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IMPACT OF WORKING CAPITAL MANAGEMENT ON PROFITABILITY OF PHARMACEUTICAL AND
CHEMICAL COMPANIES OF PAKISTAN AND INDIA LISTED AT KARACHI AND BOMBAY STOCK
EXCHANGES
A COMPARATIVE STUDY
BY
SYED TANVEER HUSSAIN SHAH
Registration No. AUP-11FL-PhD (MGT)-3141
Research Thesis Submitted to the Department of Management Sciences, Abasyn University Peshawar in Partial Fulfilment of the Requirements for the Degree
of Doctor of Philosophy of the Abasyn University, Pakistan
FACULTY OF MANAGEMENT AND SOCIAL SCIENCES, ABASYN UNIVERSITY PESHAWAR CAMPUS, RING ROAD (CHARSADDA LINK), PESHAWAR, KHYBER
PAKHTUNKHWA
2019
i
Author’s Declaration
it is hereby declared that the research “ Impact Of Working Capital
Management On The Profitability Of Pharmaceutical and Chemical
Companies of Pakistan and India listed at Karachi and Bombay Stock
Exchanges “ submitted at Department of Management Sciences at Abasyn
university by me, is my own work. I assure of the fact that in case my work is
found to be plagiarized or not genuine, HEC has the full authority to cancel my
research work and I am liable to panel action.
Student/ Author Signature: ______________
Name: Syed Tanveer Hussain Shah
ii
Plagiarism Undertaking
I solemnly declare that research work presented in the thesis titled “Impact of
Working Capital Management on the Profitability of Pharmaceutical and
Chemical Companies of Pakistan and India listed at Karachi and Bombay
Stock Exchanges “is solely my own research work with no significant
contribution from any other person. Small contribution/ help wherever taken, have
been duly acknowledged and that complete thesis has been written by me.
I understand the zero tolerance policy of the HEC and Abasyn University
Peshawar towards plagiarism. Therefore, I as an author of the above titled thesis
declare that no portion of my thesis has been plagiarized and any material used as
reference is properly referred/cited.
I undertake that If I am found guilty of any formal plagiarism in the above
titled thesis even after award of PhD degree, the University reserves the rights to
withdraw/ revoke my PhD degree and that HEC and the University has the right to
publish my name on the HEC/ University website on which names of students are
placed, who submitted plagiarized thesis.
Student/ Author Signature: ______________
Name: Syed Tanveer Hussain Shah
iii
DEDICATION
With my deepest gratitude and warmest affection I dedicate this research
work to my spouse and children, who have been a constant source of support and
encouragement during this research work.
iv
ACKNOWLEDGEMENT
Firstly, I would like to express my sincere gratitude to my supervisor
Professor Dr. Qadar Bakhsh Baloch for his continuous support during my PhD
study and related research, for his patience, motivation, and immense knowledge.
His guidance, affection and encouragement helped me to carry out this research
thesis with zeal and spirit. I could not have imagined having a better supervisor
and mentor for my PhD study. My sincere thanks also go to Dr. Gohar Saeed
(Deputy Director PARD), Dr. Shahid Jan Associate Professor (AWKU) and Dr
Fahad (Associate Professor Cecos University), whose insightful comments and
encouragement helped me during the course of writing this thesis.
I thank my fellow lecturers Mr. Obaid (Lecturer in Cecos University), Mr. Hashim
Khan (lecturer in GCMS Peshawar) and Mr Zain Ullah (lecturer in City
University) for their support in preparation of this thesis.
Last but not the least; I would like to thank my family: my spouse and my children
for supporting me spiritually throughout writing this thesis and my life in general.
