IMPACT OF WORKING CAPITAL MANAGEMENT ON

PROFITABILITY

USMAN TALAT QURESHI

M.sc FINANCE

Institute of Management Sciences

Peshawar
Session: 2013-15

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 TABLE OF CONTENTS

Abstract ………….……………………………………………………….............................. iv
CHAPTER 1...............................................................................................................................1
INTRODUCTION......................................................................................................................1
1.1 Background of the study...................................................................................................1
1.2. Objectives of the study....................................................................................................3
1.3. Significance of the study.................................................................................................3
1.4. Research question............................................................................................................3
1.5. Limitation of the study....................................................................................................3
1.6. Scope of the study...........................................................................................................3
1.7. Scheme of the study.........................................................................................................4
CHAPTER 2...........................................................................................................................5
2.1. LITERATURE REVIEW................................................................................................5
2.2. Theoretical framework....................................................................................................9
CHAPTER 3.............................................................................................................................10
METHODOLOGY...................................................................................................................10
3.1. Population of the study..................................................................................................10
3.2. Sampling of the study....................................................................................................10
3.3. Data collection...............................................................................................................10
3.4. Variables of the study....................................................................................................10
3.5. Research Hypothesis.....................................................................................................12
3.6. Model specification.......................................................................................................12
3.7. Analysis used in the study.............................................................................................13
CHAPTER 4.............................................................................................................................14
ANALYSIS..............................................................................................................................14
4.1.1. Descriptive statistics...................................................................................................14
4.1.2. Correlation analysis....................................................................................................15
4.1.3. REGRESSION ANALYSIS.......................................................................................15
CHAPTER 5.............................................................................................................................17
CONCLUSION AND RECOMMENDATION.......................................................................17
REFERENCES.........................................................................................................................18

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 DEDICATION
This research study is dedicated to my respectable, lovely and kind parents, my
teachers and my brothers and other family members for their endless love and
support who give me this great opportunity.

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 ACKNOWLEDGEMENT

First of all I would like to thanks Al Mighty Allah. I take this opportunity to express my
profound gratitude and deep regard to my supervisor for his help and guidance. He supported
me during the course of this research. His dedication and thoroughness is something that has
inspired me, and his example will serve me all our life.
I am also very thankful to my all teachers who helped me in this reach study. I am also
grateful to my parents, brothers and other family members for their encouragement and
support.

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 ABSTRACT

Working capital management plays a significant role in the profitability of the firm.
This research study investigates the impact of working capital management on the
profitability of the cement sector firms in Pakistan for the period 2009-2014. For the analysis
we have used the panel data to investigate the impact of working capital management on
profitability. Descriptive analysis, Pearson’s correlation and regression analysis are used
for the analysis. Return on asset taken as dependent variable and the variables of the
working capital management (average collection period, average payment period, and cash
conversion cycle) have taken as independent variable. The current ratio which measures the
liquidity of the firm is taken as control variable. The result of the study show that there is
significantly impact of average collection period, cash conversion cycle on the return on
assets, whereas the current ratio has strong significantly impact on return on assets. Result
of the study also shows that there is no significantly impact of the Average payment period
and Average inventory turnover on return on assets. The study of this research also
suggested that firm should reduce the duration of collection to create the value of the
shareholders.

