Chapter – 1

INTRODUCTION

1.1 THEORETICAL BACKGROUND

Most associations have an enormous amount of cash investment in working

capital, and also significant amount of current payable as a course of funding.
Firms having best level of working capital that amplifies to that value. From
one perspective, substantial inventory and a large trade recognition approach
may prompt large volume. Huge inventory decreases the danger of a
stock-out. Trade credit may animate volume in light of the fact that it permits
the consumers to survey item quality before purchasing it. ( Ravid, et al 1993).

Since brokers may have critical cost benefits of interest over financial
institutions in giving credit to their clients, it can likewise be a cheap basis of
credit for clients (Petersen & Rajan, 1997). Choices categorizing with short
term financing and working capital are alluded to as working capital
management (WCM). Working capital management WCM assurances a
business has adequate fund flow to meet its short-run obligation commitments
and operating cost. These comprise management with the liaison between a
company's current resources and its current obligation. The aim of WCM is to
provide surety that the firm has the capability proceed with its operations and
that it has adequate income to fulfill both maturing obligation and up and
coming operational expenses.

1.2 WORKING CAPITAL MANAGEMENT

The management of working capital comprises of managing accounts
receivable, accounts payable, cash, and inventories. Representing a powerful
working capital management framework is a fantastic route for some
organizations to improve their income.

1
The two primary parts of WCM are ratio management and investigation
separate segments of working capital. A key execution ratios of a WCM
system are the working capital ratio, inventory revenue and the collection
ratio. Ratio examination will guide management to distinguish ranges of
concentrate, for example, accounts receivable and payable management,
inventory management, cash management; Guthmann & Dougall (1948)
characterized working capital as excess of current resources over current
obligation. This perspective was expounded by Gladson (1963) when they
characterized working capital as the overabundance of current resources of a
business (for instance cash, inventories, & accounts receivables).

1.3 PROFITABILITY
Profitability is the capability of a company to gain a profit. A profit is what is
remain of the returns a company generates after it pays all expenses exactly
recognized with the generation of the revenue, for example, manufacturing a
product, and dissimilar expenses recognized with the performance of the
company practices. A group of financial related sizes that are exploited to
review an enterprise capability to generate profit when matched with its
overheads and other important expenses brought about within a particular
duration of time. For the majority of these ratios, having a large value in
respect to a competitor's ratio or the same ratio from a historical period is
demonstrative that the business is doing admirably.

Profitability is the necessary aim of all enterprise entities. Without profitability

the company would not make due over the long time run. So calculating
current and previous profitability and expecting upcoming profitability is
imperative. Profitability is calculated with costs and income. Income is cash
generated from the operations of the enterprise. Case in point, if crops and
livestock are manufactured and sold, income is generated. Notwithstanding,
cash entered into the enterprise from operations like, obtaining cash don't
make income. This is essentially a cash transaction between the organization

2
and the loan specialist to produce cash for working the enterprise or acquiring
assets.

1.4 FIRM VALUE

Organization value is determinant with adding market capitalization, preferred
stock, minority interest and debt by subtracting cash and cash equivalent. The
market capitalization of an organization is the product of share price and the
total numbers of shares an enterprise has outstanding. Over current things
owed to representatives and other (i.e., pay rates and wages payable, creditor
liabilities, taxes owed to government). Gole (1959) additionally held pretty
much the same perspective. This idea of working capital, as has been normally
comprehended by the bookkeepers, is all the more especially comprehended as
net working capital to differentiate it from gross working capital.

Proficient use of the company's assets, as it classifies with working capital

management suggests that executives should find viable and productive
methods to achieve the cash availability for the daily processes but keep in
mind the final objective. Abundant working capital management stimuli
increased cash flow, and consequently prompts minor requirement on outside
funding; along these lines, the chances of defaulting of the firm is decreased.
An important element in the working capital management is the cash
conversion cycle (Deloof, 2003). Cash conversion cycle is well-defined as the
interval between the buying of materials and the receiving of cash from the
sales of products or services delivered. The more drawn out the slack, the
more prominent the investment in working capital, and in this way the funding
desires of the firm will be more noteworthy. Interest cost will be likewise
greater, which prompts higher defaulting risk and lesser benefit.

In this research, we empirically inspect the result of working capital

management on the firm’s economic performance and value of firm together
in an developing market. We assume that working capital management clues
to better profitability and high value of firm. Our data set comprises of

3
corporations registered on the Karachi Stock Exchange for the 7-year period
2008 to 2014.Using multivariate regression analysis, Correlation and
descriptive statistics.