Syed Tanveer Hussain Shah
v
ABSTRACT
The current study has its focus on investigating the relationship between working
capital management and profitability of Pakistani and Indian firms. In order to
measure the profitability, ROA and ROE has been chosen as proxies for dependent
variable, while current ratio (Cr), quick ratio (Qr), accounts receivable turnover
(ARCTR), inventory turnover in days (INVTR), accounts payable turnover
(APTR), assets turnover (ATR) and cash conversion cycle (CCC) have been
utilized as independent variables. The same set of dependent and independent
variables are selected for Indian firms as well. The focus of the study is
pharmaceutical and chemical sectors of both these countries. Forty-two companies
each from India Pakistan are selected and the data from 2008 – 2012 has been
collected. QR, ARCTR, INVTR and CCC are statistically, significant and
positively related with ROA of the Pakistani firms while APTRD is statistically,
significant and negatively related with ROA. In the same line, ATR is statistically,
insignificant and inversely related with ROA. While, CR is statistically
insignificant and positively related with ROA. It has been observed that ATR, CR,
ARCTR, are statistically, insignificant and positively related with ROE, while,
QR, INVTR and CCC are statistically significant and positively related with ROE
of Pakistani firms. In Indian firms, Cr, Qr, CCC, INVTR, and ARCTR are
statistically, significant and positively related with ROA, while APTR is
statistically, insignificant and Inversely related with both ROA and ROE. The
relationship with ROE is same except that of CCC and Cr are found to be
insignificant. In addition, there is statistically significant mean difference between
the working capital management in Pakistan and India. The outcome of the study
can be deployed by policy makers, financial analysts and financial managers.
vi
TABLE OF CONTENTS DEDICATION .................................................................................................... iii ACKNOWLEDGEMENT .................................................................................. iv ABSTRACT ......................................................................................................... v TABLE OF CONTENTS .................................................................................... vi LIST OF TABLE ................................................................................................ ix LIST OF FIGURE............................................................................................... xi LIST OF ABBREVIATIONS ............................................................................ xii
Chapter-1 ................................................................................................................1 INTRODUCTION..................................................................................................1
1.1 BACKGROUND OF STUDY .................................................................. 1 1.2 THE PHARMACEUTICALSECTOR OF PAKISTAN ........................... 1 1.3 AN OVERVIEW OF INDIAN PHARMACEUTICAL INDUSTRY ..... 3 1.4 PROBLEM STATEMENT ..................................................................... 12 1.5 OBJECTIVES OF THE STUDY ............................................................ 12 1.6 JUSTIFICATION OF STUDY ............................................................... 13 1.7 SCOPE OF THE STUDY ....................................................................... 14 1.8 RESEARCH QUESTIONS ..................................................................... 14 1.9 RESEARCH SIGNIFICANCE ............................................................... 14 1.10 RESEARCH CONTRIBUTION ......................................................... 15 1.11 SCHEME OF THE STUDY ................................................................ 15
Chapter-2 ............................................................................................................... 16 LITERATURE REVIEW .................................................................................... 16
2.1 WORKING CAPITAL ............................................................................ 16 2.2 COMPONENTS OF WORKING CAPITAL ......................................... 20 2.3 WORKING CAPITAL MANAGEMENT APPROACHES ................... 24 2.4 LIQUIDITY ............................................................................................ 27 2.5 LIQUIDITY MEASURE ........................................................................ 28
2.5.1 Inventory Turnover Ratio ................................................................ 28 2.5.2 Current Ratio .................................................................................... 28 2.5.3 Quick Ratio ...................................................................................... 28 2.5.4 Cash Ratio ........................................................................................ 29 2.5.5 Total Assets Turnover Ratio ............................................................ 29 2.5.6 Accounts Payable Turnover Period ................................................. 30 2.5.7 Accounts Receivable Turnover Period ............................................ 30
2.6 PROFITABILITY ................................................................................... 31 2.6.1 Net Profit Margin ............................................................................. 31 2.6.2 Return on Assets (ROA) .................................................................. 31 2.6.3 Gross Operating Profit ..................................................................... 32 2.6.4 Return on Investment ....................................................................... 32 2.6.5 Relationship between WCM and Profitability ................................. 33
2.7 THEORIES OF LIQUIDITY .................................................................. 34 2.7.1 Trade off Theory of Liquidity .......................................................... 35 2.7.2 Pecking Order Theory of Liquidity.................................................. 35
