Applying Relative Solvency to Working Capital Management - the Break-Even Approach
21 Pages Posted: 1 Aug 2005
Date Written: June 15, 2005
This paper looks at working capital management from the perspective of net-investment, having observed that present approaches do not take the question of operational size and relative liquidity of the firm into account when dealing with the issue of working capital adequacy. To aid analysis, the research studied financial reports of 25 selected listed companies together with opinion surveys on (existing) practical applications on working capital management in some of them. The results from data analysis were validated using a students 't' distribution test. The findings revealed that firms that considered relative liquidity performs better and have better growth prospect than others, while the study recommends the use of relative liquidity (relative solvency) for a more accurate estimation of working capital adequacy by organizations.
Keywords: Working capital, relative liquidity, relative solvency, operational break-even
JEL Classification: M41, M43, M00, M21, C12, C52, C32
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