1. IMPACT OF WORKING
CAPITAL ON FIRM’S
PROFITABILITY
0
A case study of sugar
and leather sector of
Pakistan

2. Impact of Working Capital
Management on
profitability
(Case study of Sugar and Leather
Firms)
1

3. Waqas mehmood
Baf05103057
1. Introduction:
This article examines the impact of working capital
management on Firm’s profitability within the context
of Pakistan Sugar and Leather Companies. Working
capital management plays a vital role in companies’
financial performance.
Working capital is represented as the availability of
capital to satisfy day to day operations of the
business. The Firm can run simply their day to day
operations through excessive level of current assets.
Effective and economical utilization of the resources
of firm can maintain the profitability level of the
firms. Cash flows area unit enhanced by effective
management of assets.
The major elements of Working Capital (WC) are debtor
collection period, creditor payment period and
inventory holding period. Trade credit policy and huge
2

4. stock will enhance the sales volume of Sugar and
Leather firms. Firm will increase their profitability
by reducing their debtors collection period and
stockholding period.
Inventory is that the main part of Working Capital.
High level of inventory can increase the sales growth,
reducing the cost of supply and additionally reducing
the cost of production. The second element of Working
Capital is debtor collection period. The profitability
of firm may be magnified by the short length of debtor
days. The next necessary element of Working Capital is
creditor’s payment period. The firm can enhance their
profitability by taking long creditors payment period.
We are selected 4-years data from 2008-2012 of firms
listed in the Pakistan Stock Exchange.Working capital
management directly affects the firm’s profitability.
2. Objective of the Study:
The objective of this analysis is to focusing on
working capital management and its impact on gain for a
sample of 5 Sugar and Leather firms over a time period
of 4 years from 2008-2012. To analyze the problem
statement we have got developed some objectives of the
research.
 To evaluate the independent variables that has a
significant impact on gain.
 To
verify
the
connection
among
working
capital
management and gain of Sugar and Leather firms over
4 years 2008-2012.
3

5.  To
measure
the
relationship
among
gain
and
leverage.
 To construct a knowledgeable conclusion concerning
the impact of assets management on firm’s financial
performance.
4. Problem Statement:
“Have the Asset Management a vital impact on gain of
Pakistan sugar and leather industries?”
Without sensible and proper management of working
capital elements, firms cannot continue their essential
day to day operations effectively.
In this research we
will analyze that whether there is any relation between
working capital and profitability. This relation may be
positive or negative. In addition the analysis in this
paper will allow us to identify the variables which are
of key importance to Sugar and Leather Industry.
5. Research Question
4

6. As I previously described that the aim of my research
is the measurement of the effect of working capital
management
on
financial
performance
of
Sugar
and
Leather firms, so at this stage we develop a set of
testable
hypothesis,
the
Null
hypothesis
and
the
impact
on
Alternative hypothesis:
Hypothesis:
H0
=
Working
Capital
has
negative
profitability.
H1= Working Capital has positive impact on
profitability.
6. Significance of the study:
The significance of this research provides easy way to
understand about the relationship between components of
working capital management and corporate profitability.
Similarly, this research will be helpful for managers,
firm’s stakeholders such as creditors and investors,
professionals, financial analysts, and policy makers of
those selected Sugar and Leather firms to take strong
5

7. decision
on
management
of
working
capital.
This
research provides a direction that profitability level
of the firm could be enhanced by the good management of
working capital.
7. Literature Review
Working capital management can be considered an
important source of profitability of firm. Many
researchers investigated the impact of working capital
management of firm. Many researcher have worked on the
same issue but study of shin and soenen (1998) and
deloof (2003) founded the working capital management
strongly affected the cooperate profitability.
Therefore sugar and leather sector should address this
issue seriously.
In 2010 Lecturer balashundaram nimalathasan from
university of Jaffna srilanka studied the impact of
working capital on profitability of selected listed
manufacturing companies of sri lanka from year 20032007 and revealed the results that the cash conversion
cycle and return on assets are negative correlated
6

8. which mean cash conversion cycle increase when return
on asset decrease.
Amarjeet gill Nahum biger and Neil mathur studied the
relationship of working capital management and
profitability in 2010 of the sample of 88 firms listed
at New York stock for the period of three years from
2005 to 2007 and found statistically significant
relationship between cash conversion cycle and
profitability, measured through gross operating profit.
Alipour(2011) took the sample of 1063 firms listed at
Tehran stock exchange and found a negative significant
relationship between no of days account receivable,
inventory turnover and cash conversion cycle whereas
positive significant relationship between number of
days accountable with profitability and hence concluded
that working capital management significant affect the
profitability of the firm.
Kulkanaya napompech in 2012 examined theeffect of
working capital management on profitability.
7

9. Theregression analysis was based on the panel sample of
255 companies listed on the Thailand stock exchange
from 2007 through 2007 and reveled the result of
negative relationship between gross operating profit
and the inventory conversion period and the receivable
collection period. He suggested that mangers can
increase the profitability of firm by shorting the cash
conversion cycle, inventory conversion period and
receivable conversion period.
Zafar ullah Malik and athar Iqbal from Iqra University
in 2012 studied the impact of working capital
management on firm’s profitability in sugar industries
of Pakistan for the year 1999to2009.they used secondary
data of 19 sugar mills which are listed at Karachi
stock exchange and showed the result that the sale
growth, current ratio, number of days inventory and
number of days account payable are significant
affecting profitability of the firm with sale gearing
rationed no of days account receivable are
insignificant in the research.
8