2.8 GROUNDS FOR AND VALUE OF WCM ........................................... 35 2.9 SUMMARY OF THE PAST RESEARCH ............................................. 36
vii
2.10 TRADE CREDIT AS A COMPONENT OF WORKING CAPITAL48 2.10.1 Financial Motives............................................................................. 49 2.10.2 Operational Demand ........................................................................ 49 2.10.3 Commercial Motive ......................................................................... 49 2.10.4 Offering Delayed Payment to Guarantee Product Quality .................. 50
2.11 HYPOTHESIS DEVELOPMENT BASED ON LITERATURE ....... 51 2.12 THEORETICAL FRAME WORK BASED ON LITERATURE REVIEW ............................................................................................................ 63 2.13 HYPOTHESES OF THE STUDY ...................................................... 64
Chapter-3 ............................................................................................................... 69 RESEARCH METHODOLOGY ........................................................................ 69
3.1 INTRODUCTION ................................................................................... 69 3.2 RESEARCH DESIGN ............................................................................ 72
3.2.1 Research philosophy ........................................................................ 72 3.2.2 Research Approaches ....................................................................... 72 3.2.2.1 Population of the Study .................................................................... 72 3.2.2.2 Sampling Technique and Sample of the Study ................................ 73 3.2.3 Research Strategy............................................................................. 73 3.2.4 Time Horizons ................................................................................. 74 3.2.5 Techniques and Procedures .............................................................. 74 3.2.5.1 Statistical Analysis Techniques ....................................................... 74 3.2.5.1.1 Correlation Analysis ........................................................................ 75 3.2.5.1.2 Panel Regression Model .................................................................. 75 3.2.5.1.3 Pooled Regression Model ................................................................ 75 3.2.5.1.4 Fixed Effect Model .......................................................................... 76 3.2.5.1.5 Random Effect Model ..................................................................... 76 3.2.5.1.6 Chow Test ........................................................................................ 76 3.2.5.1.7Breusch Pagan (LM) Test ................................................................. 76 3.2.5.1.8Hausman Test ................................................................................... 77
3.3 RESEARCH MODEL ............................................................................. 77 3.4 OPERATIONALIZATION OF VARIABLES OF THE STUDY ......... 78
3.4.1 Returns on Total Assets ................................................................... 79 3.4.2 Return on Equity .............................................................................. 79 3.4.3 Inventory Turnover Ratio ................................................................ 80 3.4.4 Current Ratio .................................................................................... 80 3.4.5 Quick Ratio ...................................................................................... 81 3.4.6 Account Receivables Turnover Ratio .............................................. 81 3.4.7 Account Payables Turnover Ratio ................................................... 82 3.4.8 Cash Conversion Cycle. (CCC) ....................................................... 82 3.4.9 Assets Turn Over ............................................................................. 83
Chapter-4 ..............................................................................................................85 ANALYSIS AND FINDINGS .............................................................................85
4.2 DESCRIPTIVE ....................................................................................... 87 4.3 CORRELATION ..................................................................................... 88 4.4 COMMON EFFECT MODEL ................................................................ 90 4.5 FIXED-EFFECT MODEL ........................................................................... 92
viii
4.6 CHOW TEST .......................................................................................... 93 4.8 RANDOM-EFFECT MODEL ................................................................ 94 4.9 HAUSMAN TEST .................................................................................. 94 4.10 ROE AS A DEPENDENT VARIABLE ............................................. 95 4.11 COMMON EFFECT MODEL ............................................................ 97 4.12 FIXED-EFFECT MODEL .................................................................. 99 4.13 CHOW TEST FOR ROE ..................................................................... 99 4.15 RANDOM EFFECT MODEL ........................................................... 100 4.16 HAUSMANTEST ............................................................................. 101 4.17 REGRESSION DIAGNOSTICS TESTS .......................................... 101
SECTION 2.......................................................................................................... 104
4.4 ANALYSIS OF INDIAN FIRMS ROA AS DEPENDENT VARIABLE 104 4.5 ROE AS A DEPENDENT VARIABLE ............................................... 112 4.6 REGRESSION DIAGNOSTICS .......................................................... 115