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 CHAPTER 1

INTRODUCTION
1.1 BACKGROUND OF THE STUDY

Working capital management is a basic part of the financial management which play a vital
role in the performance of the firm towards strengthen and failure. Therefore for each firm is
necessary to manage their working capital properly in order to get the objectives of the firm.
Working capital management refers to the investment in the current assets and current
liabilities by the firm which are liquated in one year (kesimili and Gunay, 2011). The aim of
the working capital management is to ensure that the firm has ability to continue the
operations and it has sufficient cash flow to meet both short term debts and operation
expenses. Each firm has a basic purpose is to maximize the profit and minimize the risk. A
company can maximize their profits and improve their overall performance and minimize the
risk by understanding the role of the working capital. But increasing the profit from the cost
of liquidity can bring serious problems to the firm. Thus, the firm strategy must maintain a
balance between these two basic objectives of the firm. If a firm does not care about the
profit, so they cannot survive for a longer period. On the second hand, if a firm does not care
about the liquidity so they may face with the problem of bankruptcy or insolvency. For these
reasons is necessary to be given a proper consideration to the working capital management.
For a good working capital management is need the necessary components with desirable
quantities. Horne and Wachowicz (2004) investigated that excess of the current assets in the
firms reduces their profitability whereas the shortage of current assets enhances the
probability of insolvency. The cash conversion cycle is a popular measure of working capital
management, i.e. lag the time between the expenditures and the collection of sales. Cash
conversion cycle (CCC) for long period might increase profitability because it leads to higher
sales.
Working capital management is associated with the problems that occur in attempting to
manage the current assets, current liabilities and the internship that exist between the current
assets and current liabilities (smith K.V, 1973). According to Mead, baker and Malot (1998)
working capital means current assets. Working Capital show the current assets of the firm
which is the part of financial resources of business that vary from one type to another during
the day-to-day execution of business Deloof (2003).
So we can say that working capital means current assets and current liabilities of the firm. For
the working capital a firm should must have a good planning and controlling process,

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because it influence the short run of the business through which also affected the long run of
the business/firm. Working capital management has a main objective to maintain optimal
balance between the components of working capital management. (Rehman and nasar-2007)
working capital management directly affects the liquidity and profitability of the firm.
Efficient working capital management is a basic part of the corporate strategy to enhance the
shareholders’ value. Therefore it is an important issue to understand about working capital
and its impact on the profitability for a firm.
Generally there are two types of working capital management (1) Gross working capital (2)
Net working capital.
Gross working capital means the investment in current assets.
Gross working capital = current Assets
Current assets are the part of total assets that can be converted into cash within in accounting
year. If a firm manages their current assets effectively and efficiently then it can give more
growth and can increase the firm value in the market.
Net working capital refers to both current assets and current liabilities. Or net working
capital is the difference between current assets and current liabilities.
Net working capital = current assets-current liabilities
Working capital in business is considered as life blood in human body (Raddy andpatkar-
2004).
The components of the current assets include cash, account receivable, inventory and
marketable securities etc. current liabilities consist on short term finance by firms which their
maturity are less than one year or paid in one year. For company success is necessary to build
the creditor trust to deal with their suppliers and also creditors skillfully.
Cash means the money are fund which is necessary for the business in routine requirements.
Inventory means those goods or raw materials which are in work in progress or those finished
goods which a company considered for the sell. Marketable securities refer to the high liquids
assets which are easily convertible into cash for example Treasury bill, banker acceptance,
commercial paper etc. Account receivable refers to those receivable which firm sale the
goods to people on the credit. These elements have great impact on the profitability.
Profitability means the positive return which gets over the investment usually the purpose of
the firm existence to earn profit. The word profit is derived from the Latin word “profectus”
which means progress. In accounting the profit means positive difference between price and
cost of bringing to market. If the current assets value is less than the current liabilities so net
working capital would showing the negative value. The firm can be more profitable if
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they can translate cash from operations within the same operating cycle, otherwise the
firm would need to borrow to support its continued working capital needs.

1.2. OBJECTIVES OF THE STUDY

The prime objective of this research study to focusing on the effects of working capital
management on the firms’ profitability of cement sector companies listed on the Karachi
stock exchange. The main objectives are:
 To find out the relationship between working capital management and profitability of
the firms
 To identify the impacts of the different variables of working capital management on
the firms profitability.

