The purpose of this study was to examine effects of working capital management on firm profitability. It used return on total assets as a measure of profitability and the cash conversion cycle and its components to measure working capital management efficiency. Income statement and balance sheet of 353 manufacturing and merchandising companies in Ethiopia were employed. Panel data regression results showed that there is negative significant effect of cash conversion cycle on profitability. Besides, inventory period and accounts receivable period have negative and significant effect on profitability. And accounts payable period has positive and significant effect. Furthermore, leverage, firm growth rate and firm size also significantly influence profitability. However, these relationships don’t significantly differ between manufacturing and merchandising companies. Therefore, firms can enhance profitability by reducing the length of the cash conversion cycle, inventory period, accounts receivable period and by negotiating longer credit period from creditors.