SECTION 3.......................................................................................................... 117
4.7 T-TESTS FOR COMPARISON OF WCM IN PAKISTAN AND INDIA (PAIRED T-TEST) .......................................................................................... 117
Chapter-5 ............................................................................................................. 121 CONCLUSION AND RECOMMENDATIONS .............................................. 121
5.1 CONCLUSION ..................................................................................... 121 5.2 RECOMMENDATIONS ...................................................................... 124 5.3 FUTURE RESEARCH ......................................................................... 125 5.4 LIMITATIONS OF THE STUDY ........................................................ 125
REFERENCES .................................................................................................... 126 APPENDIX-1....................................................................................................... 146 LIST OF PAKISTANI FIRMS ......................................................................... 146 LIST OF INDIAN FIRMS ................................................................................ 148
ix
LIST OF TABLE
Table 2.1: Summary of Studies on the relationship between WCM and
Profitability ............................................................................................................ 38
Table3.1: Differences between quantitative and qualitative method ..................... 70
TABLE 3.1 Variables with Formulas .................................................................... 83
Table 4.1 Augmented Dicky Fuller Unit root test ................................................. 86
Table 4.2 Summary statistics ................................................................................. 87
Table 4.3 Correlation Matrix ................................................................................. 88
Table 4.4 Common Effect Model .......................................................................... 90
Table 4.5 Fixed-Effects Model .............................................................................. 92
Table 4.6 Chow Test for ROA (Pak) ..................................................................... 93
Table 4.7 Bruesch Pagan Test for ROA (Pak) ....................................................... 93
Table 4.8 Random-Effects Model .......................................................................... 94
Table 4.9 The Hausmantest.................................................................................... 94
Table 4.10 Correlation Analysis ............................................................................ 95
Table 4.11 Common Effect Model ........................................................................ 96
Table 4.12 Fixed-Effects Model ............................................................................ 98
Table 4.13 Chow test for ROE ............................................................................... 99
Table 4.14 Bruech Pagon Test for ROE (Pak) ..................................................... 100
Table 4.15 Random-Effects Model ...................................................................... 100
Table 4.16 Hausmantest ....................................................................................... 101
Table 4.17 Testing For Serial Correlation ........................................................... 101
Table 4.18 heterosked asticity tests (Pak) ............................................................ 101
Table 4.19 Test for Multi co linearity .................................................................. 102
Table 4.20 Descriptive Statistics (Indian) ............................................................ 104
Table 4.21 Augmented Dicky fuller Unit root test (Indian) ................................ 105
Table 4.22 Correlation Table (Indian) ................................................................. 106
Table 4.23 Pooled regression ROA (Indian)...................................................... 107
Table 4. 24 Chow test (Indian) ............................................................................ 109
Table 4.25 Fixed-Effects ...................................................................................... 109
Table 4.27 Random-Effects ................................................................................. 111
Table 4.28 Hausman Test .................................................................................... 111
Table 4.29 Correlation Matrix ............................................................................. 112
x
Table 4.30 Common Effect Model ...................................................................... 113
Table 4.31 Chow Test For ROE (Indian) ............................................................. 113
Table 4.32 Fixed Effect Model ............................................................................ 114
Table 4.33 Breusch Pagan Test for ROE (Indian) ............................................... 114
Table 4.34 Random-Effects ............................................................................... 114
Table 4.35 Hausman Test .................................................................................... 115
Table 4.36 Testing For Serial Correlation ........................................................... 115
4.37 Heteroskedasticity Test of Indian Data ........................................................ 115
Table 4.38 Multi co linearity .............................................................................. 116
Table 4.39 Quick Ratios ...................................................................................... 117
Table 4.40 Assets Turnover Ratios ...................................................................... 117
