Title: Composite financial performance score - a new performance measure for evaluating the impact of working capital efficiency of firms

Authors: Shiv Shankar Kumar; N. Sivasankaran; Subrata Roy; Naresh Gopal

Addresses: Pandit Madan Mohan Malaviya School of Commerce and Management Sciences, Mahatma Gandhi Central University, Motihari, Bihar, India ' XLRI, Xavier School of Management, Jamshedpur, India ' Pandit Madan Mohan Malaviya School of Commerce and Management Sciences, Mahatma Gandhi Central University, Motihari, Bihar, India ' Indian Institute of Management, Tiruchirappalli, India

Abstract: Working capital management is vital to the functioning of a healthy and successful commercial firm. A major portion of working capital literature has empirically examined the impact of working capital efficiency (WCE) on the firm's profitability. In literature, profitability is often used as a proxy for a company's financial performance. However, the drawback of these studies is that the outcome measure used by them does not reflect the full/aggregate impact of WCE because these measures (ROA, ROCE, ROE, NOI and GOI) only account for the impact of WCE on business profitability and ignore the impact of WCE on other sub-metrics of financial performance. In this research, we present a new performance measure of WCE, namely, composite financial performance score (CFPS) by considering the most important performance indicators such as profitability, liquidity, solvency, cash flow management, and leverage. Borrowing from Piotroski's F-score framework, we have developed a discrete binary scoring system using scores of 0 or 1 on 22 sub-parameters that form part of the above stated performance indicators of a firm. The study is useful for academicians and industry practitioners as it provides new insights and implications for them in the performance assessment of firms.

Keywords: profitability; liquidity; solvency; cash flow management; leverage; composite financial performance score; working capital efficiency.

DOI: 10.1504/IJEF.2024.139585

International Journal of Electronic Finance, 2024 Vol.13 No.3, pp.367 - 385

Received: 25 Jan 2023
Accepted: 01 Apr 2023
Published online: 04 Jul 2024 *

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