THESIS SYNOPSIS

IMPACT OF WORKING CAPITAL MANAGEMENT

ON PROFITABILITY OF TEXTILE SECTOR OF
PAKISTAN
By
Shahrukh
MS-Banking and Finance
Roll No. FA15-RBF-004

Supervisor
Dr. Usman Ayub

Department of Management Sciences

Mohammad Ali Jinnah University, Islamabad.

CONTENTS

Page Number

Section I

Introduction

1-5

1.1

Significance of the Study

1.2

Objectives of the Study

1.3

Organization of the Study

1.4

Limitations of the Study

Section II

Literature Review

Section III

Data and Methodological Framework

3.1

Sample

3.2

Estimation of Regression Models

3.3

Data Analysis

15

References

16

6-9
10-15

10

Section I

10

Introduction
2

Corporate finance is an area of immense importance for the business

organizations. The decisions taken by the financial managers significantly
affect overall profitability of the organization besides the interest of the vide
variety of the stakeholders. They adopt risk minimization strategy and
accordingly undertake a series of well-organized measure. These measures
ensure day to day operational smoothness which not only help avoiding
insolvency but also enhance prospects of profitability of the organization. A
major share of their time is spent in managing working capital because of its
links to profitability. It turns out that efficient working capital management is
a function of credit policy and cost efficient supply of raw material and input.
Frequently managers encounter trade- off situation in their endeavor. For
instance, improving efficiency of accounts receivables could generate bad
debts whereas allowing for discount may improve the collection of
receivables but fast collection of receivables could also result in some lost
sales due to a strict credit policy. Therefore, a sound working capital
management policy is usually structured on consideration of their realities.
Thus, our research study is targeted at working capital management and its
subsequent impact on profitability.

1.1 Significance of the Study

Since earlier study was built on western data and specific research studies
exclusively on the impact of working capital on profitability of companies in
Pakistan are scanty, thus this study will be conducted with an attempt to
bridge the gap in the literature by offering empirical evidence to the extent
of which the result in Pakistan will be parallel to past studies. Furthermore,
this study is hope to brings benefit where the result can contribute to the
body of knowledge by identifying how profitability of Pakistani companies
effected by their working capital. The findings of this study is also hope to

provide an insight for concerned managers on the companys WCM policy

since its provide an important role in its profitability by furnish more
attention towards WCM.
Thus, this research will provide the basis on which further research
endeavors can be made to explore the other dimensions of working capital
management.

1.2 Objectives of the Study

The core objective of this study is to evaluate the textile sectors listed firms
of Pakistan in the context of working capital management with focus as
follows.
The study is aimed at achieving the following objectives:

To examine the working capital management practices of listed

manufacturing sector in Pakistan

To investigate the relationship between working capital management

and profitability in light of experience of the manufacturing sector of
Pakistan in general textile industry in particular for a nine-year period
(2007-2014)

It will examine the nature of relationship between profitability and

working capital management by examining the data of the textile
sector.

1.3 Organization of the Study

The research study is comprised of the following five sections or chapters:Section I includes an introduction to the study, objective of the study, its
scope and significance, limitations of the study.
Section II includes the review of related literature and their findings about
the working capital management and profitability.

Section III contains the data, methodology chosen, the sample size and the
variables involved in the research and statistical models used.
Section IV presents descriptive and statistical analysis used and their
results.
Section

includes

the

summary,

conclusion

and

provides

recommendations for further research.

1.4 Limitations of the Study

The proposed research study has certain limitations that are required to be
explicitly stated. This study focuses on Manufacturing sectors (Textile Sector)
only, keeping in view separate reporting and regulatory requirements for
financial companies. Therefore, the results are not supposed to represent the
financial sector in any case. Thus, a separate study ought to be made to
observe implications of working capital management.

Section II

Literature Review

The literature on efficient management of working capital and its links to

profitability of the business organization has significantly grown in recent
years. Surprisingly, most of the writers have identified almost similar
determinants fore the management of working capital. Similarly more
studies have found positive links between working capital management
and profitability. In the fallowing an effort is made to review only recent
studies on the subject. There are differing views of writers on the subject
and there are numerous studies that explore the relationship between
profitability and working capital management.
Working capital management the effect of market valuation in case of
Malaysia (Nor ediAzharbitni Mohammad. They used ratio analysis as a tool

for regression analysis; further describe that significant relationship

between the performances of working capital management.
Working capital management and corporate performance another case of
Malaysia (M.A Zariwati, H Taufiq) descriptive statistics , correlation
analysis , regression analysis used for their dependent

