Impact of Working Capital on Profitability: ASX Mining Companies Study

This research report investigates the impact of working capital management on the profitability of mining companies listed on the Australian Stock Exchange (ASX). The study delves into the relationship between working capital components, including cash management, inventory, accounts receivable, and accounts payable, and their influence on key financial metrics such as Return on Assets (ROA). The report analyzes secondary data from a sample of ASX-listed mining companies over a five-year period, comparing and contrasting findings with existing literature to identify research gaps and validate the impact of working capital on financial performance. The study also explores the historical context of the Australian mining industry and provides recommendations for improving working capital management practices to enhance profitability and sustainability within the competitive mining sector. The report includes an introduction, literature review, methodology, findings, conclusion, recommendations, and limitations.

Running head: IMPACT OF WORKING CAPITAL ON MINING COMPANIES
PROFITABILITY
Impact of Working Capital on the Profitability of Company: A Study on Mining Companies
Listed On ASX
Name of the University:
Name of the Student:
Authors Note:

1IMPACT OF WORKING CAPITAL ON MINING COMPANIES PROFITABILITY
Table of Contents
1. Project Title.....................................................................................................................3
2. Introduction......................................................................................................................3
2.1. Research Background...............................................................................................3
2.2. Research Rationale...................................................................................................3
2.2. Research Aim and Objectives...................................................................................4
2.3. Research Questions...................................................................................................5
2.4. Key Definitions.........................................................................................................5
3. Literature Review............................................................................................................6
3.1. Components of Working Capital Management........................................................6
3.2. Working Capital Management and Profitability Relationship.................................7
3.3. History of Australian Mining Industry.....................................................................8
3.4. Research Gap............................................................................................................9
3.5. Conceptual Framework.............................................................................................9
4. Research Methodology..................................................................................................11
4.1. Research Design.....................................................................................................11
4.2. Research Approach.................................................................................................11
4.3. Data Collection Method..........................................................................................12
4.4. Sample Selection....................................................................................................12

2IMPACT OF WORKING CAPITAL ON MINING COMPANIES PROFITABILITY
4.5. Data Analysis..........................................................................................................13
5. Findings from Secondary Data Analysis.......................................................................13
6. Findings from Previously Reviewed Literature.............................................................14
7. Conclusion, Recommendations and Limitations...........................................................15
References..........................................................................................................................16

3IMPACT OF WORKING CAPITAL ON MINING COMPANIES PROFITABILITY
1. Project Title
Impact of Working Capital on the Profitability of Company: A Study on Mining
Companies Listed On ASX
2. Introduction
2.1. Research Background
Working capital management in the companies is observed to impact the profitability
position or revenue earning ability of the company. In consideration through focusing on
maintenance of effective working capital, the liquidity position of the organizations are also
determined that indicates the issue of bankruptcy and insolvency. It will also be investigated that
maintaining sufficient cash flows can facilitate the company in addressing the short and long
term debts along with dealing with expenses at minimal costs that can increase corporate
profitability
2.2. Research Rationale
Working capital serves as an effective tool in measuring the financial effectiveness along
with its short-term financial situation. Optimum maintenance of working capital is considered to
be important in realizing maximum possible returns (Aslam et al. 2018). The research will
analyze the capability of the mining organizations in attaining profits along with maximizing it
through effective use of its working capital. In addition, the study will also analyze that better
working capital management facilitates the mining organizations in attaining sustainable position
within the industry along with offering capacity to the financial managers to manage their
receivables, payments and inventories as this has increased impact on the stakeholders that

4IMPACT OF WORKING CAPITAL ON MINING COMPANIES PROFITABILITY
ensures success and increased profitability of the business (Hosseinzadeh, Smyth, Valadkhani &
Moradi, 2018). The major objective of the companies is focused on attaining profit maximization
along with attaining suitable liquidity of its position. The major issue that has been recognized is
regarding increasing profits at the expense of liquidity can attain major along with effective
issues to the companies. Management of working capital in the mining companies includes
managing inventories, cash along with accounts paid and received (Li & Islam, 2019). The
research has been carried out in order to evaluate the impact of size along with increasing
working capital and whether this investment has increased or decreased over a given time period.
After computing the requirement of the current assets, the vital task for the financial manager has
to choose suitable innocence source for finding the Australian mining companies several current
assets. This is further deemed to increase profits of these organizations (Lin, Li & Bu, 2015).
In consideration through focusing on maintenance of effective working capital, the
liquidity position of the organizations are also determined that indicates the issue of bankruptcy
and insolvency. For such reasons better working capitalmanagement in the ASX listed mining
companies are deemed to be vital in order to make sure that these organizations are carrying out
its business activities in addressing its short term requirements and for paying off its operational
expenses (Pais & Gama, 2015). Considering the same, the research will offer effective
implications for the Australian mining companies through evaluating the manner in which
managing different aspects of working capital of these companies’ impacts their profitability
within the industry.