Table 4.41 Current Ratios .................................................................................... 118
Table 4.43 Account receivable Turn Over ........................................................... 118
Table 4.44 Inventory turn over ........................................................................ 118
Table 4.45 Account Payable Turn Over .............................................................. 118
Table 4.46 Cash Conversion Cycle ...................................................................... 119
Table 4.47 Return son Assets............................................................................... 119
Table 4.48 Returns on Equity .............................................................................. 119
xi
LIST OF FIGURE
Fig 2.1: Working Capital Cycle and other Cash flows ......................................... 18
Figure 2.2 Pros and cons of low and high Inventory (Source: Arnold, 2008) ....... 24
Figure2.4: The trade credit relationships; Source: Petersen and Rajan, 1997: 668)
................................................................................................................................ 48
Figure2.5: Theoretical Frame Work Based On Literature Review ........................ 63
Figure 3.1: Saunder Onion Research Diagram is used to explain thoroughly
Research Design..................................................................................................... 71
Figure 3.2: Cash Flow Timeline and operational activities in the short-term of a
typical industrial company ..................................................................................... 84
xii
LIST OF ABBREVIATIONS
ANOVA= Analysis of Variance
APTR=Account Payable Turnover
ARECTR= Account Receivable Turn Over
ATR=Assets Turn Over
BSE= Bombay Stock Exchange
CGS= Cost of Goods Sold
CCC= Cash Conversion Cycle
CEF= Common Effect Model
CR= Current Ratio
EMU= Economic and Monetary Union
FE= Fixed Effect
FEF= Fixed Effect Model
GOP= Gross Operating Profit
GOI= Gross Operating Income
INVTRD= Inventory Turnover
KSE= Karachi Stock Exchange
NOP= Net Operating Profit
NWC= Net Working Capital
OLS= Ordinary Least Square
xiii
QR= Quick Ratio
RAE= Random Effect Model
ROI= Return on Investment
ROA=Return on Assets
ROE=Return on Equity
US= United States
WC= Working Capital
WCC= Working Capital Cycle
WCM= Working Capital Management
WLS= Weighted Least Square
WTO= World Trade Organization
1
Chapter-1
INTRODUCTION
1.1 BACKGROUND OF STUDY
The term working capital (WC) refers to the amount of capital involved in
day to day operations of business concern, it can be defined as the amount of fund
confined in current assets of the company or the net current assets after deducting
the current liabilities from the current assets of the business firm. The
management of WC is very essential for the success of any business venture either
manufacturing or trading thus the importance of WC management cannot be over
looked (Singh & Pandey, 2008).
The overall business of firm either it is manufacturing, trading or
servicing; revolve around inventories, account receivables and cash. Thus it can
be concluded that basic aim of the finance manager is to keep the WC at the best
and optimum level which will enhance both the profitability and liquidity of
business firm. Working capital, the cash required for regular operations of a firm,
is considered an investment of the business in current assets and the utilization of
short term liabilities to store a portion of the investment. Best management of
these current assets and liabilities is vital in making value for shareholders. If a
firm can minimize the investment in current assets, the withdrawals from the
current assets can be invested in some productive investment thus leading to more
cash inflow and reducing cost of capital along these lines expanding the
company's growth opportunities and shareholders' profitability (Mohammad &
Saad, 2010).
1.2 THE PHARMACEUTICALSECTOR OF PAKISTAN
The Pakistan population is less than 2.7% of world’s total population and
has market size of 1.5 billion dollars. The per capita income of Pakistan is far
lower than US per capita income which was 5000 US dollars according to report
of World Bank (2002). The world health organization (WHO) concluded in their
2
study of “world medicine situation” that Pakistan is the only country which spends
77% of its health care budgets buying medicines instead of producing its own
pharmaceutical products this scenario reveals that Pakistan government have not
paid any attention to the growth of pharmaceutical firms as Pakistan is spending
about 0.5 to 0.8 % of its GNP on pharmaceutical industry.
Just after a decade the Pakistan appeared on world map, in 1960s the
pharmaceutical companies got started their operation slowly and got a significant
growth in 1980s. As the population of Pakistan is more than other developed
countries of the world and has low GDP, the cost of production was very low and
there was a huge potential of pharmaceutical products consumption, hence there
was a momentous ratio of profit in pharmaceutical industry. Thus this sector
attracted many Multinational firms to start their operations in Pakistan and
maximize their profit. For the development of pharmaceutical industry regulatory
policy and in order to motivate the local investors, Government extended support
to pharmaceutical sector in 1970s under the “generic policy”.
In Pakistan more than 500000 people are directly or indirectly involved in
pharmaceutical business. The growth of pharmaceutical industry in 2004 was
recorded more above 15% and from 2005 onward; this growth remained between
12 to 14%.The Pakistan pharmaceutical industry possesses much facilities and
potential to cater drugs products, and manufacturing about 60% of country
consumption. Pakistan’s pharmaceutical industry manufactures 15% production of
multinational companies under the manufacturing and licensing agreements as
well. (EC, TRTA for Pakistan, 2007).
