Financial performance is a multi-dimensional construct. In the broadest sense, financial performance refers to the degree to which short-, medium- and long-term financial objectives have been accomplished (Shen et al. 2020). Accounting-based metrics typically provide users with information regarding historic profitability. Despite relying on audited financial data, such measures might be manipulated by management. Commonly used accounting-based metrics include the return on assets (ROA) and return on equity (ROE) ratios (Aktas et al. 2015; Arunkumar & Ramanan 2013; Oke 2023).

In turn, value-based metrics ensure that focus is placed on a cycle of sustainable value creation. This strategic value creation process entails generating long-term financial, as well as social and environmental value by integrating sustainability into the core operations of a company. Outcomes include enhancing competitiveness by optimising WCM, decreasing waste and reducing related costs. In turn, divergent stakeholders’ demands can be met (Manninen, Laukkanen & Huiskonen 2024).

A financial performance metric is considered part of the VBM perspective if it accounts for a company’s cost of equity or WACC (Young & O’Byrne 2001). The theoretical background of value-based measures is largely rooted in FCF valuation (Griffith & Carroll 2011). A company’s FCF represents the amount by which its operating cash flow exceeds its working capital needs and capital expenditure on non-current assets. A firm’s FCF is hence calculated after provision for all investments in financially feasible projects has been made. The metric accordingly indicates the cash flow that is available to be distributed to a company’s capital providers (Griffith & Carroll 2011).

As it is more challenging to manipulate value-based metrics than accounting-based measures, some scholars prefer FCF above accounting-based return ratios (Hann, Ogneva & Ozbas 2013). Zimon and Tarighi (2021) described FCF as a reliable indicator of how well companies have maintained their operating cash flows. When calculating FCF, financial managers typically commence with the net operating profit after tax (NOPAT), before incorporating the change in net operating capital (NOC) required to support operations. A key advantage associated with the NOPAT metric is thus that it allows for comparison between companies irrespective of how they are financed (Mauboussin & Callahan 2022).

Furthermore, NOPAT and the investment in NOC could be used to compute the ROIC metric. This value-based return measure expresses NOPAT as a percentage of a company’s NOC. In turn, NOC comprises of NOWC and long-term operating capital. The ROIC measure thus enables managers to make effective asset allocation decisions and compare investment opportunities. Managers will typically select the investment opportunity that returns the highest ROIC (Martin et al. 2009).

The financial feasibility of an investment could further be assessed by comparing its ROIC to the company’s WACC (Martin et al. 2009). The resultant spread value reflects whether the return earned on the invested capital exceeds the cost of obtaining the capital. If WACC is larger than ROIC, additional investment in NOC will diminish value. According to PricewaterhouseCoopers (PwC 2019:6) ‘more can be done to boost ROIC’ through WCM. Companies could accordingly enhance their ROIC by optimising their WCM.

Working capital management refers to the management of a company’s short-term assets and liabilities with the aim of improving its operating efficiency (Le 2019). Ideally, current assets should thus be allocated in a manner that maximises operating efficiency and minimises waste (Boțoc & Anton 2017). Sound WCM practices should provide an ongoing investment in the current assets of a company, thereby allowing the timeous settlement of expenses, including inventory purchases. Furthermore, such practices could ensure continuous growth through additional investments in specific current assets. A primary indicator of an effective WCM strategy is thus that it has a positive impact on value creation. Underinvestment in working capital can cause liquidity problems (Habib & Kayani 2022; Le 2019).

Prior WCM authors largely focused on the CCC and the NTC. The NTC differs from the CCC in the sense that the trade receivables, inventory and trade payables are expressed relative to sales, whereafter it is multiplied by the number of days per annum (Akbar et al. 2021; Ameer & Otherman 2021; Erasmus 2010). Since both the CCC and NTC are calculated based on information contained in a company’s financial statements, these working capital measures reflect the accounting perspective.

In contrast, the VBM framework centres on FCF, and by implication incorporates WCM through NOWC (Strischek 2001). The amount of FCF generated by a company could be considerably influenced by its WCM strategy, as reflected by the changes in NOWC over time (Griffith & Carroll 2011). The FCF metric thus enables investors to reflect on a company’s operational efficiency and adopted WCM strategy (Hann et al. 2013).

As the NOWC specifically focuses on a company’s operational efficiency, only items that are directly linked to operating activities are considered. This metric is hence computed by accounting for changes in selected operating current assets, such as trade receivables and inventory and trade payables that are required to support the operating activities (Strischek 2001). The NOTC can be determined to assess a company’s WCM by dividing the NOWC by sales and converting it to the number of days per annum. By implication, the shorter the NOTC, the more efficiently a company has managed its NOWC.

