Working capital is important for any firm and its administration is acknowledged as an essential of corporate administration. The main objective of working capital management is to choose the appropriate levels of the working capital components in order to ensure that the firm is able to meet its operating expenses and mitigate risks of default on payment of short-term obligations. In addition, working capital management is important for a firm’s survival because of its effects on a firm’s profitability and risk, and consequently its value (Gimeno, Folta et al. 1997) (Gunay and Kesimli 2011) and (Deloof 2003). Failure to manage working capital in prudent manner may lead to liquidity crisis and reduction in profitability, affecting the ability of firm to continue its operations.

This paper examines the impact of working capital management on the firm's profitability using retun on equity as its core determinant. Using a sampe of ninety listed Malaysian Shariah-compliant and non-Shariah firms react differently to similar firm specific variables. By employing static panel data estimation technique, we document that although the Shariah-compliant firms are subject to certain restrictions, they still efficiently compete with their conventional counterparts in terms of profitability by sustaining a higher return on equity. This might be attributed to better management of their receivables as well as a higher and better inventory turnover as per our empirical results. Thus, it can be assumed that Shariah restrictions have not impeded the performance of Shariah-compliant firms; rather it has helped them in some respects if not all.