Corporate profitability-working capital management tie: empirical evidence from pharmaceutical sector of Pakistan

Abstract

The importance of working capital management in generating the corporate profitability cannot be disregarded. This study aims to empirically investigate the impact of working capital management on the profitability of pharmaceutical sector of Pakistan. The study has taken secondary data covering a period of six years from 2011-2016. Current ratio, cash conversion cycle and current assets to total assets were taken as independent variables to represent working capital management and return on the asset taken as the dependent variable to represent corporate profitability. Through panel regression analysis, this study has found a significant impact of current ratio and cash conversion cycle and current assets to total assets have an insignificant impact on corporate profitability. These results give an insight of managing corporate profitability by considering current ratio and cash conversion cycle. This study should be beneficial for the pharmaceutical sector of Pakistan as performance and survival of this sector is important for investor and for the health of the general public. Contribution/ Originality No such studies has been undertaken for the Pharmaceutical Sector Companies of Pakistan. This results of the study are quite aligned with the prior literature not only from Pakistani perspective but also from developing economies context.

Variables comunes en la explicación de rentabilidad y liquidez en sectores del mercado brasileño

“…Sobre la gestión de capital de trabajo y la relación rentabilidadliquidez Uno de los criterios más sostenidos, cuando se comienza a realizar una revisión de la bibliografía sobre este tema, es que el capital de trabajo es la variable gestionable para alcanzar un equilibrio entre liquidez y rentabilidad. En tal sentido, fue posible apreciar que un grupo de autores considera que el éxito de una empresa radica en su capacidad para gestionar los activos circulantes (Banos, García y Martínez, 2014;Caliskan y Durer, 2011;Demir y Ersan, 2017;Filbeck y Krueger, 2005;Howorth y Westhead, 2003;Jaramillo, 2016;Karaduman, Akbas, Uremadu, Egbide yEnyi, 2012;Kungu, Wanjau, Waititu y Guekara, 2014;Sen y Oruc, 2009;Shafique, Farhan y Sahabia, 2018).…”

“…No obstante, la práctica confirma que algunas empresas pueden tener rentabilidad utilizando una política conservadora de capital de trabajo (Afza y Nazir, 2007;Al-Shubiri, 2010;Cheng y Geng, 2021;Cruz, Kimura y Sobreiro, 2019;Dias et al, 2022;Feng, Lo y Chan, 2019;Michalski 2014;Javid y Zita, 2014;Rech et al, 2019;Shafique et al, 2018;Vahid et al, 2012), manteniendo efectivo e inventarios que las ayude a protegerse de fluctuaciones de precios del mercado y situaciones macroeconómicas inciertas (Braga et al, 2004;Dias et al, 2022;García y Martínez, 2007;Michalski 2014).…”

“…La variable cf manifiesta correlación significativa con la liquidez en los dos sectores estudiados, lo cual corrobora diversos hallazgos anteriores mostrados por la literatura (Ajilore y Falope, 2009;Deloof, 2003;García Teruel y Martínez Solano, 2003). Cuando se analiza este comportamiento, es decir, empresas cuya correlación entre duración de ciclo financiero y liquidez es positiva, unido al resultado de una correlación positiva entre rentabilidad y liquidez, se induce la posibilidad de que estas empresas pueden tener rentabilidad utilizando una política conservadora, resultados también obtenidos en otros estudios (Afza y Nazir, 2007;Al-Shubiri, 2010;Cheng y Geng, 2021;Cruz, Kimura y Sobreiro, 2019;Dias et al, 2022;Feng, Lo y Chan, 2019;Javid y Zita, 2014;Michalski, 2014;Rech et al, 2019;Shafique et al, 2018;Vahid et al, 2012).…”

Role of Working Capital Management in Enhancing Firm Profitability: An Empirical Study on the Manufacturing Companies of Pakistan

“…Moreover, Rahman et al (2019) also endeavored to analyze the relationship between the components of WC and companies' profitability and proved a direct effect of inventory turnover and CCC on firm profitability and an inverse effect of receivable turnover on firm profitability. An alternate study by Ahmed et al (2018) carried out in the pharmaceutical sector to investigate the WCM impact on firm profitability for six years period, i.e., 2011-2016, employed the panel regression analysis and stated that a negative association of working capital management and profitability exists and suggested that an optimum volume of working capital the managers should maintain, which will result in profit maximization. For instance, Sohail and Quddos (2021) conducted a study on 21 firms listed in KSE from the non-financial sector from 2014-2019 and documented a significantly positive association of WCM with profitability, implying that high profitability is led by the high liquidity of companies.…”

“…According to Sani et al (2023), changes in firm liquidity and operational efficiency are subject to the management of working capital and are, therefore, considered crucial prospects for firms' financial management. Several types of analysis on the affiliation between the management of working capital and profitability have been performed in several eras and in various industries in Pakistan, where most of these are focused on textiles (Tufail et al, 2013;Sheikh et al, 2016), pharmaceuticals and chemicals (Shah, 2018;Ahmed et al, 2018), and in cement industries (Sarwat et al, 2017). However, little similar research has been conducted on the sub-sectors of the manufacturing industry, such as power generation and distribution, automobile assembly, food and personal care products, engineering, sugar, and allied industries in the context of Pakistan.…”