Abstract:
Working capital management is considered to be a crucial element in determining the profitability of
business firms. An optimal working capital management practices are contributing positively to the
firm‟s profitability. In recent years many insurance companies in Sri Lanka have been an encounter
many issues regarding working capital. Many research studies have been carried out to find the
effect of the working capital on firms‟ profitability, but there were only a few studies carried out to
investigate the effect of working capital on the profitability of the insurance companies in Sri Lanka.
To fulfill this existing research gap, this study investigates the effect of working capital on a firm‟s
profitability of all the listed insurance companies in the Colombo Stock Exchange (CSE) for the
period of five years starting from 2015 to 2019. This study used Average Collection Period (ACP),
Average Payment Period (APP), Current Ratio (CR), and Debt Ratio (DR) to measure the working
capital while Return on Assets (ROA), Return on Equity (ROE), and the Profit Margin (PM) were
used by the researcher to measure the profitability of the listed insurance companies in the CSE.
Pearson correlation analysis was used to find the association between the working capital and the
firm‟s profitability. Three random effect panel regression models were used to find the effect of
working capital on a firm‟s profitability. The results of the study conclude that APP and DR have a
negatively statistically significant effect with the ROA (Model 01), ACP has a positive statistically
significant effect with the ROE (Model 02) and the CR has a positive statistically significant effect
with the PM (Model 03) of the Sri Lankan listed insurance companies. In line with the above
findings, it is recommended to adopt a conservative working capital strategy while paying higher
attention to the ACP and CR as the most favorably affected factors to the profitability of the listed
insurance companies in the CSE.
Keywords: Colombo stock exchange; Profitability; Profit margin; Return on assets; Return on equity;
Working capital management.
