This study was conducted by Mohamma

This study was conducted by Mohammad Morshedur Rahman, and it
examines that the Profitability and Working Capital management of Textiles
Industries has a positive relationship ratio on all the statistical tools used to
examine Profitability, Working Capital position and relation between them
and the effect of Working Capital on Profitability as well. Author mainly
collected data from Annual Reports of the companies. The study reveals that
positive relationship exists between Working Capital Management and
Profitability, but the textile industry is not showing working capital
management efficiency.
The study was conducted by Sarbapria Rai. Therefore, according to
this study, there is a positive relationship between working capital
management and profitability of the company; hence for this purpose, the
author took sample of 311 Indian manufacturing firms of 14 years from
1996-2010 and studied the impacts of working capital management on
profitability, and including the debtors turnover ratio, inventory turnover
ratio, debt ratio and many other ratios for measuring the working capital and
return on assets and others for measuring profitability of Indian
manufacturing firms. After analyzing the results, it was proved that there is
European Scientific Journal January 2014 edition vol.10, No 1 ISSN: 1857 – 7881 (Print) e - ISSN 1857- 7431
378
a significant relationship between working capital management and the
profitability of company.
III- Modeling framework:
After reviewing theoretical literature, the following best fitted
variables have been driven to measure the impact of working capital
management on profitability, and the equation to investigate the relationship
between working capital management and profitability is as follows:
ROA= βο+β1CTO+ β 2DTO+β3ITO+ β4CR+ε
Where ROA is the return on assets ratio, CTO is the creditors
turnover ratio, DTO is the debtors turnover ratio, ITO is the inventory
turnover ratio and CR is the current ratio.
Where ROA is dependent and the remaining are independent
variables:
The ε is the error term. In the above equation, β1 is expected to be
negative but the researcher is not very sure about it, so it has to be
determined (CTO ≤?), β2, β3, β4 are expected to be positive (β2DTO≥0, β3
ITO≥0, β4CR ≥0). All data was obtained from annual report of Glaxo smith
Kline pharmaceutical company, sample size is 16 i.e. from 1996 to 2011.
Following is the hypothesis which has to be tested in this study.
Hᵒ: β1= β2= β3+ β4=0
H1: β1+β2+ β3+ β4≠0
IV - Estimation results:
To examine the data, the following analysis was done. The
descriptive statistics of the data is:
Table1. Sample: 1996 2011
ROA DTO CTO ITO CR
Mean 35.95625 53.68750 15.43750 4.981875 3.262500
Median 35.05000 51.50000 14.00000 5.000000 3.500000
Maximum 59.90000 77.00000 23.00000 7.800000 4.600000
Minimum 24.20000 43.00000 5.000000 3.800000 2.100000
Std. Dev. 10.33002 10.48630 4.486554 1.079779 0.915696
Skewness 0.690672 0.732289 -0.252075 1.108555 -0.123767
Kurtosis 2.696294 2.432848 3.232120 3.917211 1.384716
Jarque-Bera 1.333567 1.644433 0.205365 3.837903 1.780277
Probability 0.513357 0.439456 0.902413 0.146761 0.410599
Sum 575.3000 859.0000 247.0000 79.71000 52.20000
Sum Sq. Dev. 1600.639 1649.438 301.9375 17.48884 12.57750
Observations 16 16 16 16 16
Table-1 is explaining to us the descriptive statistics which covers the mean, median,
standard deviation and other results.
European Scientific Journal January 2014 edition vol.10, No 1 ISSN: 1857 – 7881 (Print) e - ISSN 1857- 7431
379
The correlation matrix for the equation is:
Correlation matrix
Table2.
ROA DTO CTO ITO CR
ROA 1.000000 0.989984 0.638537 0.965144 0.871140
DTO 0.989984 1.000000 0.623751 0.952698 0.849886
CTO 0.638537 0.623751 1.000000 0.474999 0.559231
ITO 0.965144 0.952698 0.474999 1.000000 0.840868
CR 0.871140 0.849886 0.559231 0.840868 1.000000
As the correlation shows the degree of relationship between
dependent and independent Variables, It shows how much strong or weak the
relationships between two variables are. Hence, the above data shows there
is a strong positive relationship between return on assets (dependent
variable), debtors turnover and inventory turnover ratios (independent
variables). Moreover, the above number shows that there is a moderate
relationship between creditors turnover and dependent variable and more
than moderate relationship between current ratio and dependent variable.
Regression results:
Regression results for the equation are as follows:
Table3.
Dependent Variable: ROA
Method: Least Squares
Date: 05/23/13 Time: 13:53
Sample: 1996 2011
Included observations: 16
Variable Coefficient Std. Error t-Statistic Prob.