1.3. SIGNIFICANCE OF THE STUDY

Working capital management is a key decision for each firm. Efficient and effective
managed fund enabled to the firm to meet their current demand and chances of the future
opportunities. This research will consider the impact of working capital management on
profitability in order to see that if working capital can affect the profitability or not.
This study will provide the practical guideline for researchers who want to have more
knowledge about the topic.

1.4. RESEARCH QUESTION

Does working capital significantly affect the profitability of the cement companies listed
on Karachi stock exchange, Pakistan?

1.5. LIMITATION OF THE STUDY

 Lack of time
 Lack of resources
 Unavailability of data

1.6. SCOPE OF THE STUDY

The study of this research is focused only on cement sector listed on Karachi stock exchange
(KSE). Further 5 companies from the sector are being selected for 6 years (2009-2014). The

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study focused on the variables of the working capital management such as cash conversion
cycle (CCC), Average collection period (ACP), Average payment period (APP), number of
days inventory (AIT) and its impacts on the firm’s profit.

This study is structured as follow: the second section of the study deals with the brief review
of important empirical and theoretical literature on the effects of working capital management
on the profitability. The third and fourth sections of this paper provide the methodology and
framework of the research includes sampling and variables etc. In fourth section discuss the
data analysis, discussion. Final section of the paper provides the conclusion.

CHAPTER 2

2.1. LITERATURE REVIEW

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Ponsian & chrispin ( 2014) analyzed three manufacturing companies listed on dar es Salam
stock exchange for the period (2002-2012) and they take the data from the annual report of
the companies and dar se Salam stock exchange. For the quantification basis they used the
Pearson’s correlation and regression analysis. Result suggested that there is strong positive
relationship between the profitability and cash conversion cycle and there is strong negative
relationship between the profitability and average payment period, average collection period,
inventory turnover in days and liquidity.
Iqbal, Ahmad and riaz, (2009) highlighted the impact of working capital management on
profitability by analyzing the manufacturing companies in Pakistan for one year listed on
Karachi stock exchange. They used the secondary data for analysis and have taken the
working capital management an independent variable and net profit as dependent variable.
The result suggested that there is significant negative relationship between the net operating
profitability and cash conversion cycle, inventory turnover in days, average collection period
and average payment period.
Rehman and Nasr, (2006) examined the working capital management and its impacts on 94
Pakistani firms listed on Karachi stock exchange for five years (1999-2004). Pearson’s
correlations and regression analysis techniques have used for analyzing the data. The result
found a negative relationship between the working capital management variables including
cash conversion cycle, average collection period, average payment period and the
profitability of the firms. He also suggests that managers can create a positive value for
shareholders by reducing the level of cash conversion cycle.
Samiloglu & Demrtgunes, (2008) examine the impacts of working capital management and
its impacts on profitability of Turkish manufacturing firms for the period 1998-2007. The
result suggested that there is significantly positive relationship between account receivable
periods, inventory period, leverage and profitability of the firms. And also examine the cash
conversion cycle, and size of organization has negative relationship with profitability.
Asghar ali & Syed Atif ali, (2012) investigated the impact of working capital management on
profitability by analyzing the 15 companies at random from chemical textile and engineering
sectors undertaken 5 companies from each sector listed on Karachi stock exchange for period
2003 to 2008. Regression analysis technique was used for analyzing data The result revealed
that working capital management having positive effect on total assets and profitability of the
15 firms listed Karachi stock exchange and the also highlight that efficient management of
inventories can enhance the profitability.