Though there are only few national companies that are engaged in “Active
Pharmaceutical Ingredients” (API) which are protected by the government of
Pakistan through tariff protection and could not go beyond 5-9% of required raw
materials. The pharmaceutical industry of Pakistan is mostly dependent on china,
India, Europe, Japan, Korea and North America for Active Pharmaceutical
Ingredients and recipient of USP / EU standard.(EC.TRTA for Pakistan 2007
'Drug Control organization 2005).
3
1.3 AN OVERVIEW OF INDIAN PHARMACEUTICAL
INDUSTRY
The pharmaceutical industry of India has got a significantly good position
in global market and in near future will get more dominant position with the help
of generic chemical production as Indian firms produce about 20 percent of global
production in recent years. For the generic medicines the production of India is
counted to be more than 25 percent in 2020. The Indian firms produce and export
these generic medicines to more than 200 countries of the world. Indian
pharmaceutical industry is a major producer of different vaccine and it has the
capability of producing 18 different vaccines. The Indian vaccines are used inside
the India and outside the India as well about 150 countries are importing different
vaccines from India, which makes the India a major producer of vaccines.
The pharmaceutical industry of India is playing an essential role in serving
many developed and developing nations of world by producing and providing the
most affordable and good quality pharmaceutical products to other nations. As the
Indian pharmaceutical industry is producing a major portion of global demand the
Indian pharmaceutical industry is expected to continue its growth of 20 percent
production of total global production for next 7 to 8 years. Indian pharmaceutical
industry is the top 20 export countries of pharmaceutical products and has got the
compound annual growth rate of 19 percent for the last 11 years. Indian industry
in recent years has got a tremendous growth in technology, infrastructure and
variety of manufacturing products. The government of India is thriving to make
pharmaceutical industry of India the global market leader in drugs production.
The Indian department of pharmaceutical called the 2015 as the year of
“Active Pharmaceutical Ingredients” which has initiated by Minister of fertilizer
and chemical Mr. Ananth Kumar who at time of lunching ceremony spoke “the
huge amount of drugs is considered to be the backbone of the Pharmaceutical
Industry. This sector is required to be given relief in terms of subsidies in order to
confront obstacles from cheaper imports of drugs.Without compromising on
regularity provisions, environmental considerations, and quality phenomenon,
the concernsobstructing the progression of the industry have to be dispelled.It can
4
be harmful for interest of a country to extremely rely on one country for import of
drugs in abundant amount. Hence, it is inevitable to have greater reliance on its
own resources.
The government of India thriving continuously to make the pharmaceutical
industry the global leader of pharmaceutical market and to make sure the
existence of plenteous special quality pharmaceutical products with most
reasonable prices outside and within the country for bunch consumption. Even
though the Indian pharmaceutical industry is the major producer of global
production and has capability of manufacturing many products but still to keep the
position of producing affordable products and satisfy the requirement of safety,
quality and efficacy level, the Indian pharmaceutical industry need adaptation of
latest technology and efficient production.
Managing working capital effectively craves correct management of firm’s
current assets and its liabilities in such a simplest way that it'll cut back the
incapability risk of meeting short period commitments on one hand, and effective
application of excess investment on other hand. (Eljelly, 2004). Managing
working capital effectively has an important role with the general strategy of a
company toward making share owner wealth. Assists are cited as outcome of your
time interval that exists between expenditure for getting staple and collection of
sales of finished merchandise (Rafuse, 1996).The approach towards managing
working capital of a firm may result in an exceedingly vital influence on each of
its profitably and liquidity (Shin & Soenen, 1998)
The WC has basically two main concepts, the net working capital and the
second one gross working capital and both are frequently used by different users
of financial statement and accounting. On the other hand in finance context, the
finance manager when conducting research or discussing different matters usually
focuses on the gross working capital that is the total investment in current assets
i.e. cash, inventory, accounts receivable and marketable securities of the business
concern (Horne & Wachowicz, 2000).The working capital (WC) can be in
different shapes i.e. receivables, cash, cash equivalents, note receivables, bill
receivable, inventories, securities which are marketable etc.