5IMPACT OF WORKING CAPITAL ON MINING COMPANIES PROFITABILITY
2.2. Research Aim and Objectives
The aim of the research is to analyze the impact of working capital on the profitability of
the mining companies listed on Australian Stock Exchange (ASX). The objectives set in this
research to be attained after its completion is indicated below:
 To understand and analyze the association between working capital management and
profits of ASX listed mining companies
 To analyze the impacts of distinct working capital components on the profits attained by
the ASX listed mining companies
 To make better suggestions in improvement for the successful survival of the mining
companies in the competitive mining industry
2.3. Research Questions
The research questions those are to be answered through completion of this research are
indicated under:
 What is the relationship between the working capital management and profitability in the
Australian mining industry?
 What are the components within working capital that facilitates in measuring profitability
of the mining companies?
2.4. Key Definitions
 Working capital: This can be defined as the capital needed by a business in operating its
daily trading operations that is computed as current assets less than current liability.
 Profitability: This can be defined as the degree to which the activities of businesses yield
financial gains or profits.

6IMPACT OF WORKING CAPITAL ON MINING COMPANIES PROFITABILITY
3. Literature Review
3.1. Components of Working Capital Management
Lala, Moyo, Rehbach and Sellschop, (2016) revealed that working capital management
involves important decisions regarding several aspects, encompassing the available cash
investment in order to maintain a considerable level of inventories, managing accounts payable
and receivable. Working capital management is also limited to such tasks and is also implicated
in several interaction levels internally along with among the external parties. Aslam et al., (2018)
indicated that for instance, credit officers are needed to investigate the credit history of their
consumers for realizing their financial worthiness. The major components related with working
capital management include receivables, cash, payables management and inventory. The purpose
of cash management is to analyze the optimal levels of cash for the business operation cycle
nature.
Hosseinzadeh, Smyth, Valadkhani and Moradi, (2018) revealed that the challenge related
with suitable cash management is to balance the proper level of cash and marketable securities
which might decrease the insufficient funds risks for the operations along with opportunity
expenses of attaining high resources level. These researchers also stated that inventory
management considers that inventories are the products that an organization is manufacturing for
sale along with the components developing the product. Li and Islam, (2019) added that various
forms of inventories have been added within the mining organizations such as work in progress,
raw materials and finished goods. The inventory management objective might be to determine
along with maintaining suitable level of inventory investment that should normally exist between
two difficult points such as excessive and inadequate inventories. Al Nimer, Warrad and Al

7IMPACT OF WORKING CAPITAL ON MINING COMPANIES PROFITABILITY
Omari, (2015) revealed that accounts payables considers the suppliers whose invoices for
services and goods have been processed bit not paid.
In consideration to same accounts payable are always considered as a vital source for
working capital financing for companies. These researchers also revealed that receivables
management considers accounts payable as suppliers whose invoices for the services or goods
have been processed but still not paid. Afrifa and Padachi, (2016) stated that the objective of the
receivables management is to decrease the time lapse between sales completion and receipts
payment. In effective working capital management, cash conversion cycle serves as an important
tool for evaluation that facilitates in establishing the reasons and ways in which companies
require more cash in operating and the ways it will be in a position to refund the negotiated
resources. Cash availability is deemed to be as vital measure in analyzing the effectiveness of
capital management as business is attaining more loss over periods but it cannot survive with
suitable cash conversion cycle management.
3.2. Working Capital Management and Profitability Relationship
Afrifa and Padachi, (2016) elaborated that the company’s profitability is focused on
maintaining effective return on assets (ROA) is employed as a measure of the profitability for the
companies. ROA is also employed by the companies in analyzing the impact of working capital
management on the profitability of the Australian mining organizations. Lala, Moyo, Rehbach
and Sellschop, (2016) revealed that in analyzing the profitability of the organizations, ROA is
deemed as an indicator of managerial efficiency as it indicates that the company’s management
transformed the company’s assets under its control within earnings. ROA is also considered to
affect earnings before interest and taxes divide by the company’s net assets. Afrifa and Padachi,
(2016) stated that company profitability serves as the capability to generate a high range of