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Ghosh & Maji, (2003) examined the efficiency of working capital management of the Indian
cement companies during 1992 – 1993 to 2001 – 2002. For measuring the efficiency of
working capital management, performance, utilization, and overall efficiency indices were
calculated instead of using some common working capital management ratios. Setting
industry norms as target-efficiency levels of the individual firms, this paper also tested the
speed of achieving that target level of efficiency by an individual firm during the period of
study. Findings of the study indicated that the Indian Cement Industry as a whole did not
perform remarkably well during this period.
Mohammad, Morshedur & Rahman, (2011) carried out a research to identify the relationship
between working capital management and profitability of the Textiles industry. In the study
they found out that there is no significant relationship between the working capital
management and profitability.
Sayeda Tahmina Quayyum, (2012) carried out in the research several industries. The main
objective of the research is to find out which industry is significantly influenced by the
working capital components. In the study the concluded that except the food industry there
exists is a significant relationship between the working capital components and profitability.
Gachira , (2014) investigated the impact of working capital management on the profitability
of the 39 non-financial firms for period 2009 to 2013 listed on the Zimbabwe stock exchange.
Panel and regression analysis techniques were used for analyzing the data The result show
that there is a positive relationship among cash conversion cycle, inventory turnover, and
debtors days on the profitability and there is negative relationship between debt to assets
ratio, current ratio and creditors days on the profitability.
Fayaz Ali shah and wajjid khan, (2012) in this paper made an attempt to observe the impact
of cash conversion cycle on profitability of the firms undertaken 46 companies from textile
sector listed on Karachi stock exchange for a period of (2003-2009). They used ordinary least
square and was taken the return on assets as dependent variable and cash conversion cycle,
number of days account payable ,number of days account receivable and number of days
inventory were taken as independent variables. So the result shows that the dependent
variable is affected by all independent variables.
Kirva, (2012) examined the relationship between the working capital management variables
and the gross profit of the manufacturing firms listed on Nairobi stock securities exchange for
the period (2006-2010). Multiple regression and correlation analysis techniques were used for
analyzing data. According to the study there profitability of the firm has positive relationship
with average payment period and average collection period but has negative relationship with
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inventory turnover in days. They also recommended that managers should collect the
receivables soon as possible and reduce the cash conversion cycle.
The study of the malik.M and waseem ullah, (2013) explained the relationship between the
working capital management variables and profitability of the firms on the basis of 25
companies from textile sector listed on Karachi stock exchange. The data were taken from the
secondary data and correlation and regression analysis techniques used for data analysis.
They observed that there is positive relationship between the firm’s profitability and the
inventory, cash and account receivable while there is significantly negative relationship
between account payable and profitability of the firms.
Rehman and khan, (2013) examined the influence of working capital management variables
on the performance of small medium enterprise for period from 2006 to 2012 in Pakistan.
Return on assets was taken as dependent variable and independent variables were cash
conversion cycle, number of days account receivable, number of days account payable and
number of days inventory. In addition some other variables were taken as debt ratio, growth
and size of the firm. In the result they found that account payable, growth and size has
negative relationship with the firm profitability whereas account receivable, cash conversion
cycle, number of days inventory and debt ratio has positive relationship with the firm
profitability.
Nazir and Afza (2008) investigate the relationship between working capital management and
profitability of the firm undertaken on the basis of 204 Pakistani firms and divided into
sixteen groups listed on Karachi stock exchange for period (1998-2005). The impacts of
aggressive/conservative policies also have been evaluated on return on assets. Result
suggested that there is negative relationship between the profitability measures and degree of
aggressiveness of working capital investment and financing policies.
Bashir and Ahmed, (2013) examine the impacts of working capital management on
profitability of the 100 non-financial firms listed on Karachi stock exchange for the period
2005-2009. They used panel data in the research and have analyzed by regression and
Lagrange multiplier test. The result of the study suggested that there is positive relationship
between the average collection period, current ratio, size, leverage and profitability. But there
is significant negative relationship between average payment period, inventory turnover in
days and profitability of the firms.
Iqbal and Zhuqman, (2012) examined the relationship between working capital management
and profitability of 85 non-financial firms in Pakistan for a period from 2008 to 2013. The
data was obtained from the firm’s financial statements. Panel least square and correlation
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techniques were used for data analysis. Result of the study show that there is strong positive
relation between ROA and size, GDPGR and sales growth of the firms. They also suggested
that profitability and value of the firm managers can improve by dropping account payable
days, account receivable days and inventory turnover in days.
Sharma and Kumar, (2011) investigate the impacts of working capital on profitability of
Indian 265 non-financial firms listed on Bombay stock exchange for the period 2000-2008.

