Impact of Working Capital Management and Capital Structure on Profitability of Automobile Firms in Pakistan

Abstract

The net profit of any business entity for a particular time period can be conceptualized as the final outcome of its investing, financing and operating activities. These activities are influenced by Management’s decisions and several internal and external environmental factors. This paper investigates how profitability of firms, in the automobile sector of Pakistan, is influenced by working capital management and capital structure of firms. The current ratio was taken as representative of the result of working capital management policy and financial leverage as the bench mark for capital structure. Supplementary analysis was also undertaken to assess the impact of operating leverage and firm size on profitability. The aim of the research was to examine empirically, using pooled data analysis, whether profitability of automobile firms is related to selected indicators in accordance with the generally accepted finance theory. Also, if some non-conformities to the theory are observed, how these could be explained. Furthermore, the research results based on analysis and tests applied on the data could be used in formulating some policy recommendations on how management of profitability could be improved by automobile firms in Pakistan.