variables

operating income , independent variable cash conversion cycles. Result

showed that cash conversion cycle is significantly negatively associated
to the firm profitability.
Is it better to be aggressive or conservative in managing working capital
(TalatAfza, Miansajidnazir) Variables used for this purpose is aggressive
investment policy i.e. total current assets / assets. Aggressive financing
policy i.e. totals current liabilities / total assets. Methodology used for this
purpose is Tobin Q model. ROA and ROE. The result showed that there is a
negative relation between the degree of responsiveness and working
capital management.
Working

capital

management

and

corporate

performance

of

manufacturing sector in Pakis tan Abdul Rehman, TalatAfza etc. Variables

used for the analysis i.e. Net operating Profitability, Average collection
period, Inventory turnover in days, Average payment period, cash
conversion cycle, net trading cycles, gross working capital turnover ratio.
Further the impact of working capital on manufacturing sector is tested by
using panel data methodology.

The results showed that overall

manufacturing sector, working capital has significant impact on the

profitability of the firm.
Trends in working capital and its impact on firms performance: An
Analysis of Mauritian small manufacturing firms (KessevenPadachi)
Variables used for the analysis i.e. Return on assets is dependent variable,
6

explanatory variables cash conversion cycle. Control variables includes

natural log of sales, gearing ratio, gross working capital turnover ratio,
ratio of current assets to total assets. The primary aim of this paper is to
investigate the impact of working capital management on corporate
profitability of small manufacturing firms. The study has shown that the
paper has been able to achieve high scores on the various components of
working capital.
Working capital and profitability an empirical analysis (Pc narware)
Variables are working capital ratio, Acid test ratio, current assets to total
asset ratio, current assets to total assets ratio, current assets to sales
ratio, working capital turnover ratio, Inventory turnover ratio, debtors
turnover ratio. Methodology used in this paper multiple regression
analysis, SPSS used for ratios analysis. The result showed that both
positive and negative situation.
The Relationship between working capital management and profitability: A
Vietnam case Hyunch Phuong Dong, JhyTaysu. Variables used for this
analysis

Gross

operating

profitability,

Number

of

days

account

receivables, Number of days inventory, Number of days account

receivables, cash conversion cycle. Methodology used for this analysis
Primary data sources of Vietnam stock exchange for a period of 2006 to
2008, 130 firms used for analysis. The result showed that negative
relation between accounts receivables and days inventory.
Working capital and profitability In case of Pakistani firms: (March 2007,
Abdur Rehman and Mr. Nasir). Variables used for this analysis Net
operating profitability, average collection period, Inventory turnover in
days, average payment period, cash conversion cycle, current ratio, log of
sales. Methodology used in this article is Panel data regression analysis,
Cross sectional and time series data. The result showed that significant
7

impact on profitability of the firm, average collection period, inventory

turnover in days and Negative relation between account payable and
profitability.
The relationship between working capital management and profitability of
oil and gas sector of Pakistan: (2006 Shah A.M.S and Sana). Variables
used for this analysis Cash conversion cycle, days accounts receivables,
days inventory. Methodology used for this analysis Poll data analysis, and
regression model. The result showed Positive relation between gross profit
and number of days accounts payables. Positive relation between
working capital management and profitability.
The Relationship between working capital management and profitability:
(India 2007, Anand M & Malhotra). Variables used for this analysis is Cash
conversion cycle, days accounts receivables, days inventory. Methodology
used in this article Multipleregression analysis. Results showed that
positive relation between working capital and firm profitability.
Laziridis. I &Tryfondis.D (2006) in their work have investigated the
relationship

between

corporate

profitability

and

working

capital

management by analyzing experience of 131 companies listed on the

Athens Stock exchange during 2001 to 2004. They have found that if the
cash conversion cycle is correctly handled and if the different components
like accounts receivables, accounts payables, inventory are kept to an
optimum level, then profitability increases which increases value of the
organization.
Gracia- Teruel J.P & Martinez- solan P. (2007) have used 8872 small and
medium size Spanish