1.5 CONTRIBUTION OF THE STUDY

This investigation adds to the literature on the correlation between the working
capital management and the association's profitability in no less than two
ways. In the first place, it concentrates on Pakistani manufacturing companies
especially electrical goods manufacturing sector where just restricted
examination has been led on such firms as of late. Second, this research
approves a portion of the testing so as to find of past authors the association
between working capital management and the profitability of the specimen
organizations, and also the association between the firm’s value and working
capital. No one had yet studded both the aspects of profitability and firm’s
value on the selected companies. Along these lines, this study adds element to
the prevailing hypothesis created by past creators.

4
1.6 LIMITATION OF THE STUDY
A mixed bag of variables identified with working capital management that
may possibly be related or "capable" for the effectiveness of manufacturing
organizations can be initiate in the writing. In this research, the decision of
independent variable is taking into account identified with working capital
management Firms Value and benefit and extra variables that were examined
in reported experimental work. The decision is once in a while constrained, be
that as it may, because of absence of information. Accordingly, the last set
includes six intermediary variables: accounts payables, accounts receivables,
firm size, inventory, cash conversion cycle, current proportion, and gross
operating benefit.

1.7 OBJECTIVES
Following objectives are taken for the study.
1) To identify the relationship between WCM and profitability.
2) To highlight the relationship of working capital on firm’s value.
3) To recognize the profitability.

1.8 HYPOTHESIS
H1: The WCM significantly impact on Return on Assets (ROA) of the
manufacturing companies.
H1a: Inventory Conversion Period has impact on Return on Assets (ROA) of
manufacturing industries.
H1b: Accounts Collection Period has impact on ROA of Manufacturing
industries.
H1c: Cash Conversion Period (Cycle) has impact on ROA of Manufacturing
industries
H2: The Working capital management has significantly affects the firm’s
value (FV)

5
 Chapter – 2
LITERATURE REVIEW

By Limin Li (June, 2012) investigated the impact of working capital

management on firm value: Indication from the airline industry. For the study,
47 airline industry enterprises were investigated and the information were
adopted for the period 2003 to 2011. Regression analysis was applied to the
panel data and notice out the relation between working capital and firm’s
value. For firms value cash conversion cycle and market value used and
considered as the dependent variable. The results indicated that there is a
substantial inverse intermingling between cash conversion cycle and enterprise
value. However, an inverse association develops punier later when addition of
other control variables. This is imputable to the performance that company
funds statute disturbs firm's liquidness and ultimately touches on it value.
Established on the findings, the supervisor can generate company worth by
diminishing cash inversion cycle.

Osundina Jacob Ademola, Osundina Kemisola C. (2014) carried a study about

The Effect of Working Capital Management on Market Value of Quoted Food
and Beverages Manufacturing Firms in Nigeria. For the study working capital
is taken as dependent variable and inventory conversion cycle, cash collection
period, accounts payable payment period, and the aggressive investment
policy was used and the market value was measured by Tobin Q. Survey
method was used and primary data were employed. For the analysis, Pearson
product correlation and multiple regression analysis applied. The outcomes of
the survey specify that there is a strong direct relation of firms value and
working capital management of beverages and food firms in Nigeria.
Furthermore the results also highlight that Account Collection Period, Cash
conversion cycle, Aggressive Investment Policy, Inventory Conversion Period,
Account Payment Period, and sustained a significant event on the market
value of food and beverage manufacturing firms in Nigeria.

6
Bandara R.M.S (2012) investigated a study about the impact of working
capital practices on firms value. For the investigation of relation of operating
capital and firms' value 74 Sari Lankan companies from four sectors were
chosen for the year 2005 to 2009. Meditative working capital, Aggressive
working capital and Conservative working capital management practices were
considered as independent variables and firm value measured by Market value
added and economic value added was used up as independent variable. Panel
regression analysis was applied for the study. The study found out that
working capital management had a substantial positive force on the market
value of food and beverage manufacturing firms in Nigeria. Likewise, the
result of this work shows that account collection period, inventory conversion
period, Cash conversion cycle, Account Payment Period, and Aggressive
Investment Policy had a significant event on the market value of food and
beverage manufacturing firms in Nigeria.