10. Zubair Arshad and Muhammad yasir ghondal in 2013
studied the working capital management and
profitability of Pakistan cement sector and revealed
that there is significant negative relation between
working capital management on profitability of firm.
In Pakistanthere have been few researcherson working
capital management .Sana and shah (2006) worked on oil
and gas sector. They took very small sample of 7 firms
and they concluded that profitability shareholder value
can be increased by managing the working capital
efficiently.
Nazir and Afza (2007) in their research analyze the
relationship between aggressive and conventional way of
investing in working capital for 205 firms for 17
different sub sectors. Their result showed negative
relationship between aggressive approach in working
capital investment and the profitability of firm.
Though researcher have studied the relation between the
components of working capital management and the
9

11. corporate profitability with reference to Pakistan but
it’s not enough. There is still lack of evidence of
relationship between the two variables.
This is the motivational force to do a research on
sugar and leather sector of Pakistan. For the purpose
sample of 5 sugar and 5 leather firms listed on Karachi
stock exchange has been taken during 2008 to 2012.
8. Methodology:
In this study we have to identify sample companies and
key variables that has a relationship between working
capital and profitability of Sugar and Leather firms.
The secondary data necessarily required to perform the
research was gathered from official site of sugar and
leather firms and some require data was abstracted from
the library of state bank and Karachi stock exchange.
Rest of data is collected from annual reports.
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12. Sample size:
In this study, we have utilized the secondary data to
estimate the above data.
We are generally selected
sample of 5 out of 35 mills of Sugar and 5 out of
Leather firms listed in Stock Exchange and gather the
data of 4years from period 2008 to 2012.
Table 1: Selected sugar and Leather Companies
(Companies will be selected when research start)
Sr.
No.
1
Sugar Companies
Sr
No.
1
2
2
3
3
4
4
5
Leather Companies
5
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13. Variables Selected:
In this study we identify different key variables that
has effect on company’s liquidity and profitability.
Choice of variables depends on previous studies. They
include dependent and independent variables.
Independent variables include current asset, liquid
asset, Acid test ratio or Quick ratio.
The dependent variable is return on investment
Table 2:
Selected Variables
Sr
No.
Independent Variable
1
Cash conversion cycle
(CCC)
Interest Coverage
Ratio (ICR)
Debt Equity Ratio
(DER)
Age of Inventory (AI)
Age of Debtors (AD)
Age of Creditors(AC)
2
3
4
5
6
Dependent Variable
Return on Assets
(ROA)
Table 3: method of computation
Variables
Method of Computation
12

14. Cash Conversion Cycle
(CCC)
Interest Coverage
Ratio (ICR)
Debt-Equity Ratio
(DER)
Age of Inventory (AI)
Stockholding Period +
Debtors Collection Period –
Creditors Payment Period
PBIT/ Interest
External Equities or
debts/Equity capital
(Average Inventory/Average
Cost of Sales) x 365 days
Age of Debtors (AD)
(Average Debtors/Average
Annual Credit Sales) x 365
days
Age of Creditors (AC)
(Average Creditors/Average
Cost of Sales) x 365 days
PBIT/ Total assets
Return on Assets
(ROA)
9. Bibliography
Kulkanaya Napompech effect of working capital on the
profitability of Thai listed firmsInternational journal of
trade economics and finance vol 3 no 3 June 2012
Zubair Arshad and yasir gondal IMPACT OF WORKING
CAPITAL MANAGEMENT ON PROFITABILITY A CASE OF THE
PAKISTAN CEMENT INDUSTRY INTERDISCIPLINARY JOURNAL OF CONTEMPORARY
RESEARCH IN BUSINESS vol 5 no 2 June 2013
Lecturer balashundaram nimalathasan working capital
management and its impact on profitability a case study
of selected listed manufacturing companies in srilanka
information management
Amarjit
gill
nahum
biger
and
neil
mathur
the
relationship between working capital and profitability
evidence from the united states business and economics journal
vol 2010:bej-10
13

15. Zafar ullah Malik and athar Iqbal affect of working
capital management of firm profitability in sugar
industry of Pakistan mpra 1 may 2012
Alipour Mohammad (2011) working capital management and corporate
profitability evidence from Iran world applied science journal
12 (7), 1093-1099
Deloof
m
2003
does
working
profitability of Belgian FIRMS?
MANGEMENT 25 3 945-968
capital
JOURNAL
management
OF BUSINESS
affects
FINANCE
Shah A & a Sana 2006 impact of working capital management on the
profitability of oil and gas sector of Pakistan European journal
of scientific research 15 3 301-307
Zubairi, H. Jamal (2011). Impact of Working Capital Management
and Capital Structure on Profitability of Automobile Firms in
Pakistan. Finance and Corporate Governance Conference.
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