Impact of Working Capital Management on Firm’s Profitability: Evidence from Composite Textile Firms in Pakistan.

Abstract

The purpose of this study is to examine the impact of working capital management on firms’ performance for a sample of composite textile sector firms listed in Pakistan Stock Exchange. The study includes a conceptual as well as empirical analysis, in which panel data from a sample of twenty-six composite textile sector firms, for the period from 2002 to 2018 is analyzed to examine if more efficient working capital management improves firms’ accounting profitability and firms’ value or not. Working capital management was measured by receivable collection period (AR), payable payment period (ACP) and inventory holding period (INV). The profitability was measured by return on equity (ROE). The impact of working capital management on profitability was analyzed along with size of firm (SIZE), sale growth rate (SGROW), financial leverage debt to equity ratio (DEBT) and GDP growth rate (GDPGR). To bring up more robust results, this study used more than one estimation technique, OLS pooled data analysis and fixed effects regression analysis. Using OLS pooled estimation technique, this study found that receivable collection period (AR), payable payment period (ACP) and financial leverage (DEBT) have significant negative relationship with return on equity (ROE) and sales growth (SGROW) has positive impact on return on equity (ROE). This indicates that by decreasing receivable collection period (AR), account payable period (ACP) and financial leverage (DEBT), firm’s profitability can be enhanced. Inventory holding period (INV), size of firm (SIZE) and GDP growth rate (GDPGR) are found insignificant. The study’s originality and value lie in suggesting that policy makers in composite textile sector firms in Pakistan need to motivate and encourage managers to pay more attention towards working capital management, in order to enhance profitability and GDP growth rate is not a determinant of profitability of composite textile firms in Pakistan