CTO 0.228787 0.096566 2.369225 0.0372
DTO 0.540272 0.118003 4.578448 0.0008
ITO 3.317941 1.049417 3.161699 0.0091
CR 0.652331 0.618795 1.054196 0.3144
C -15.23929 1.565700 -9.733213 0.0000
R-squared 0.991506 Mean dependent var 35.95625
Adjusted R-squared 0.988418 S.D. dependent var 10.33002
S.E. of regression 1.111736 Akaike info criterion 3.300029
Sum squared resid 13.59552 Schwarz criterion 3.541463
Log likelihood -21.40023 Hannan-Quinn criter. 3.312392
F-statistic 321.0153 Durbin-Watson stat 1.540742
Prob(F-statistic) 0.000000
The statistical significance can be verified by the Coefficient,
standard error test, t-statistics, Adjusted R-squared, F-statistic, Prob.(Fstatistic)
and the Durbin-Watson statistics. In summary, the econometric test
applied through E-views shows the statistically significant relationship
European Scientific Journal January 2014 edition vol.10, No 1 ISSN: 1857 – 7881 (Print) e - ISSN 1857- 7431
380
between the dependent variable and independent variables from the model.
The above regression results shows that CTO, DTO and ITO have a positive
significant impact on ROA, but there is no significant impact of CR on ROA.
Also, the adjusted r-squared is showing that the above mentioned
independent variables effect the dependent variable by 98.8 percent.
Actual fitted graph for the equation:
-2
-1
0
1
2
20
30
40
50
60
70
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Residual Actual Fitted
V -Conclusions and Implications:
As the above results shows that there is a positive relationship
between debtors turnover (DTO) and return on assets(ROA), between
inventory turnover(ITO) and ROA and between creditors turnover (CTO)
and ROA, but there is no significant relationship between Current ratio and
ROA, so the null hypothesis has been rejected.
Hence, the interpretation of results is that by increasing debtors
turnover and inventory turnover and by decreasing creditors turnover ratios,
the company can increase its profitability but there is no significant effect of
increasing or decreasing the current ratio on profitability. Therefore, the
results of the research indicate that through proper working capital
management, the company can increase its profitability. This above study
will benefit and contribute to the body of knowledge by identifying how
Pharmaceutical companies manage their working capital in the most
effective and efficient manner in order to multiply profitability of the
business.
European Scientific Journal January 2014 edition vol.10, No 1 ISSN: 1857 – 7881 (Print) e - ISSN 1857- 7431
381
VI-Direction for further research:
There is a need for further research in the area of describing the
variables effecting profitability because there might be some more variable
effecting the profitability of the business.
Refrences:
Abbasali Pouraghajan, Milad Emamgholipourarchi, 2012, Impact of
Working Capital Management on Profitability and Market Evaluation:
Evidence from Tehran Stock Exchange (Vol. 3 No. 10)
Kulkanya Napompech , 2012, Effects of Working Capital Management on
the Profitability of Thai Listed Firms, International Journal of Trade,
Economics and Finance, Vol. 3, No. 3.
Malik Muhammad∗, Waseem Ullah Jan∗∗, & Kifayat Ullah, Working
Capital Management and Profitability An Analysis of Firms of Textile
Industry of Pakistan, Journal of Managerial Sciences Volume VI Number 2
Mobeen Ur Rehman,Naveed Anjum,2013, DETERMINATION OF THE
IMPACT OF WORKING CAPITAL MANAGEMENT ON
PROFITABILITY: AN EMPIRICAL STUDY FROM THE CEMENT
SECTOR IN PAKISTAN Asian Economic and Financial Review,, 3(3):319-
332.
Mohammad Morshedur Rahman, 2011, Working Capital Management and
Profitability: A Study on Textiles Industry, ASA University Review, Vol. 5
No. 1.
Ganesan, V. (2007). “An Analysis of Working Capital Management
Efficiency in Telecommunication Equipment Industry”, Rivier Academic
Journal, Vol. 3, No. 2, pp 13.
Salauddin, D. A. (2001). “Profitability of Pharmaceutical Companies of
Bangladesh” The Chittagong University Journal of Commerce, Vol.16, pp.
54.
Shin, H. H. and Soenen, L. (1998). “Efficiency of Working Capital and
Corporate Profitability”, Financial Practice and Education, Vol. 8, No. 2, pp.
37-45.
Dr. Sarbapriya Ray,2011, Evaluating the Impact of Working Capital
Management Components on Corporate Profitability: Evidence from Indian
Manufacturing Firms, International Journal of Economic Practices and
Theories (IJEPT) ISSN: 2247 – 7225 (online).