Pertaining to WCM strategies, an aggressive strategy entails that management aims to maximise profitability and free up maximum capital for expansion purposes by maintaining low levels of working capital. Working capital shortfalls are then financed with short-term debt. Although cash flow can improve, liquidity risk can also increase given the potential inability to meet short-term obligations. This strategy is usually utilised if management can predict future cash requirements with relatively high accuracy (Guizani & Abdalkrim 2023; Tsuruta 2018). Furthermore, large companies tend to exercise their bargaining power with suppliers when implementing this strategy (Jabbouri et al. 2025).

In contrast, managers that follow a conservative WCM strategy prioritise liquidity by maintaining high levels of current assets, thereby resulting in high carrying costs. Such high levels of working capital are typically funded by long-term financing sources (Guizani & Abdalkrim 2023; Tsuruta 2018). Profitable companies with high operating cash flows tend to adopt this WCM strategy (Jabbouri et al. 2025). A moderate WCM strategy aligns debt maturities with the maturity of the company’s financial needs. As this strategy entails maintaining average inventory, it typically translates in stable operations. Profitability can thus be improved. Corporate leaders can accordingly meet short-term obligations while avoiding high carrying costs (Weinraub & Visscher 1998).

Prior researchers mainly reported a significant negative relationship between the CCC and selected accounting-based profitability metrics (Aktas et al. 2015; Aldubhani et al. 2022; Arunkumar & Ramanan 2013; Doan & Bui 2020; Falope & Ajilore 2009; Hossain 2020; Kasozi 2017; Kiymaz, Haque & Choudhury 2024; Koroma & Bein 2024; Kumar, Sawarni & Roy 2024; Lazaridis & Tryfonidis 2006; Louw, Hall & Brummer 2016; Mandipa & Sibindi 2022; Mathuva 2010; Özkaya & Yaşar 2023; Sawarni, Narayanswamy & Ayyalusamy 2021; Shah 2019; Tran, Abott & Yap 2017). Similar results were noted for the NTC WCM metric (Ameer & Otherman 2021; Erasmus 2010; Shin & Soenen 1998). Several scholars have further investigated the relationships between the components of the CCC and profitability. As seen in Table 1, most of them noted a significant negative relationship between profitability, and the inventory and trade receivable periods and a significant positive link with the trade payables period (Boțoc & Anton 2017; Deloof 2003; Garcia-Teruel & Martinez-Solano 2007; Habib & Dalwai 2024; Kiymaz et al. 2024; Tauringana & Afrifa 2013; Uyar 2009).

Perusal of Table 1 further highlights an evident need to adopt the value-based perspective to investigate the linkages between WCM and financial performance metrics. The researchers therefore identified suitable value-based return ratios based on a rigorous literature review. PricewaterhouseCoopers (2019) recommended that companies should account for value creation opportunities (proxied by ROIC) by optimising working capital levels. The ROIC metric was hence selected as a value-based return ratio for this empirical investigation.

In the VBM context, managers should focus on achieving ROIC in excess of WACC. The spread was hence selected, as this value-based measure indicates whether value was created or destroyed. Furthermore, FCF is a key value-based indicator, as this metric is directly impacted by operational efficiency (Hann et al. 2013). Pertaining to the value-based WCM metrics, NOWC was selected based on the overview of prior research. The NOTC was then derived from NOWC.

Compared to other emerging markets, South Africa experiences unique socio-economic challenges. South Africa has a well-developed financial sector, yet it is the most unequal country globally (World Bank 2022). Furthermore, despite being a highly industrialised and technologically advanced economy within the African continent, 37.9% of the population lives in poverty, coupled by a high unemployment rate (Statistics South Africa 2025). The following hypothesis was formulated based on the preceding discussion:

Ethical clearance to conduct this study was obtained from the Stellenbosch University Research Ethics Committee: Social, Behavioural and Education Research (REC: SBE) (Project no.: ONB- 2023-27650). The study was classified as exempt from ethical clearance.

The panel regression results for ROIC (dependent variable), NOWC and NOTC are reported in Table 5. A statistically significant negative regression coefficient is reported for NOWC. This significant result shows that the sampled companies with lower NOWC values had higher ROIC values. High NOWC might reflect inefficient WCM given that substantive cash is tied up in operations. The discussed descriptive results furthermore show that NOWC increased gradually over the research period, while ROIC decreased. The sampled companies that managed to curb their investment in NOWC thus benefited in terms of ROIC. PricewaterhouseCoopers (2019) confirmed that return on investment can be enhanced by releasing cash from working capital. Furthermore, effective WCM entails that sufficient investments are made in operating current assets and that trade payable terms are optimised, which are in turn essential to ensure sustainable value creation (Strischek 2001).

Pertaining to the control variables, large sampled companies generated higher ROIC than small companies, in line with the outcome reported by Endri and Fathony (2020). A statistically significant negative regression coefficient is further reported for leverage. Managers of the sampled companies that avoided excessive debt use thus benefited in terms of ROIC. The regression outcomes for spread are reported next in Table 6.