To Analyze the data using OLS multiple regression. The results of the study revealed that
profitability and working capital management is positively correlated in Indian companies.
The study further reveals that numbers of day’s accounts payable and inventory of number of
days are negatively correlated with a firm’s profitability, whereas cash conversion period and
number of days accounts receivables exhibit a positive relationship with corporate
profitability.
Maradi, Salehi and Arianpoor, (2012) compared working capital management of two groups
of listed companies in Tehran Stock Exchange (TSE), which comprised of chemical industry
and medicine industry. In chemical industry, 34 companies and medicine industry, 30
companies were selected and information related to these companies was gathered over 10
years (2001-2010) and analyzed using OLS multiple regression. The results show that, in
medicine industry compared to chemical industry, debt ratio makes more impact on reduction
of net liquidity. But examination of impact of LEV over WCR indicate that, in chemical
industry, debt ratio makes more impact on reduction of working capital requirements,
compared to medicine industry.
(Filbeck and Krueger, 2005) examined the importance of efficient working capital
management by analyzing the working capital management policies of 32 non-financial
industries in USA. In the study they found significant differences exist between industries in
working capital practices over time. Moreover, these working capital practices, themselves,
change significantly within industries over time.
Shin and sonion (1998) reveal that efficient Working Capital Management (WCM) is very
important for creating the shareholders’ value. Working capital way to be managed has a
significant impact on both profitability and liquidity. The relationship between the corporate
profitability, length of Net Trading Cycle and risk adjusted stock return was examined using
correlation and regression analysis, by industry and capital intensity. The study found that
there is a strong negative relationship between the profitability and lengths of the firm’s net

13
trading Cycle. In addition, shorter net trade cycles were associated with higher risk adjusted
stock returns.
Jacob & Ademola,( 2014) investigate the relationship between working capital management
on the net operating profitability of the beverage and food manufacturing companies listed on
the Nigeria stock exchange for the period (2002 to 2011). Multiple regression, correlation and
descriptive statistics techniques were used for analyzing the data. They categorized the
variables of the study into three parts dependent variable (net operating profit, independent
variable (working capital management) and the third one was the control variables.

2.2. THEORETICAL FRAMEWORK

(Independent Variable)
Working Capital Management

Average Collection Period

Average Payment Period
Average Inventory Turnover
Cash Conversion cycle
(Dependent variable)

Return on Assets
(Control Variable)

Current Ratio

To identify the influence of working capital management on profitability there are taken three
kinds of variables i.e. dependent variable, independent variables and control variable.
Dependent variable is return on asset taken to measure the profitability of the firm.
Independent variables are the variables of working capital management i.e., Average
collection period, average payment period, average inventory turnover and cash conversion
cycle. The control variable is the current ratio undertaken to measure the impact of the
liquidity on the profitability of the firm.

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 CHAPTER 3

METHODOLOGY
3.1. POPULATION
The focus of our work is only on the cement sector companies (22 companies) itemized on
“Karachi stock exchange.

3.2. SAMPLING
Our research includes 5 companies of the cement sector mentioned on the KSE for six years
during the period 2009-2014. Companies are selected in the study with complete required
data.

3.3. DATA COLLECTION

In the research of this study we are used the secondary data which is gathered from the
internet and Annual Financial Statement of these firm.

