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Relationship between Efficiency Level of Working Capital Management and Profitability of Firms in the Textile Sector of Pakistan

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  • Imran Omer Chhapra
  • Nousheen Abbas Naqvi

    ((KASBIT), Karachi,)

Abstract

The main aim of this study is to investigate the relationship between working capital management (WCM) and firm’s profitability in the textile sector of Pakistan. WCM plays an important role in firm’s financial management decisions. An optimal WCM is expected to contribute positively to the creation of firm’s value and enhancement of its profitability. Working capital, fixed assets’ cost, Cost of production, cost of debt (interest expense), and size (capital) of the firm as control variables are also used to investigate their effect on profitability (net income). A sample size of 55 textile companies in Pakistan has been selected for a period of six years, from 2003 to 2008. The relationship between WCM efficiency and profitability is examined using correlation, regression analyses and ANOVA (Analysis of Variance) test. The results show a strong positive significant relationship between WCM and firm’s profitability in Pakistan’s textile sector. In case of control variables, it is found that there is a significant relationship between working capital, fixed assets’ cost, cost of production, and size (capital) and profitability. However, results show a significant negative relationship between debt used by the firm and its profitability. The findings enhance the knowledge base of WCM and will help companies to manage working capital efficiently. Moreover, it will help the policy makers and decision making authorities to better orient themselves towards considering and adopting efficient ways of managing working capital.

Suggested Citation

  • Imran Omer Chhapra & Nousheen Abbas Naqvi, 2010. "Relationship between Efficiency Level of Working Capital Management and Profitability of Firms in the Textile Sector of Pakistan," Indus Journal of Management & Social Science (IJMSS), Department of Business Administration, vol. 4(1), pages 30-42, December.
    • Handle: RePEc:iih:journl:v:4:y:2010:i:1:p:30-42
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    References listed on IDEAS

    as
    1. S. M. Amir Shah, 2007. "Corporate Debt Policy Pre- and Post-financial Market Reforms: The Case of the Textile Industry of Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 46(4), pages 465-478.
    2. Marc Deloof, 2003. "Does Working Capital Management Affect Profitability of Belgian Firms?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 30(3‐4), pages 573-588, April.
    3. Marc Deloof, 2003. "Does Working Capital Management Affect Profitability of Belgian Firms?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 30(3-4), pages 573-588.
    4. Pandey I M & Perera K L W, 1997. "Working Capital Management in Sri Lanka," IIMA Working Papers WP1997-01-01_01425, Indian Institute of Management Ahmedabad, Research and Publication Department.
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    Cited by:

    1. Minhas Akbar & Ahsan Akbar & Muhammad Umar Draz, 2021. "Global Financial Crisis, Working Capital Management, and Firm Performance: Evidence From an Islamic Market Index," SAGE Open, , vol. 11(2), pages 21582440211, May.
    2. Burja Camelia, 2013. "Analysis Model For Return On Capital Employed," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 1, pages 82-87, February.
    3. Mohammad Tahir & Melati Binti Ahmad Anuar, 2016. "The determinants of working capital management and firms performance of textile sector in pakistan," Quality & Quantity: International Journal of Methodology, Springer, vol. 50(2), pages 605-618, March.
    4. Mohammad Tahir & Melati Anuar, 2016. "The determinants of working capital management and firms performance of textile sector in pakistan," Quality & Quantity: International Journal of Methodology, Springer, vol. 50(2), pages 605-618, March.
    5. Ijaz Hussain, 2012. "The Consequences of Easy Credit Policy, High Gearing, and Firms’ Profitability in Pakistan’s Textile Sector: A Panel Data Analysis," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 17(1), pages 33-44, Jan-June.

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    More about this item

    Keywords

    Working Capital; Profitability; Cost of Production; Fixed Assets; debt.;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • L64 - Industrial Organization - - Industry Studies: Manufacturing - - - Other Machinery; Business Equipment; Armaments

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