The statistically significant negative association shown between NOWC and spread in Table 6 suggests that the sampled companies with lower NOWC had higher spread values. In terms of WCM, lower NOWC values indicate that companies have either maintained or reduced their investment in operating current assets, while taking advantage of credit terms by delaying repayments to creditors. Lower NOWC was also related to higher ROIC (see Table 5), which by implication contributed to larger spread values.

Large sampled companies and those with low leverage further had high spread values. Theoretically, WACC is expected to initially decrease if more debt financing is used, given that debt is the cheapest source of financing. WACC starts to increase once the minimum value related to the theoretical optimal capital structure is exceeded (Mauboussin & Callahan 2022). Corporate leaders hence cautiously monitor debt usage, as too much debt can increase risk levels, thereby constraining their companies’ ability to generate cash flow in a sustainable manner (Mauboussin & Callahan 2022). The results for FCF are reported in Table 7.

The sampled companies with large investments in NOWC generated higher FCF, compared to those with lower NOWC. It is important to note that NOPAT and the net change in long-term operating capital should also be considered, as these values could considerably impact FCF (Griffith & Carroll 2011; Martin et al. 2009). Enhanced operational efficiency might have facilitated investments in financially feasible projects. In turn, NOPAT would increase, and by implication FCF would be positively impacted.

The statistically significant negative regression coefficient for NOTC (at the 10% level) in Table 7 indicates that the sampled companies with shorter NOTCs had higher FCF values. A shorter NOTC points to more efficient WCM. The results thus show that enhanced WCM efficiency had positive FCF implications for the sampled companies during a 17-year period, including two crisis periods. Since the advent of the COVID-19 pandemic and the increased emphasis on sustainable value creation, managers place renewed focus on FCF (Zimon & Tarighi 2021).

As shown in Table 7, smaller sampled companies generated higher amounts of FCF. This result might be partly explained by smaller companies having fewer financially feasible projects to invest in. Their FCF might hence be higher compared to their larger counterparts with more financially feasible projects because of the related lower investment in operating capital required by smaller companies. Furthermore, the sampled companies that utilised less debt reported larger FCF. As companies can use FCF to reduce debt, companies with higher FCFs might have lower leverage (Yeo 2018). Based on the reported results, the null hypothesis was hence rejected. Working capital management practices evidently impacted the value-based performance outcomes of the sampled companies.

Effective WCM is of particular importance during crisis periods (Shen et al. 2020). The COVID-19 pandemic considerably impacted the optimal levels of current assets and current liabilities of companies operating in various industries (Alareeni & Hamdan 2022; Shen et al. 2020). In turn, companies’ CCCs typically increase during crisis periods (Zimon & Tarighi 2021). Zimon and Tarighi (2021) further found that companies tend to keep more inventory and allow more lenient credit terms during crisis periods. Corporate managers should hence cautiously balance capital being tied up in working capital sources and being able to withstand crisis periods, thereby contributing to sustainable value creation that could have positive implications for a range of stakeholders.

Separate analyses were conducted for the three largest industries, namely Consumer Staples, Consumer Discretionary and Industrials (non-tabulated). For the ROIC analysis, these industries had statistically significant negative regression coefficients for NOWC, in line with the results observed for the full sample. The Consumer Discretionary industry further yielded similar results to the full sample for NOTC. In contrast, a negative but statistically non-significant relationship was noted between NOTC and ROIC for the Consumer Staples and Industrials sub-samples.

The industry analyses further revealed statistically significant negative regression coefficients for NOWC and spread, similar to the results reported for the full sample. The Consumer Discretionary sub-sample reflected a statistically significant positive regression coefficient for NOTC. The results for Consumer Staples and Industrials did not reflect statistically significant regression coefficients for NOTC.

The outcomes for the industry-specific regression analyses, including FCF and NOWC, were similar than those reported for the full sample. The industry-specific results for NOTC further reflected statistically significant negative regression coefficients for Consumer Staples and Consumer Discretionary. This negative association could indicate that shorter NOTCs resulted in higher FCF values, in line with the results reported for the full sample.

Based on the reported outcomes, it is recommended that corporate leaders should give more attention to the selection of a suitable WCM strategy. They should ensure that the selected strategy is sufficiently aligned with their company’s goals. The allocation of operating current assets and current liabilities should thus be regularly reviewed. Investors are further encouraged to increase their use of value-based metrics when evaluating investments. They should hold corporate leaders accountable by asking questions pertaining to questionable WCM practices.

Pertaining to the study’s limitations, the reported results are not generalisable to all JSE-listed companies, as Basic Materials and Financials were excluded from the sample. Future scholars can thus explore the WCM strategies of companies operating in these industries. Case studies can further be conducted to account for the impact of crisis periods on WCM strategies. Future researchers could also conduct semi-structured interviews with corporate leaders to explore their views on WCM best practices and potential pitfalls in emerging and developed markets. Interviewees could also be requested to explain how they perceive the linkages between VBM and WCM. The qualitative outcomes can then be compared with the reported quantitative results.