3.4. VARIABLES

The emphasis of this study is on “WC Management and Profitability” of Pakistani firms.
Return on assets is dependent variable through which measured the profitability of the firm.
Whereas, “Average collection period, Average payment period, Average inventory turnover
and cash conversion cycle” are Independent variables and use as component of working
capital. Current ratio is the control variable to measure the effect of liquidity of the firm.
They include “Dependent and Independent variables”.
3.4.1. “Return on assets (ROA)”: “Return on assets is measure of profitability of the firm and
consider as dependent variable. It is defined as profit before tax and divided by Total Assets”.

profit before tax

“ ROA¿ ”
total Assets
3.4.2. “Average collection period (ACP): Average collection period is used as proxy for
collection policy which is consider as independent variable and is calculated as account
receivable divided by net sales and multiplying by days in year (365)”.

Account recievable
“ACP¿ ×365”
Net sales

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3.4.3. “Average inventory turnover (AIT)”: “Average inventory turnover is used as proxy for
inventory policy which is also consider as independent variable and calculated as inventory
divided by cost of goods sold and multiplying with days in year (365)”.

Inventory
“ITID¿ ×365”
cos of goods sold

3.4.4. “Average payment period (APP): Average payment period is used as proxy for
payment policy which is also considered as independent variable and calculated as account
payable divided by cost of goods sold and multiplying by days in year (365)”.

Account payable
“APP = ¿ ×365”
cost of goods sold

3.4.5. “Cash conversion cycle (CCC): Cash conversion cycle is used as a comprehensive
measure of working capital and also considered as independent variable and calculated as
number of days account receivable plus number of days inventory and minus number of days
account payable”.

“CCC = Number of days + Number of days - number of days”

Account receivable inventory account payable

3.4.6. “Current ratio: current ratio is used as proxy for liquidity of the firm is consider as
control variable and calculated as current assets divided by current liabilities”.

current assets
“Current ratio¿ ”
current liabilities

CHAPTER 5

CONCLUSION AND RECOMMENDATION

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WCM is of significance in corporate financial management which has prodigious sway on the
firm’s profitability. Therefore, for each firm, it is necessary to manage WC appropriately so
as to get the objectives.

The main purpose of this research is to identify the influence of “WCM on Profitability” of
cement sector in Pakistan for the period of 2009 to 2014. In the example of this study we
have included 5 cement companies from the cement sector listed on KSE for a period of 2009
- 2014. Only those companies are selected whose financial data of the required variables for
the required time period are available. ROA is used for the purpose of measuring
“profitability”. ACP, APP, CCC and AIT are used as components of WC while “Current
Ratio” is taken as a degree of liquidness.

Tests of hypothesis show the significant impact of “Average collection period, Cash
conversion cycle and Current Ratio” ensure a strong impact on ROA. Whereas the average
payment period and average inventory turnover has no significant impact on the return on
assets. According to the result to the result of correlation matrix ACP is negatively correlated
with ROA where ACP value is -0.4214. p value for ACP is 0.042 which is less than 0.05
which means that it is significantly related with the value of ROA. According to this result
research the null hypothesis of the ACP, CCC and CR are rejected and alternate hypothesis
are accepted where the null hypothesis for APP and AIT accepted and alternate hypothesis
rejected.
This study shows the adverse rapport with the WCM and Profitability.
So, on this basis our study, It is recommended that Company should reduce the Duration of
collection through which they can create the value of the shareholders.

3.5. RESEARCH HYPOTHESIS

HYPOTHESIS 1
Hο: There is no significantly impact between the Average collection period and profitability.

17
H1: There is significantly impact between the Average collection period and profitability.

HYPOTHESIS 2
Hο: There is no significantly impact between the Average payment period and profitability.
H2: There is significantly impact between the Average payment period and profitability.

HYPOTHESIS 3
Hο: There is no significantly impact between the inventory Average inventory turnover and
profitability.
H3: There is significantly impact between the Average inventory turnover and profitability.

HYPOTHESIS 4
Hο: There is no significantly impact between the cash conversion cycle and profitability.
H4: There is significantly impact between the cash conversion cycle and profitability.

HYPOTHESIS 5
Hο: There is no significantly impact between cash ratio and profitability.
Hο: There is significantly impact between cash ratio and profitability.