Iluta Arbidane and Svetlana Ignatjeva (2013) tested the link between working
capital management and profitability. For the study, 182 NACE manufacturing
companies were investigated for the period 2004 to 2010. Regression was
employed for the study to analyze the profitability and working capital
management. Gross operating Profit and Return on Assets (ROA) were used
as dependent variables and applied for the profitability of the firms. While
inventory conversion period (days), receivable collection period (days),
payable deferral period (days) and Cash Conversion Cycle (days) were used to
measure of working capital which is independent variable. The mass of the
firm is selected as a command variable. The results of the study highlight a
significant inverse correlation in Latvian manufacturing companies only
between ROA and RCP are fewer significant between gross operating profit
GOP and Receivable collection period RCP. The survey further suggests there
was a direct correlation between profitability and inventory conversion period.
The profitability ROA and the fund conversion cycle have also an
insignificant inverse coefficient.

7
Ntui Ponsian, Kiemi Chrispin, Gwatako Tago and Halim Mkiibi (2014)
conducted a revision about the essence of working management on
profitability. 10 years data from 2002 to 2012 for three manufacturing
companies listed on the Dare Salam Stock Exchange (DSE) were investigated.
Regression (Ordinary Least Square) and person’s correlation were employed.
The results determined that profitability and cash conversion cycle having
positive relationship. There is an inverse relationship between profitability and
liquidity showing that as liquidity decreases, the profitability increases;
Furthermore there exists extremely negative significant affiliation between
profitability and average collection period demonstrating that a decrease in the
number of days a firm receives payment from sales interrupts the profitability
of the firm directly; lastly, there is enormously significant positive link
between the dependent variable average payment period, while the relation
with profitability the inventory turnover in days exists a highly significant
inverse relationship. Clarifying those entities which maintain low inventory
levels decrease the cost of storage the inventory which leads to higher
profitability.

Tendai Zawaira1; Enard Mutenheri (2014) conducted a study on the topic

“The Relationship between Profitability of Non-Financial Companies Listed
and Working Capital Management on the Zimbabwe stock Exchange”. For the
study Data were collected from 2010 to 2012 for 32 non-financial companies
listed on the Zimbabwe Stock Exchange and examined using regression
analysis. For profitability Return on assets were used which indicate
dependent variable and for independent variables working capital management
5 ratios were used like, Inventory Conversion Period (days), Cash Conversion
Cycle(days), Payables Deferral period (days) Receivables collection Period.
The regression outcomes display that profitability was not linked with cash
conversion cycle, inventory Conversion Period, quick ratio, Receivable
Collection Period, current liabilities to total asset ratio, debt ratio, current asset
to total asset ratio, and age of company. Hence, a strong inverse relationship

8
between profitability and payables deferral period has found. Moreover, size
and liquidity has found to improve profitability of company.

Abbasali Pouraghajan Milad Emamgholi pourarchi (2012) inspected Impact of

Working Capital Management on Profitability and Market Evaluation:
Evidence from Tehran Stock Exchange. Information was gathered for the
organizations registered on Tehran stock exchange from 2006 to 2010. Linear
multiple regression examination and Pearson correlation were utilized for the
investigation. Return on invested capital and Return on Assets ratio proportion
was utilized for profitability measure and taken as dependent variable while
Tobin Q proportion, cash conversion cycle, current ratio, current assets to total
assets, current liabilities to total assets ratio, cash ratio and total debts to total
assets ratio were taken as independent variables. The consequences of the
examination determine that there is a critical connection between the working
capital management and profitability criteria of organization however there is
no noteworthy relationship with the foundation of market value of company.
Additionally the outcomes demonstrate that management can raise the
profitability of organization through dropping total debts to total assets and
cash conversion cycle.

Benjamin Yeboah, and Michael Yeboah (2014) directed a study about the
Effect of Working Capital Management of Ghanan Banks on Profitability.
Ganaian banks were utilized and information was taken from the period 2005
to 2010. Panel methodology was utilized for the study. Gross operating Profit
was utilized with respect to quantify of profitability and taken as dependent
variable while Creditors Payment Period (CPP), Cash Conversion Cycle
(CCC)and Debtors Collection Period (DCP) were utilized for working capital
and taken as independent variables while (SIZE), Leverage (TDA), Growth
(GRO), Risk (hazard), Debt maturing structure (LDEBT) and Credit risk is
taken as control variables. The exact aftereffects of the study recommend that
cash conversion cycle is adversely identified with bank's profitability

9
marginally. Specifically, we find that influence of the banks indicate factually
altogether a positive influence on banks' profitability.