firms for the period of 1996 to 2002 for

investigation of a relationship between working capital management and

profitability. Their investigation reveals that by reducing their firms
8

number of days accounts receivables and inventories and by shortening

the cash conversion cycle firms profitability could be improved. Their
finding indicate that in the most profitable firms there are shorter number
of days accounts receivables, days of inventory and accounts payables as
well as a shorter conversion cycle. The previous studies focus on large
firms (Shin and Soenen 1998), however their study based on small and
medium enterprises could not confirm the number of days accounts
payables affecting its return on assets.
Summing up it can be maintained that the topic is well researched around
the world and with numerous findings. Some authors have concluded a
significant positive relationship between profitability and working capital
management while others have not found such a relationship. At country
level studies conducted in Malaysia, Belgium, Mauritius, Spain, Pakistan
and Athens and Greece sound working capital management is argued to
have a positive relationship and profitability.
As far as the researcher on the topic in Pakistan is concerned, this study
will use current data, the findings of which will be generalized to the
entire manufacturing sector besides the specific understanding of the
textile industry.

Section III Data and Methodological Framework

The following section contains the details of the methodology to be used in
the proposed research study. It contains the sample, methodology used, and
variables.
3.1 Sample

The study analyses experience of only textile firms during the period of
2007-2014 on the basis of secondary data. The sample includes three main
types of companies; spinning, weaving and composite, of the textile sector.
Data will not be accessible from one individual source; a number of sources
will be utilized for recording of the variables included in this study. Some
prominent secondary sources utilized for recording of financial data includes
state bank of Pakistan(SBP), Karachi stock exchange(KSE), All Pakistan textile
mills

associations(APTMA),

Securities

and

exchange

commission

of

Pakistan(SECP), Ministry of textiles, Federal bureau of statistics(FBS)etc.

Some figures will also be recorded from the annual reports of the companies
downloaded from the websites of the companies and from business
recorders.
3.2Estimation of Regression Models (Variables):

According to Padachi (2006) the fallowing general regression functions will be

used.
ROA= F (INS, GR, GWCTR, Ct1, Ct2, EXWC)
ROA i.e return on asset is dependent variable
Independent variables are
LnS is the natural log of sales
GR is the gearing ratio
GWCTR is gross working capital turnover ratio
Ct1 denotes the current asset divided by total assets
Ct2 denotes the current liabilities divided by total assets
EXWC denotes the explanatory variable which denotes days inventory, days
payables, days receivables and cash conversion cycle subsequently in each
of the following four regression model devised.
Therefore, in light of analysis the fallowing model is proposed to enhance
statistical logic;
10

ROA= f (INS, GR, GWCR, Ct1, EXWC)

This model can be rewritten for each component of working capital variables
as fallows.
ROA= f (INS, GR, GWCTR, Ct1, DI)

(equation

1)
ROA= f (INS, GR, GWCTR, Ct1, DR)

(equation

2)
ROA= f (INS, GR, GWCTR, Ct1, DP)

(equation

3)
ROA=

(INS,

GR,

GWCTR,

Ct1,

CCC)

(equation4)
DI denotes days inventory
DR denotes days Receivables
DP denotes days payables
CCC denotes Cash conversion cycle (cash conversion cycle= Days Inventory
+ Days Receivables Days Payables)

11

3.1: Table: Measurement of variables and abbreviations

Variables

Measurement

Abbreviati

Return on assets

Net income / Total assets

on
ROA

Size of the firm using

Natural logarithm of sales

LOS

Gearing ratio

Total

Gross

working

financial

debt/

total GR

assets
capital Net sales/ current assets

GWCTR

Turnover ratio
Current assets to total Current assets to total assets Ct1
assets
EXWC i.e
Average
period
Inventory

ratio
collection Accounts
turnover

receivables

sales * 365
in Inventory / CGS *365

Net ACP
ITID

days
Average payment period Accounts payables/ purchases APP
Cash conversion cycle

* 365
ACP + ITID APP

CCC

3.3 Data Analysis

The data will be analyzed using multivariate regression analysis through
MS-Excel and SPSS Soft wares. First of all, companies will be entered and
sorted in soft wares. Then, the relationship between working capital
management and profitability of firms will be determined with the help of
regression analysis.

12

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Anand, M. & Malhotra, K., Working capital performance of corporate India:
An empirical study, ICFAI Journal of Applied Finance, Vol.13, No.1pp.46-81,
January 2007.
Laziridis, I and Tryfondis, D., Relationship between working capital
Management and Profitability of Listed companies in the Athens Stock
exchange . Journal of financial Management and Analysis, Vol. 19, No. 1,
January-June 2006 Available at SSRN: http://ssrn.com/abstract=931591
Padachi k. (2006) Trends in working capital management and its impact on
firms Performance: An analysis of Mauritian small Manufacturing firms,
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15