A study on the impact of working capital management on profitability of selected rural banks in the Philippines

• Main Authors: Go, John Paulo, Lin, Dewiit, Ocampo, Mary Patricia Nicole A., Recto, John Eric R.
• Format: text
• Language: English
• Published: Animo Repository 2015
• Subjects: Banks and banking > PHilippines; Bank profits > Philippines; Profit; Finance and Financial Management
• Online Access: https://animorepository.dlsu.edu.ph/etd_bachelors/6306
• Institution: De La Salle University

In determining the firm's market value, it s essential for the firm to identify its working capital management, and its direct affects with the profitability. A firm should take into consideration its liquidity and risks in analyzing the factors in working capital management that can affect profitability. This study determines the relationship between working capital management and profitability of selected rural banks in the Philippines from the period 2009 to 2013. The relationship between working capital management and profitability is examined using the panel data analysis via pooled ordinary least squares (OLS) regression including Jacque-Bera normality tets, White's general heteroscedasticity test, and multicollinearity test. Liquidity ratios are used as independent variables in the study such as current ratio (CR), bad loans ratio (BLR), loans to deposits ratio (LDR), cash ratio (CSR), and interest coverage ratio (ICR) while credit risk (LLP/TL) and liquidity risk (LR) are identified as risks inherent in working capital. On the other hand, profitability measurements such as net profit margin (NPM), return on assets (ROA) and return on capital employed (ROCE) are listed as dependent variables. The results show that in rural banks, CR and ICR are the working capital management components that would inrease profitability while BLR, CSR, and LLP/TL are components that would decrease profitability. Based on the results, the researchers suggest that banks should come up with more efficient ideas and ways to manage working capital and credit risk for them to achieve optimal levels of liquidity and profitability.