The researcher selected a sample of Turkish manufacturing enterprise for the

Period of 1998-2007.This study is done to investigate factors of a company
profitability by method for variables linked with working capital management.
Study demonstrates that inventory period, accounts receivable period and
leverage essentially and decidedly affect Profitability. And additionally
examine the cash conversion cycle, and size of association not has critical
consequences for firm profitability but rather leverage is essential variable
effecting firm productivity adversely (Samiloglu & Demrtgunes, 2008).

In this study completed an endeavor to study the effectiveness of working

capital management of the Indian cement organizations during 1992 – 1993 to
2001 – 2002. For calculating the ability of working capital management,
usage, performance and general effectiveness guides were ascertained rather
than using some normal working capital administration proportions. Outcomes
of the paper showed that the Indian Cement Industry all in all did not achieve
astoundingly well during this period (Ghosh & Maji, 2003).

The study underscored that working capital hypothesis contained shared

objectives of profitability. The problem under inspection was to build up
whether all the more as of latest formed option working capital concepts
demonstrated enhanced relationship with quantifiable yield on investment to
that of conventional working capital ratio or not. Finding shows that there has
no enormous distinctions among the years as for the independent variables
(Smith & Begemann, 1997).

The pioneer work of (Shin & Soenen, 1998) suggested that productive
Working Capital Management (WCM) was vital for generating worth for the
stockholders. The method working capital was overseen had a huge effect both
on profitability. The association between the period of Net Trading Cycle,
corporate benefit and risk adjusted stock return was investigated using
regression and correlation analysis, by capital strength and industry. They

10
exposed an in number undesirable relationship between dimensions of the
company's net-trading Cycle and its benefit. Similarly, tinier net exchange
cycles were related with greater danger balanced stock returns.

Different studies testified that working capital management can have a

significant influence on the company effectiveness. Lazaridis and Tryfonidis
(2006), Shin and Soenen (1998), Raheman and Nasr (2007), among others,
dignified working capital with cash conversion cycle, which consists of
account receivable collection period, account payable periods and
stockholding period. These investigators reinforced that larger share in
working capital (the greater cash conversion cycle) leads to lessening the
business’s profitability (Nazir and afza, 2003, 2009 and Banos-Caballero et al,
2010).

Deloof (2003) utilized a specimen of Belgian organizations and establish that

organizations can rise their productivity by reducing the collection period and
inventory turnover in days. He likewise establish that fewer gainful firms hold
up slower when they pay their credit. Wang (2002) utilized a sample of
Taiwanese and Japanese firms and observed that a smaller cash cycle would
prompt a superior association's functional execution. Solano and Teruel (2007)
took tests of little to average size Spanish businesses for the periods of
1996-2002 and establish that the organizations can make esteem by reducing
the collection periods and inventory turnover in days, in this way directing to
decrease the cash conversion cycle.

On the other side, however, different analysts bolster that spending more in
cash cycle (traditionalist arrangement) may prompt improved profitability
since keeping high inventory levels is required to growth sale volume, lessen
stock expenses, diminish conversion of conceivable disruption in assembly
and secure beside price vacillations (Blinder and Maccini, 1991). A greater
indebted individuals' collection period might likewise reinforce the association
with clients and henceforth may prompt enhance in sales volume (Ng et
al,1999). Deloof (2003) demonstrated that moderately immense measures of

11
company benefits are save for working capital. Summers and Wilson (2000)
likewise expressed that more than 80% of the day by day firm’s exchanges in
UK business sector is on credit standings.

2.1​ ​THEORETICAL FRAME WORK

As demonstrated in the above given chart the main goal of this study is to
identify the relationship between profitability and working capital
management and also between working capital management and firm’s value
and profitability of Cable and electrical goods. There are two dependent
variables Working capital and firms’ value. Profitability is calculated by Gross
Operating Profit while firm’s value is determined by adding market
capitalization preferred stock, minority interest, and debts minus cash and cash
equivalent from the sum. Working capital is taken as independent and

12
measured by Average payment period, Inventory turnover in days, Cash
conversion cycle, Average collection period, and average payment period on
productivity of the firm and measured by Gross Operating Profit. Some
control variables are additionally utilized as a part of the study like current
proportion, organization size and growth.

