Abstract
The goal of the study is to measure the relationship between working capital management and firm profitability in the manufacturing sector of Pakistan. We have selected the sample of 100 Pakistani manufacturing listed companies on Karachi Stock Exchange for the time period of 10 year from 1999-2008. The data used in this study was acquired from Karachi Stock Exchange (K.S.E) and from the Balance Sheet Analysis of Joint Stock Companies by State Bank of Pakistan. We have studied the effect of different variables of working capital management including the Average collection period, Inventory turnover in days, Average payment period and cash conversion cycle. Current ratio, Size and debt ratio used as control variables. Pearson Correlation and Regression Analysis (Ordinary Least Square and Fixed Effect Model) are used.The results show that there is a strong negative relationship between variables of the working capital management and profitability of the firm. It means that as the cash conversion cycle increases it will lead to decreasing profitability of the firm, and managers can create a positive value for the shareholders by reducing the cash conversion cycle to a possible minimum level. We find that there is a significant negative relationship between liquidity and profitability. We also find that there is a positive relationship between size of the firm and its profitability. There is also a significant negative relationship between debt used by the firm and its profitability.The sample size consisting of 100 manufacturing companies is relatively small as compared to 650 companies listed on the Karachi Stock Exchange as on August 2009 which slightly limits the generalizability of the findings. To the best of the researcher’s knowledge this study is a unique study of its kind in the Non-Financial Sector that studies the impact of working capital management on firm profitability of manufacturing sector.
Published Version
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