Impact of Working Capital Management on Profitability and Value of Firm: A Study of Manufacturing Sector of Pakistan

Abstract

Manufacturing is third largest sector of Pakistan's economy. The manufacturing firms convert raw material to finished goods that is useful for people. The whole process (raw material to end product) requires huge amount of working capital. Any anomaly in working capital management directly effects on performance, profitability and value of firm. The present study explores impact of working capital management on profitability as well as on value of firm. The study collects random sample of 30 manufacturing firms registered on Pakistan Stock Exchange for twelve years (2005 to 2016). The regression models were estimated using Generalized Method of Moments. The results showed profitability and value of firms decrease with increase in receivable and inventory turnover because delay in receivables or sale of inventory enhance financing needs for working capital. Liquidity contribute largely in increase profitability as compared to value of firm. However, some variables showed partial results for both models for example profitability increased with rise in growth and cash conversion cycle. Value of firm was decreased with delay in accounts payable turnover because it cased distrust of supplier and investors. We expected size will increase profitability and value but contrary results expressed decline in both. The research findings suggest firms in Pakistan should focus on efficient working capital management for better profitability and value addition of firm.

The Impact of Investment Decisions on Firm Profitability of Non-Financial Sectors in Pakistan: Mediating Role of Sales Growth

“…Analysis of a sample of publicly traded Chinese manufacturing companies using the fixed effect panel regression model revealed a negative relationship between WCM and profitability. Shabbir et al (2018) examined the impact of WCM on profitability using a sample of Pakistan's 30 manufacturing industries for the years 2005 to 2016. The data was analyzed using the GMM model, and the findings showed that raising the ACP, inventory turnover, and CCC had decreased the profitability.…”

“…In this section, the measurement of the variables is discussed. (Bhutto et al, 2018;Hanif et al, 2019;Shabbir et al, 2018) Inventory Turn Over' ITO = Cost of Goods Sold / Avg Inventory * 365" (Bhutto et al, 2018;Hanif et al, 2019;Shabbir et al, 2018) Capital Expenditure' CAPEX= NCA(Current year) -NCA (Last year) + Depreciation & Amortization (Current year)" (Gradzewicz, 2021;Van Horne & Wachowicz Jr, 2008;Wachira, 2017) Source: Research Own Illustration…”

“…Previously, in Pakistan, the relationship of investment decisions with profitability have been studied separately mainly focusing on manufacturing sector, like Shabbir, Iftikhar, and Raja (2018) studied the impact of WCM on profitability and found significant positive relationship whereas Kanwal et al (2017) conducted a study on the relationship of WCM with profitability and found significant negative relationship. Likewise Gul (2018), andTariq andKhattak (2019) examined the importance of capital budgeting for firm's performance and found significant positive association but other sectors like communication, energy etc.…”

Cashflow Management Practices and the Financial Performance of Five-Star Hotels in Nairobi County, Kenya

“…Assessment of financial performance is based on a range of financial metrics that examine various facets of a company's operations and profitability (Ghosh & Mondal, 2021). One widely employed metric is Return on Equity (ROE), which gauges a company's profitability by comparing the returns generated for shareholders in relation to their investment (Abbasi et al, 2020). Revenue growth is another important measure in evaluating a hotel's financial performance.…”

The Impact of Efficiency Management on the Profitability of the Firms: Textile Composite Sector

“…Goel, (2017) studied on the 10 Indian textile firms concludes that inventory holdings, credit payment has a high significance on the ROA in a periodic manner. (Shabbir, 2018) Conducted the study to identify the impact of receivable turnover, payable turnover, inventory turnover, growth, and firm size on return on asset and value of firm. Sample data is of 30 manufacturing firms listed in PSX for 12 years.…”