation cycle was of more significance as a computation of liquidity than the current ratio that changes profitability. The volume variable was found to have major outcome on profitability at the industry altitude. The consequences were steady and had essential propositions for liquidity administration in different Saudi companies. Primary, it was obvious that there was a negative correlation between profitability and liquidity pointers for instance current ratio in the Saudi model studied. Next, the reading also discovered that there was enormous divergence between manufacturing businesses regarding the important computation of liquidity: (Eljelly, 2004)

A large amount of companies had a huge sum of cash installed in working capital. It can thus be anticipated that the manner in which working capital is administered will have a considerable outcome on profitability of those companies. By means of correlation and regression investigations we institute a considerable negative connection between gross operating returns and the amount of days accounts receivable, supplies stock and accounts payable of companies. On the root of these outcomes it is recommended that directors or executives could generate significance for their stockholders by dropping the quantity of days’ accounts receivable and inventories to a sensible lowest level. The direct opposite connection between accounts payable and profitability is steady with the analysis that lower profitable companies stay longer to reimburse their invoices. (Deloof, 2003)

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