5
For smooth and good running of day to day business the WC management
is very vital as the optimal level of WC remains the life blood for firm, if the
business uses a large amount of WC it may incurred loses but if the business
concern uses too little amount of WC it jeopardize its smooth running and expose
the business to serious risk of bankruptcy thus the Current assets must have an
optimal level according to the size of business and nature of operations carried by
the firm. WC management is required to keep the adequate amount of current
liabilities and current assets in such a manner, which can boost the profitability of
a firm and increases shareholders wealth (Chakra, 2008).
The amount of WC is a source of financial requirement in short term for
the business firm in other words WC is trading capital for business which is not
subjected to any cost as it neither retained from the shareholders nor is debt from
the debtors but it is availed by business concern for less than one year. The
amount of funds committed in WC changes shape and material in a normal
accounting period. The importance of WC management cannot be overseen nor
can it be questioned as it serves like a life blood. As blood is necessary for life of
human, proper WC management is vital for the life of business. If the
management of WC is not sound it can lead the firm to bankruptcy. The WC
management is the main ground of 80% baby business failure in both the growing
and advanced economies of the world (Rafuse, 1996).
Net Working capital is the product of current assets minus current
liabilities and they are entered in the left side while liabilities are entered into
other side of balance sheet. Current assets are the assets which can spawn cash
within one year. It may be in cash equivalent and cash, instant investments, trade
and other receivables, prepaid expenses, inventories and work-in-progress(WIP)
(Arnold, 2008).
Deloof, (2003) that Firms will maximize their worth by having liquid
assets and best level of capital. On the other hand of the record, a firm
has massive inventory and liberal trade credit policy which can cause higher sales.
Larger inventory reduces the danger of stock-outs. Cash discount that could be a
6
Part of trade credit, stimulates sales as a consequent, it permits customers to
weighproduceeminence before paying (Long, Malitz and Ravid, 1993). The
negative facet of giving way trade credit and maintaining inventories is that,
finances is bolted up in capital (Deloof, 2003). Another element of capital is
accounts due, that is in alternative words not extending trade credit
however receiving it from a provider. Receiving such a trade credit from
a provider permits a firm to assess the standard of the product bought, and
might be a cheap and versatile supply of funding for the firm (Raheman and Nasr,
2007).
The monetarydisaster of (2008-2009) is the most important surprise to all
over the world economy. The crisis began in late summer 2007 with the
collapse of two hedge funds, property of the Yankee firm and Bear Stearns. It all
deteriorated over time, despite the efforts by governments to prevent this menace.
Some months later, several of their known mini loans were unravelled, and it
became clear that these loans had quite high risk. It had
been unfortunately never being paid back. This situationled to the collapse and
bailing out of nation bank, Such as Northern Rock and AIG Insurance. A year
later Lehmann Brothers Financial scandal within the United States unfolded, that
emitted a large shock wave everywhere the globe. The inconvenience of credit
was the most downside for financially affected companies. As a result of the
financial distress; these companies had to chop additional finance, equipment,
promotion, and servicecomparative monetarily at
liberty companies throughout the crisis (Campello et al., 2009).
More than required rate of WC can make the return on investment of
business below the industry return on investment. Conversely the business having
too little amount of WC, and can face the risk of shortage in inventory in the era
of high demand for business product, or not in time delivery of inventory, when
the merchandise are needed on emergency basis. Which make the business unable
to satisfy the needs of good customer, who as a result switch to another
competitors and the firm loses customer. Which means low demand, low sale, low
revenue, low cash inflow and hence low profitability and bankruptcy risk, (Horne
and Wachowicz, 2000).
7
In real life the management of WC especially in large capital intensive
businesses has become a very crucial phenomenon as the top executives of large
scale businesses are trying hard to know the paramountintensity of working
capital(WC) for their business (Lamberson, 1995). There is a notion of a number
of researchers who asserts that businesses are able to minimize their cost of
financing and make available more amounts of funds available for investment in
value adding project through reducing the investment in working capital in a way
that does not harm the smooth running of business. The essential part of financial
manager’s efforts and time are spending in finding out the optimal level of WC for
business but unfortunately 75% managers are failing in this regard.
