Relationship Between Liquidity, Cash Conversion Cycle and Returns of Russian Companies

Abstract

Tatiana Aleksandrovna Garanina - Associate Professor of the Department of Finance and Accounting, Academic Director of EMBA Programs, Graduate School of Management, St. Petersburg State University. Email: garanina@gsom.spbu.ru
Olga Evgenievna Petrova - Institute "Graduate School of Management" Saint-Petersburg State University.

The research covers the influence of liquidity and cash conversion cycle on financial performance (as a return on net operating assets, RNOA) of Russian companies. The question of working capital management is very topical in the context of the Global Financial Crisis (GFC) that brought up a problem of survival for a lot of companies and even industries.  A regression analysis of 720 Russian companies from eight different industries (telecommunication, transport, electric utility industry, trade, metallurgy, mechanical engineering, chemical and petrochemical industry, oil and gas industry), for the period from 2001 to 2012 is performed. As a result, an inverse relation between these companies’ cash conversion cycle and RNOA was identified. To analyze the data we use a specialized statistical program – STATA 12.0.The results of the research show that for all subsamples of companies, excluding the companies with negative cash conversion cycle, there is a statistically significant positive relationship between cash conversion cycle and return on net operating assets; the companies with negative cash conversion cycle are charactarized by a positive relationship between these two variables. This result confirms our expectations that in order to increase the return, companies should tend to have a zero cash conversion cycle. We also revealed that there is a statistically significant positive relationship between a current relationship and return on net operating assets.This means that Russian companies should seek to augment their liquidity index in order to increase RNOA, but the index should only be augmented to a defined value. We found out that the main limitations for increasing RNOA are the required rate of liquidity and the optimal level of financial cycle of an organization.  Besides, the recommended intervals of current ratio were calculated for the contemporary economic situation in Russia. We define the maximum values of current ratio the excess of which will bring to the negative relationship with return on net operating assets.