3.6. MODEL SPECIFICATION

For the impacts of working capital management on the firms’ profitability we used the panel
data regression analysis.

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The form of our model is:
ROA = f (ACP, APP, AIT, CCC, CR)
ROA = βο+β1 (ACP) +β2 (APP) +β3 (AIT) +β4 (CCC) +β5(CR)+µ
Where
ROA: Return on asset
ACP: Average collection period
APP: Average payment period
CCC: cash conversion cycle
AIT: Average inventory turnover
CR: cash ratio
βο: intercept
β1, β2, β3, β4 & β5: coefficient
µ: Error term of the model

3.7. ANALYSIS USED IN THE STUDY

In this research study we have used two types of analysis descriptive analysis and quantitative
analysis.
3.7.1. Descriptive analysis

Descriptive analysis is the first step in our analysis; it will help us to provide detailed
information about each relevant variable.
3.7.2. Quantitative analysis

In quantitative analysis we applied two methods: First: we used correlation model to measure
the degree of association between different variables under consideration. Second: we used
Regression analysis to estimate the significant impact between profitability variable, working
capital management variables and liquidity variable.

CHAPTER 4

ANALYSIS

4.1.1. Descriptive statistics

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 Descriptive analysis shows the mean and standard deviation of the different variables
in this study. It also presents the minimum and maximum values of the variables which help
in getting a picture about values of the variables. There are 30 observations for the panel data
set for 5 cement sector companies over the 6 years of period from 2009-2014.

Table 1: Descriptive statistics of variables for cement companies

Variable Obs Mean Std. dev. Min Max

ROA 30 0.9188 0.1295 -0.1462 0.3492
ACP 30 17.4695 32.2591 0.4286 165.4973
APP 30 74.6246 31.7248 26.5672 158.1859
CCC 30 59.9300 28.3300 0.8983 100.9700
AIT 30 92.0000 66.9362 -9.2495 273.6047
CR 30 1.2391 00.9863 0.4180 4.3708

Table 1 presents the summary statistics of the variables used in the present study for 5
companies’ year observations were used. Total observation for each variable in the above
table is 30. The mean value of return on assets is 91.8% with a standard deviation of 12.9%,
whereas the minimum value for ROA is -.1461725 and maximum value .3492064. The mean
value of average collection period is 17.469 days with a standard deviation of 32.259 days,
whereas the minimum value for ACP is.4285538 and maximum value is 165.4937. The mean
of average payment period is 74.624 days with a standard deviation of 31.724 days, whereas
the minimum value is 26.56723 and maximum value is 158.1859. The mean value of cash
conversion cycle is 59.93 with a standard deviation of 66.93617, whereas the minimum value
is .89832 and maximum value is 100.97. The mean of the average inventory turnover is 92
days with a standard deviation of 66.936 days, whereas the minimum value is -9.249524 and
the maximum value is 273.604. The mean of the current ratio is 1.239136 with a standard
deviation of .9862452, whereas the minimum value is .4180326 and maximum value is
4.370828.

4.1.2. Correlation analysis

Correlation analysis is used to find the relationship between working capital management and
Return on Assets.
Table 2: Correlation Analysis between Working Capital Variables and Profitability.
ROA ACP APP AIT CCC CR

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 ROA 1.0000
ACP -0.4214 1.0000
APP -0.2323 0.2598 1.0000
AIT -0.3530 -0.0255 0.0439 1.0000
CCC 0.5946 -0.083 -0.8787 0.0360 1.0000
CR 0.6954 -0.2519 -0.2756 -0.3570 -0.0071 1.0000

Correlation matrix shows the degree of strength or association between two variables. Table 2
shows that ROA is negatively correlated with ACP, APP and AIT. ROA and ACP is
negatively correlated with the value of -0.4214. ROA and APP is negatively correlated with
the value of -0.2323. ROA and AIT is negatively correlated with the value of -0.3530.
Further, CCC and CR is positively correlated with ROA with the value of 0.5946 and 0.6954
respectively.

