Impact of Working Capital Management on the Profitability of firms: Case of Pakistan’s Cement Sector

Abstract

The aim of this study is also to find out the component wise connection between the effective management of working capital and productivity in the context of Pakistan’s cement sector. There are studies proving both, relevancy and irrelevancy of working capital management with profitability, but most of the studies advocate an inverse relationship between liquidity and profitability. Thus, a firm should maintain a delicate balance of working capital so that smooth operation can be achieved without disturbing the profitability. Panel data of 18 companies listed in KSE from cement sector from 2007 to 2011 is collected. Profitability of Companies, being dependent variable, is gauged through Return on assets (ROA). Efficiency of working capital management is calculated through six accounting ratios. Panel Least square method of regression is applied for analysis. Results suggest that assets turnover ratio (ATO), current ratio (CR) and size of the firm (SLS) have positive and significant affiliation with the return on assets (ROA). Inventory, account receivable and payable, the most important elements of working capital, found insignificant. Thus, it can be inferred that in cement sector of Pakistan, efficiency of working capital management has least role to play in enhancing the profitability of firms.