Chapter – 3
METHODOLOGY
3.1 POPULATION
This study is to be done in the Karachi Stock Exchange KSE listed firms.
There around 640 listed companies on KSE. one classification is done on the
premise of business profit and capitalization and classified as the KSE 100
file, KSE 30 Index, KMI 30 Index and All Stocks Index, in KSE 100 the high
capitalization firm is chosen from every part and after that the remaining
organizations are additionally chosen on premise of high capitalization with no
thought of an industry or division. The KSE 100 record rundown is redesigned
time by time as the organizations' capitalization fluctuates. The organization
can be rundown or delist from KSE 100. Regularly the organizations with
superior in their stock returns and other operation and also expansive in size
are recorded on KSE 100 file. Another classification is done on the bases of
similar business activities and are classified in t 34 sectors

3.2 SAMPLING
3.2.1 Sample Size
This study looks at merely Cable and electrical goods sector consisting 8
companies. This is non-financial sector and concern with the production of
electrical good. Power is the main issue of Pakistan if certain companies are
growing it will help in resolving power problem by producing less power
consuming goods

13
3.2.2 Sampling Technique
This study utilizes purposive sampling procedure. For the study among 34
sectors only electric goods manufacturing sector is selected. This sector
consist 8 firms. These companies are selected due to the fact that Pakistan is
facing power problems one of the solution is to use less power which can be
obtained from producing less consumption products.

3.3 DATA COLLECTION

The information of the study were gotten from financial statements analysis
investigation of firms listed at KSE extricate from State Bank of Pakistan,
which envelop the balance sheet information of every single recorded
companies of KSE for 2008 to 2014, and yearly share costs were acquired
from business recorder site. For relevant study and literature review study
digital library and academic journals are utilized.

3.4 STATISTICAL TOOLS

For the study different statistical tools were employed to carry out the liaison
of working capital with profitability and working capital with firm’s values.
Tools used for the analysis of data are as follows:

3.4.1 Descriptive Statistics

This tool is used to describe the variables detail, average, lowest and highest
value of each variable with standard deviation and number of observation.

3.4.2 Correlation Analysis

Correlation analysis is used to determine the relationship between variables,
although the study is concern with finding relationship, therefor this tool will
helps in finding correlation between dependent variable and independent
variables and also between independent variables.

3.4.3 Regression Analysis

14
Regression analysis is used to find the relationship between dependent and
independent variables. If there is more than one independent variable then this
is known as multiple regressions. As for as this study is concern two
dependent variables are there and more than two independent variables so the
study uses Multiple regression and multivariate model is used.

3.5 MODEL ESTIMATION

Two dependent variables are used in the study therefore we have two
regression equations
1. ROA=α + β1(CAP) + β2(APP) + β3(ITID) + β4(CCC) + β5(CR) + β7(CS)
+ ​μ
2. FV = α + β1(CAP) + β2(APP) + β3(ITID) + β4(CCC) + β5(CR) + β7(CS)
+ ​μ
Where:
a = ​Constant term for the independent variables
ROA​= Return on Assets
FV = ​Firm’s Value
ACP ​= average collection period
APP ​= average payment period
ITID ​=inventory turnover in days
CCC ​cash conversion cycle
CR​ = Current Ratio
CS ​= Company Size
µ ​= the error term
β ​= Regression model coefficient

3.6VARIABLES
3.6.1 Dependent variables
● Return on Asset (ROA):
Used to measure the profitability of the firm against the use of their total
assets. It is calculated as:

15
● Firm’s Value:
A firm’s value is calculated as the market capitalization plus preferred stock,
minority interest and debts and then subtract cash and cash equivalent from the
sum. Market capitalization of a firm can be calculating by the product of the
firms share price and the number of shares which the firm has outstanding.
FV=Market Capitalization+Debts+Minority Interest+Preffered equity-cash
and cash equivalent.

3.6.2 Independent variables

● Average collection period (ACP):
Average Collection Period is the normal number of days for converting the
firm's account receivables into cash. It is calculated as:

● Average payment period (APP):

Average payment period is the average numbers of days a company takings to
pay its current liabilities. Average Payment Period is calculated as:

● Cash conversion cycle (CCC):

Cash conversion cycle is the sum of inventory turnover in days and
average period of collection less then average payment days. (Keown​et al​.,
2003). It is calculated as:

● Inventory turnover in days (ITID):

Inventory turnover in days is the average number of days that require to
convert the raw material into finish goods and then to sell that finish goods. It
is calculated as:

16
3.6.3 Control Variables
● Current Ratio (CR):
Liquidity means the ease of converting an asset into cash without
meaningful loss. Current ratio is used for the measure of liquidity as a
traditional approach. Current ratio is calculating by dividing the current
asset by current liability.