4.1.3. REGRESSION ANALYSIS

In order to test the hypotheses, pooled OLS regression analysis has been conducted to
determine whether there is significant relationship between working capital management and
profitability.

Table 3: Regression analysis for the variables

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 Random-effects GLS regression number of observation = 30
Group variable: company number of groups = 5

R-sq within= 0.5615 observation per group min = 6

Between = 0.6229 Avg = 6.0
Overall =0.5695 Max = 6
Wald chi2(4)= 33.07
Corr(u_i, x)=0 (assumed) pro > chi 2 =0.0000
ROA coefficient Standard error z p>/z/ [95% conf. interval]
ACP -0.001137 .0005599 -2.03 0.042 -.0022345 -.0000396
APP .0000204 .0005696 0.04 0.971 -.0010959 .0011367
AIT -.000304 .0002742 -1.11 0.267 -.0008414 .0002333
CCC .041323 .0135920 3.17 0.045 .0291654 .1039357
CR .0747378 .0917002 3.97 0.000 .0361261 .1133496
_Cons .0455792 .0664083 0.69 0.492 -.845787 .1757371
Sigma_u 0
Sigma_e 0.8201539
rho 0 [fraction of variance due to u_i]

In this context R-square is 56.15% so this mean the proportion of the return on asset
(dependent variable) is explained by the independent variables are 56.15%. If the p value is
lower than the 0.05, there is a significant relationship between the independent variables and
dependent variable. When the p value is higher than the 0.05, then it is considered that there
is no significant relationship between the variables.
The Table 3 show that there is significantly impact of Average collection period and cash
conversion cycle on returns on assets and there strong significantly impact of current ratio
(control variable) on return on assets. The result also show that there is no significantly
impact of average payment period and average inventory turnover on the Return on assets.
The result of our study support and is consistent to the result of Rehman and nasr (2007) and
result of Asif iqbal and Zhuqan which shows significant impact of working capital on
profitability and this research study is also consistent with result of Nadeem iqbal, Naveed
Ahmed and Zeeshan riaz (2014).
So based on this result we can say that working capital management has impact on the firm
profitability and firm manage there working capital to meet profitability goals.

CHAPTER 5

CONCLUSION AND RECOMMENDATIONS

22
Working capital management is of importance in corporate financial management which has
great impact on the firm profitability. Therefore for each firm is necessary to manage their
working capital properly in order to get the objectives of the firm.

The main purpose of this study is to identify the impact of working capital management on
profitability of cement sector companies in Pakistan. This study investigates the impact of
working capital management on profitability of Pakistani cement sector companies for the
period of 2009-2014. In the sample of this study we have included 5 cement companies from
the cement sector listed on Karachi stock exchange for a period of 2009 to 2014. Only those
companies are selected whose financial data of the required variables for the required time
period are available. ROA is used for the purpose of measuring profitability. Average
collection period, Average payment period, Cash conversion cycle and Average Inventory
turnover are used as components of working capital while current ratio is taken as a measure
of liquidity.

Tests of hypothesis show the significant impact of average collection period, cash conversion
cycle on return on assets and current ratio have a strong significant impact on return on
assets. Whereas the average payment period and average inventory turnover has no
significant impact on the return on assets. According to the result to the result of correlation
matrix ACP is negatively correlated with ROA where ACP value is -0.4214. p value for ACP
is 0.042 which is less than 0.05 which means that it is significantly related with the value of
ROA. According to this result research the null hypothesis of the ACP, CCC and CR are
rejected and alternate hypothesis are accepted where the null hypothesis for APP and AIT
accepted and alternate hypothesis rejected.
This study shows the negative relationship between the working capital management and
profitability of the firm. So, on this basis our study recommended that Company should
reduce the duration of collection through which they can create the value of the shareholders.

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