The Impact of Working Capital Management on Financial Performance: Evidence from the Sugar Sector of Pakistan

Abstract

Current dynamics shaped by Covid-19 crises, marks the gravity of working capital management (WCM), as an important feature in paving a way towards an entity’s success if managed properly. This study explores the impact on financial performance of Pakistani sugar mills by working capital management (WCM). Sugar mills add to national assets, national sales tax revenue and a source of employment for people of Pakistan. This study is done keeping in mind the sectoral importance of sugar mills in overall wellbeing of economy. To explore WCM-profitability relationship, a sample consisting of 23 companies within a time frame of 15 years from FY2006-FY2020 is taken into account. The research is based on secondary data. Measures of working capital management are current ratio CR, inventory turnover ratio IT, and CATAR as independent variables. The measures of financial performance are return on assets ROA, and earnings per share EPS as dependent variables. Analytical tools used are regression analysis, correlation tests, and descriptive statistics. Dynamic panel data methodology has been used in this research. Hypothesis is based on trade-off theory, financing advantage theory, precautionary motive theory, and transaction motive theory. The research revealed that CR and CATAR have significant positive relationship with ROA, and EPS. Whereas, inventory turnover proved to be significant but negative to financial performance. In conclusion, the study proved that working ix capital measures have significant role on firm’s performance and there is a significant difference among their effects on sectoral basis.