● Company Size (LOS ):

Company size is used as a control variable in this study and measure by taking
natural logarithm of sales.
LOS = ln (Sales)

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 Chapter – ​4
ANALYSIS AND RESULTS

4.1 DESCRIPTIVE STATISTICS

Descriptive statistics tells us about the details of variables taken i.e. Number of
observation per variable, maximum and minimum value of the variables, the
average and standard deviation of each variable.

Statistical summary.

variables Observation Mean Std.Deviation Minimum Maximum

ROA 56 2.274 3.454 -2.650 7.890

FV 56 3250.000 2060.000 1660.000 7780.000

CR 56 1.224 0.061 1.130 1.320

INTID 56 80.040 13.475 64.374 107.353

CS 56 17.577 0.138 17.338 17.744

ACP 56 158.293 23.235 126.191 199.519

APP 56 194.411 32.380 152.210 232.225

CCC 56 43.922 44.192 12.001 93.470

Table – 4.1

Summary of our data are displayed in Table –4.1. According to the results the
average value of profitability is 2.274 with a standard deviation of 3.454. The
minimum ROA in the selected sector is -2.650 while the maximum is 7.890.
The results further highlights the average value of the firms of electrical goods
manufacturing companies are 3250 million with a standard deviation of 2060
million. The lowest firm value is 1660 million and the highest is 7780 million.
The current ratio shows that for paying 1rupee current liability the companies
have 1.224 current assets with the average standard deviation of 0.061. The

18
minimum the companies have to pay their current obligation 1.130 against 1
liabilities and maximum1.320 to pay 1 current liability. Coming toward
company size which is determined by natural log of sales, the average size of
the firms are 17.577 with the deviation of 0.138. The highest value for size is
17.774 and the lowest is 17.338 representing that all the companies are about
in similar range and of having the same size.
The company’s inventory process takes 80.040 days to complete on average
bases with a standard deviation of 13.47. The highest time to convert
inventory is 107 days while the lowest time is 65 days. For cash collection the
companies required 158.29 days on average bases with a standard deviation of
23 days which is probably high time for collection of their outstanding’s. As
for accounts payables are concern the firm’s paying their current obligation in
194 days on average with a standard deviation of 32 days. The highest time
the entities takes to pay their current liabilities are 232 days while the lowest
time for paying current liabilities are 153 days. Cash conversion cycle the
most important among all the proxies showing time period from buying to
selling, the results show that electrical good manufacturing companies takes
42 days for this cycle on average bases with standard deviation of 44 days.
The minimum time required for cash conversion cycle is 12 days while
maximum time is 93 days.

Correlation Analysis
To explore the correlation between dependent and independent variables such
as profitability, working capital management WMC and Firm’s Value
Correlation analysis is used with the help of STAT 12. If working capital is
negatively associated with profitability it means company has efficient
working capital management and vice versa. Same is the case for Firms value
if the company is efficiently managing their working capital then there must
be chance of greater firm’s vale.

19
 Correlation

ROA FV CR INTID CS ACP APP CCC

ROA 1.0000

FV -0.2946 1.0000

CR 0.1244 0.6703 1.0000

INTID -0.4777 -0.4355 -0.8908 1.0000

CS 0.8575 0.0097 0.3141 -0.6144 1.0000

ACP -0.9490 -0.0370 -0.3330 0.6537 -0.9298 1.0000

APP -0.0291 0.4326 -0.1065 0.1732 -0.0911 0.0499 1.0000

CCC -0.6233 -0.4303 -0.3687 0.5217 -0.6094 0.6885 -0.6536 1.0000

Table 4.2

The result of correlation analysis is obtained from STATA. The above tables
show that there is – relation of profitability with Inventory turnover as it takes
more time to convert inventory into cash then there will be less profitable.
Return on assets shows negative relation with accounts receivable correction
period, is cash collection period decreases profitability will increase been
increased. According to table 2 results accounts payable payment period
portrays the same relationship as accounts payment period decrease it will
increase profitability. Cash conversion cycle the most important among the
working capital measures also shows negative relation with profitability. This

20
indicates that if a company takes more time to complete this cycle, then
profitability will be decreases.
Current ratio used for liquidity measure as a traditional approach shows
positive relation with profitability as current ratio increases it will increase
profitability. Company size also highlights the same positive relationship as
the company size increase they will be having more return.
Further the results of correlation portray positive relation with current ratio;
Accounts Payment Period and company size is these elements increase will
strengthen company value. On the other hand as Accounts collection period
and Inventory turnover period increase will weaken the company value.

