Working Capital Leverage: A Conceptual Critique and Modified Formulation
International Journal of Management Research and Business Strategy ( IJMRBS ), Vol. 2 Issue 2 , April 2013
This working paper elucidates that the term 'working capital leverage’ as per the traditional concept, i.e. the responsiveness of the return on investment (ROI) to changes in the level of current assets (CA) is a misnomer because the leverage effect does not exist for an increase in the level of current assets. Also, the correct term for the traditional 'working capital leverage' should be 'current asset elasticity of ROI' [or ‘gross working capital elasticity of ROI']. Lastly, the true connotation of the term ‘working capital leverage’ is manifested in a newly defined concept of 'net operating working capital leverage'.
Keywords: working capital leverage, business leverage, operating leverage, net operating working capital leverage
JEL Classification: M21, M41, G31Accepted Paper Series
Date posted: June 12, 2011 ; Last revised: April 8, 2013
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