8IMPACT OF WORKING CAPITAL ON MINING COMPANIES PROFITABILITY
revenue over expenses for attracting and holding the investment capital. Four vital measures of
the companies profitability includes the rate of return of the company’s assets (ROA), the
company’s rate of return on the company’s equity (ROE), net company command operating
profit margin. These researchers also explained that the ROA measures the return to all the
companies’ assets and is generally employed as overall profitability index and it is also gathered
that the higher the value the more profitable will be companies.
Afrifa and Padachi, (2016) added that in realizing the effect of working capital
maintenance on the company’s profitability ROA serves as the indicator of managerial efficiency
as it indicates the effective manner in which the company’s management converted the
company’s assets under its control within earnings. It is also explained in this research that ROE
measures the return rate of the owners equity employed within the company. This also indicates
the company has the operating profit margin measures the returns to capital per naira of the gross
company revenue. Lala, Moyo, Rehbach and Sellschop, (2016) explained that the working
capital management also focuses on the per unit produced component of attained profit along
with asst turnover ratio. The net income is attained directly on the income statement and it is
computed through matching the company’s revenue with the expenses experienced to generate
revenue along with attaining loss or gain on the company’s capital assets sale.
3.3. History of Australian Mining Industry
Afrifa and Padachi, (2016) revealed that the Australian mining industry are attaining
increase net profits of around 126% globally and the market capitalization of the top 40
Australian market increased by 30%. It has also been analyzed that the mining industry of
Australia is prospering for the reason that Australia is attaining an increased supply for mineral,
hydrocarbon and the non-mineral reserves that is extracted, processed and sold by the mining

9IMPACT OF WORKING CAPITAL ON MINING COMPANIES PROFITABILITY
companies. Hosseinzadeh, Smyth, Valadkhani and Moradi, (2018) added that the mining
division’s financial performance and profitability is totally relied on the pricing, the Australian
dollar value, international supply trends, capital investment and commodities demand. The
revenue of the Australian mining companies are observed to increase at a slow rate over the past
five years with increased output that basically offsets generally lower prices. Lala, Moyo,
Rehbach and Sellschop, (2016) explains that the results regarding profitability of the industry are
deemed to be the highest that indicates effective working capita management by the companies.
In addition, it has been evidenced that the ASX listed mining companies have reported an
increase in the profit margin for about 37.1% and the average profit margin for all industries in
Australia accounts for just 11.2% (Hosseinzadeh, Smyth, Valadkhani & Moradi, 2018).
Moreover, the revenue ratios of the ASX listed mining companies in Australia are higher in
comparison to the largest international miners all around the world.
3.4. Research Gap
From analyzing the previous literature existing on the impact of working capital
management on mining companies profitability it has been analyzed that there is a gap in
analyzing that the profitability of the companies is affected by inventory, cash, payables and
receivables along with return on assets in mining industry (Lala, Moyo, Rehbach & Sellschop,
2016). To deal with such gap, the current research will facilitate in analyzing that the assets held
by the mining companies impacts its products and sales activities and attaining enough working
capital are necessary for smooth operations of the same.
3.5. Conceptual Framework
The conceptual framework indicated in the figure below indicates the manner in which
the working capital management aspects such as cash return on assets, inventory along with

10IMPACT OF WORKING CAPITAL ON MINING COMPANIES PROFITABILITY
payables and receivables on the mining company’s profitability. Focused on this framework, the
research will focus on explaining the ways in which working capital and profitability
relationships relies on the company’s existing assets and liabilities in order to make sure that the
company is capable to continue its operations (Lala, Moyo, Rehbach & Sellschop, 2016).
Moreover, it will also be investigated that maintaining sufficient cash flows can facilitate the
company in addressing the short and long term debts along with dealing with expenses at
minimal costs that can increase corporate profitability (Lala, Moyo, Rehbach & Sellschop,
2016).
Figure 1: Conceptual Framework
(Source: Authors Note)
CashInventory

11IMPACT OF WORKING CAPITAL ON MINING COMPANIES PROFITABILITY
4. Research Methodology
4.1. Research Design
The research design that will be followed in this research is explanatory research as it can
offer the researcher with increased opportunity of guiding the research towards attaining a
particular goal relied on study objectives. Explanatory research design use can also facilitate the
researcher in explaining the cause-effect association through explaining the possible future
findings from the research (Scafarto, Ricci & Scafarto, 2016). This research design is significant
to be used for the research as it is centered on analyzing the impact of working capital on the
profitability of ASX listed mining companies. Explanoriry research will facilitate in explaining
the factors in details regarding various aspects of working capital management effective on the
profit earnings of these organizations and the ways in which lack of same can hamper liquidity of
mining organizations (Lins, Servaes & Tamayo, 2017). In addition, the explanatory research
deign will focus on developing a recommendation list in addressing issues faced by these
organizations in maintaining sufficient working capital.
4.2. Research Approach
As the current research is focused on analyzing the association between working capital
management and profits of ASX listed mining companies, inductive research approach is
employed in the current study. This is for the reason that the researchers are centered on carrying
out qualitative analysis for attaining desired research outcomes and this will be carried out
through gathering relevant secondary data (Burgstaller & Wagner, 2015). Secondary data will be
gathered to evaluate the existing models along with past trends along with the proven facts
because of which inductive research approach will be implemented in the study for extracting
suitable study findings.