Firm Profitability and Economic Crises: The Non-Linear Role of the Cash Conversion Cycle

This study investigates whether economic crises matter in profitability and, in this context, the (non) linear role of the cash conversion cycle for a sample of firms from five EU countries. The study employs unbalanced panel data fixed effect to examine two dependent variables: return on assets and net margin. Independent variables are the cash conversion cycle, financial leverage, size, tangibility, cash flow ratio, and inventory investments. Results of this study reveal that longer cash conversion periods are associated with lower profitability, with the effect being more pronounced in the absence of crises. Further, the study shows a non-linear relationship between profitability and cash conversion cycle, and diminishing returns are observed by using a squared cash conversion cycle. The study contributes to the existing working capital management literature by examining the effect of the cash conversion cycle on profitability from an international perspective and the effect of economic crises. Thus, empirical evidence can serve scholars, business policymakers, and professionals of corporate finance in managing their working capital strategically.