The relationship between working capital management and corporate profitability for US construction companies

Purpose The going concern for any company, and certainly a construction company, is profitability. More than a monetary measure, profitability considers the relationship with the company’s revenues. Thus, the effective use of the company’s working capital (current assets less current liabilities) and other financial metrics are studied for their impact on profitability. This study aims to examine the relationship between working capital management and profitability among U.S. construction companies. Design/methodology/approach This study applies the well-documented methodology of studies from around the globe – but specifically within the US construction industry. A database of over 6,000 annual financial statements from construction companies was used to determine the commonly used financial ratios, while correlation and multiregression analyses were run. The test was subsequently performed on varied strata based on company revenue size. Findings The findings of this study are intuitively unconventional – suggesting that extending credit terms provides pecuniary benefits to companies. This study does present a fundamental relationship between working capital and profitability – but not without reasonable confounders. Originality/value Variation in the comparative results from previous studies and this one provided sufficient new findings to support the research conclusions and subsequent discussion – adding to the body of knowledge on net working capital and profitability.