4.2 REGRESSION ANALYSIS PROFITABILITY

Regression is used to test the relationship between dependent and independent
variables. According to the current study ROA used for profitability and firm’s
value is dependent variable. The study uses two dependent variables there for
multivariable least squares method is applied. Data is mix of cross sectional
and time series there for pooled least squares method is applied and the
following results are obtained.
The model that has been applied are as:

ROA=α + β1(CAP) + β2(APP) + β3(ITID) + β4(CCC) + β5(CR) + β6(CS) + ​μ

Source SS df MS Number of obs = 448

Model 67.7506094 5 13.5501219 F( 1, 5) = 4.53
Residual 3.83636233 1 3.83636233 Prob> F = 0.001
Total 71.5869718 6 11.931162 R-square = 0.9464
Adj.R square = 0.6785
R00t MSE = 1.9587
ROA Coefficient Std. Error t P>|t| [95% Conf. Interval]

APP -1.174842 .1195957 -9.823 0.000 -1.69445 1.344765

INTID -.24061 .109423 -2.01 0.042 -3.068182 3.046298

ACP -.174842 .0.06341 -2.7645 0.041 -1.694449 1.344765

21
CCC .006685 .026136 3.907 0.004 -.3314207 .3327577

CR -43.34778 13.96154 -3.104 0.004 -564.7474 536.8243

CS -15.84587 4.498346 -3.522 0.003 -205.8392 196.8425

CONST 299.5935 126.9588 2.398 0.040 -3679.738 3933.655

According to the results the constant coefficient value is significant, means

that if the effects of all the variables are zero then there will be 299.59 million
increases occur in profitability. Accounts payment period shows significantly
negative relation with profitability the coefficient value is -1.174 indicates that
if there is 1 day increase in in payment period profitability will be increased.
Inventory turnover in days also portrays the same negative relationship if there
is 1 day decrease in inventory conversion period then there will be .24 million
increase in profitability. Accounts collection period also having significant
relation with profitability if there is 1 day increase in collection period
profitability will be decreased .1748 million. For cash conversion cycle the
regression results show positive relationship as the cycle increases profitability
will be also increased.
Current ratios and company size are taken as control variables for current
ration there is negative relation and company size show positive relationship
with profitability. As current ratio increases profitability will be decreased and
for company size as the company size increases will increase profitability.
Furthermore the results highlights F- statistics is highly significant and the
value is 4.5 which is greater than 4 signifies that the model is good fit. R
squire shows the overall effect of independent variables collectively on
dependent variables, r squire value is 0.94. This shows that 94% dependent
variables explained by independent variables
For the second dependent variable regression results are as follows and the
model that has been applied are given bellow:
FV =α + β1(CAP) + β2(APP) + β3(ITID) + β4(CCC) + β5(CR) + β6(CS) + ​μ

22
Source SS df MS Number of obs = 448
Model 2.0815e+19 5 4.1631e+18 F( 5, 1) = 7.88
Residual 4.7203e+18 1 4.7203e+18 Prob> F = 0.000
Total 2.5536e+19 6 4.2559e+18 R-squared = 0.8151
Adj R-squared = -0.1091
Root MSE = 2.2e+09
FV Coefficient Std. t P>|t| [95% Conf. Interval]
Error
INTI 3.22 0.003 -3.31e+09 3.48e+09
859 267
D
ACP 836 133 6.30 0.000 -1.60e+09 1.77e+09
APP 386 104 3.71 0.003 -1.60e+09 1.77e+09
CCC -319 29 -11 0.000 -4.00e+08 3.36e+08
CR 36700 48100 0.76 0.585 -5.74e+11 6.48e+11

