Effects of Working Capital Management on Firm’s Profitability: A Study on the Firms Listed Under DSE in Bangladesh

Md Shakhaowat Hossin,Sohana Begum

doi:10.32861/ijefr.67.130.138

Abstract

This paper investigates the relationship between working capital management and financial performance of Pharmaceuticals and Textile firms listed at the Dhaka Securities Exchange in Bangladesh. The data analysis was carried on ten Pharmaceuticals and Textile firms for a period of 2013 to 2017. Secondary Data was analyzed by applying Descriptive Statistics, Regression and Correlation analysis to findthe relationship of current ratio, inventory conversion period and average payment period with Return on Asset. The findings indicate that the Pharmaceuticals and Textile firms’ performance is influenced by the variables relating to working capital. There is a positive relationship between profitability and current ratioand Inventory Turnover period shows a negative relationship with profitability but Average payment period shows insignificant impact on profitability. The study concludes that there exists a relationship between working capital managementand financial performance of Pharmaceuticals and Textile firms in Bangladesh. The study recommends that for the Pharmaceuticals and Textile firms to remain profitable, they should employ working capital management practice that will help in making decisions about investment mix and policy, matching investment to objective, asset allocation for institution and balancing risk against profitability.

Highlights

Banking industry is the vital part in any economy because it plays an important role in mobilizing savings from surplus to deficit unit to stream economic activities of the country which propel its economic growth
Profitability is measured by return on assets (ROA) and Return on Equity (ROE) which may be significantly influenced by the internal factors such as Interest Rate Spread (IRS), Net interest margin (NIM), capital adequacy ratio (CAR), Credit Risk (CR), Deposit Growth (DG), Loan to Deposit Ratio (LD), Cost to Income Ratio (CTI) and SIZE of the bank
Similar trend found in ROE, NIM, LD and CTI where as IRS, CA, and Size are comparatively stable among the segments

Summary

Introduction

Banking industry is the vital part in any economy because it plays an important role in mobilizing savings from surplus to deficit unit to stream economic activities of the country which propel its economic growth. Mujeri and Younus (2009) asserted that for enhancing economic growth, an important prerequisite is to ensure the required flow of saving into productive investments which depends on the development of appropriate financial institutions banks that are capable of generating adequate quantity and quality of investment. To make the industry effective and efficient as well as to provide better financial service to the citizen, a number of commercial banks licensed time to time which are operating according to the bank company act 1991. The industry has exaggerate number of banks and sometimes these numbers may affect profitability and cause to be over competitive even inefficient the industry as Mexico has only 47 commercial banks with 7.4 times larger GDP and 13.2 time larger surface area of Bangladesh in 2016 (Khatun et al, 2018)

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