Cash conversion cycle and firms’ profitability – a study of listed beverage, food and tobacco companies of Sri Lanka.

Abstract

The purpose of this study is to examine the relationship between cash conversion cycle (CCC) and profitability of firms at Food, Beverage and Tobacco sector in Sri Lanka. CCC and the properties of namely days of sales outstanding days (DSO), days of inventory on hand (DIH) and number of days of payable (NDP) have been used to measure the CCC. Profitability is measured through return on asset (ROA) and return on equity (ROE). Analyzing a sample of 20 randomly drawn companies listed in Colombo Stock Exchange (CSE) in Food, Beverage and Tobacco sector over five years from 2011 to 2015, the study finds that CCC is negatively and significantly related to the profitability measure of ROE. Food, Beverage and Tobacco companies can increase profitability by maintaining shorter CCC. This investigation is significant as prior literature on CCC and profitability nexus in Food, Beverage and Tobacco sector is extremely limited. Findings obtained here are useful for Food, Beverage and Tobacco companies and policy makers to ensure efficient CCC at Food, Beverage and Tobacco sector in Sri Lanka.