Abstract
The corporate finance literature has traditionally focused on the study of long-term financial decisions. Researchers have particularly examined investments, capital structure, dividends or company valuation decisions, among other topics. However, short-term assets and liabilities are important components of total assets and needs to be carefully analyzed. Management of these short-term assets and liabilities warrants a careful investigation since the working capital management plays an important role for the firm’s profitability and risk as well as its value. It requires continuous management to maintain proper level in various components of working capital i.e. cash, receivables, inventory and payables etc. The present study is an attempt to evaluate the efficiency of the working capital management of cement sector of Pakistan for the period 1988-2008. Instead of employing the traditional ratios; working capital efficiency has been measured in terms of utilization index, performance index and total efficiency index as suggested by Bhattacharya (1997). This paper also tests the speed of achieving the target level of efficiency by an individual firm during the period of study using industry norms as the target level of efficiency. Findings of the study indicate that the cement sector as a whole did perform well during the study period.
Highlights
The corporate finance literature has traditionally focused on the study of long-term financial decisions, investments, capital structure, dividends or company valuation decisions
The results indicated a significant negative relationship between the cash conversion cycle and profitability indicating that more aggressive working capital management is associated with higher profitability
The company has utilized its current assets well in order to generate sales, this efficiency level could not be maintained in performance and efficiency index of working capital management where Bestway Cement and Al-Abbas Cement have outperformed the rest of firms in cement sector
Summary
The corporate finance literature has traditionally focused on the study of long-term financial decisions, investments, capital structure, dividends or company valuation decisions. Business success heavily depends on the ability of financial executives to effectively manage receivables, inventory, and payables (Filbeck and Krueger 2005; Parsad, 2001). Firms can reduce their financing costs and/or increase the funds available for expansion projects by minimizing the amount of investment tied up in current assets. The specific objectives of the study are: (a) to examine the efficiency of working capital management practices of the selected firms in cement industry. It is expected that the present study may contribute to better understand the levels of working capital efficiency of cement sector of emerging markets like Pakistan. Conclusions and discussion are reported in the last section of the study
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