CS 17600 7060 2.50 0.020 -2.16e+11 2.30e+11

CON -3.17 0.003 -4.41e+12 4.04e+12

S -332 102

For firms value as dependent variable the regression results highlights F-

statistics is highly significant and the value is more than 7 which is greater
than 4 signifies that the model is good fit. R squire shows the overall effect of
independent variables collectively on dependent variables, r squire value is
0.8151. This shows that 81.51% dependent variables explained by independent
variables.
According to the results the constant coefficient value is significant, means
that if the effects of all the variables are zero then there will be -332% effects
on firm’s value. Accounts payment period shows significantly positive relation
with Firm’s Value the coefficient value is 858 indicates that if there is 1 day
increase in in payment period firm’s will be increased. Inventory turnover in
days also portrays the same positive relationship if there is 1 day increase in
inventory conversion period then there will be 386 increases in firm’s value.
Accounts collection period also having significant relation with firm’s value if

23
there is 1 day increase in collection period firm’s value will be strengthen 836
million. For cash conversion cycle the regression results show negative
relationship as the cycle increases firm’s value will be weaken 319 million.
Current ratios and company size are taken as control variables. Both the
control variables shows positive relationship as current ratio increase 1 unit
there will be 36700 increase in Firm’s value as the company size increases
there will be 17600 increases in firm’s value.
In a conclusion there are both positive and negative relationship exist between
both the dependent and independent variables of both the dependent variables.
Profitability is affected by working capital as working capital managed
efficiently profitability as increased.

24
 Chapter – 5
CONCLUSION AND RECOMMENDATIONS

5.1 CONCLUSION

The current study is conducted to find out the relation between profitability
and working capital and also to find out the relationship between firm’s value
and working capital. There are two dependent variables profitability as
measured by return on asset (ROA) and firm’s value measured by Market
capitalization plus, preferred stock, minority interest and debts by subtracting
cash and cash equivalents​. For the study secondary data is utilized from the
period 2008 to 2014. Data was collected from financial statements analysis by
SBP. Electrical goods manufacturing companies were used for the study.

For the analysis three tests were used such as descriptive statistics which
shows number of observation minimum and maximum values and average
with standard deviation. According to the results of summary statistics results
the average of profitability is 2.274 with a standard deviation of 3.454. On
average bases the cash collection period is 158 days with standard deviation
23 days. Accounts payment period is 194 on average for the sector with
standard deviation 32 days. Cash conversion cycle of the industry is 43 days.

The second test applied for the study is correlation analysis all the selected
variables shows both positive and negative correlation with both the dependent
and independent variables. According to the results there is – relation of
profitability with Inventory turnover as it takes more time to convert inventory
into cash then there will be less profitable. Return on assets shows negative
relation with accounts receivable collection period, is cash collection period
decreases profitability will increase been increased. According to table 2
results accounts payable payment period portrays the same relationship as
accounts payment period decrease it will increase profitability. Cash
conversion cycle the most important among the working capital measures also

25
shows negative relation with profitability. This indicates that if a company
takes more time to complete this cycle, then profitability will be decreases.

Third test is applied regression analysis for both the dependent variables
separately for both of the dependent variables F- statistics are significant and
shows that both the models are good fit. For profitability R squire value is
more than 90 means 90% profitability is affected by the selected variables and
also firm’s value is 80% effected by the independent variables. Further the
results of regression shows if the effects of all the variables are zero then there
will be 299.59 million increases occur in profitability. Accounts payment
period the coefficient value is -1.174 indicates that if there is 1 day increase in
in payment period profitability will be decrease. Inventory turnover in days
also portrays the same negative relationship if there is 1 day decrease in
inventory conversion period then there will be .24 million increase in
profitability. Accounts collection period also having significant relation with
profitability if there is 1 day increase in collection period profitability will be
decreased .1748 million. For cash conversion cycle the regression results show
positive relationship as the cycle increases profitability will be also increased.

According to the results the constant coefficient value is significant, means

that if the effects of all the variables are zero then there will be -332% effects
on firm’s value. Accounts payment period shows significantly positive relation
with Firm’s Value the coefficient value is 858 indicates that if there is 1 day
increase in in payment period firm’s will be increased. Inventory turnover in
days also portrays the same positive relationship if there is 1 day increase in
inventory conversion period then there will be 386 increases in firm’s value.
Accounts collection period also having significant relation with firm’s value if
there is 1 day increase in collection period firm’s value will be strengthen 836
million. For cash conversion cycle the regression results show negative
relationship as the cycle increases firm’s value will be weaken 319 million.

5.2 RECOMMENDATIONS

26
Further studies are encouraged from the other sectors and more variables may
be added to identify the relationship of working capital management with
profitability and firms value to help KSE listed companies to properly manage
working capital because it have significant impact on profitability.

27
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