The primary aim of WC management is to keep a proper balance among
the numerousconstituents of working capital i.e. cash, inventory, receivables,
payables, short term investment etc. In this regard, it is the sole competency of top
executives and financial managers to meritoriously manage all the components of
working capital, (Filbeck & Krueger, 2005).
According to Almeida et al (2003), the WC is an alternate of money and
cash that we need for smooth running of business, thus any change in WC will
cause a proportionate change in money holding, alongside short term debt is again
an alternative of cash and money as a financial resource. Shin & Soenen (1998)
asserted that if a business firm can excellently manage its working capital, there
will be no need of funding from outside sources and there will be a constant
growth in profitability of the firm.
Keeping in view the end objective of enhancing profitability, through
direct relationship, firms may embrace two sorts of working capital approaches:
the aggressive and conservative strategies. The forceful working capital approach
infers that organizations turn out to be more profitable and more risky by
diminishing interests in working capital accounts. Conversely, conservative
working capital strategy suggests that organizations turn out to be less beneficial
and less risky as they expand interest in working capital accounts. Nonetheless,
some empirical studies support that aggressive working capital approaches
improves benefit, dismissing important perspectives, for example, the danger of
8
losing deals or interferences underway, procedure if firms diminish excessively
their profit in working capital (Long et al., 1993).
Recent studies point to the manifestation of an ideal level of working
capital, caught through an inward relation in the middle of working capital
management and profitability, demonstrating that organizations seek after an ideal
working capital level that amplifies productivity. The non-linear relationship is
certain when firms hold low levels of interest in working capital and gets to be
negative for more elevated amounts (Baños & Caballero, 2012).
Companies can have a most ideal measure of WC that prompts their
quality amplification. On the other hand, keeping up an enormous stock, promptly
allowing credit to clients, and being willing to hold up a more extended time to get
credit may bring about higher sales. The drawback of conceding liberal exchange
credit and keeping up abnormal states of stock is that cash is stashed in working
capital. On the liabilities side, deferring payment to suppliers lets a firm to get the
products prior to payments. Hence incremental spontaneous financing decreases
the requirement for costly external funding (Lev, 2001). Poor working capital
management led to default of the companies and this phenomenon observed in
UK’s firms (Rafuse, 1996). Working capital management is mainly focusing on
short term financing and firm’s short term investment decisions (Sharma &
Kumar, 2011). Working capital management has great importance for distribution,
trading and manufacturing companies as it squarelyupsets their liquidity and
effectiveness(Raheman & Nasr, 2007).
Johnson and Soenen (2003) in their research reported that if a firm
efficiently manages working capital then its profitability will increase. There are
many evidences from previous researches that working capital management
influences company’s profitability.In majority of firms, these discrete sections
were administered bydiverse managers of the firm on several different
managerialstrata. But both felt for aunifiedstyle, where all the three discrete
sections are combined. This led to the unification of the management of
inventories, account payables and account receivables, called Working Capital
Management (WCM) (Sartoris and Hill, 1983).
9
Deloof, (2003) well-organized working capital management is the
foundation for maximizing shareholder’s wealth and profitability. So maximizing
profit is the only objective for most of the firm and at the same time it focuses on
liquidity. It may prevent insolvency (Raheman & Nasr, 2007). The prominence of
working capital management for small firms increases many folds, because such
type of firms mostly depend on financing from trade credit and short term bank
loans to finance their different investments, account receivables and inventory
(Long et al., 1993). Short term finances are associated with short term operating
activities such as purchasing of raw materials, product manufacturing expenses,
product selling or collecting expenses. According to the researcher all the above
mentioned actionsgenerateforms of cash influxes and cash flow out may not be
harmonized and ambiguous (Hill et al.2010).
There are two types of situation that may occur for an investing firm one
is under-investment and the other is over-investment. If a firm is unable to
efficiently manage its working Capital and then in the under-investment situation
it failed to meets its obligations while in over-investment situation the return on
employed capital will not be enhanced. So in both situations the efficient and
effective management of the working capital is vital for the firm (Kieschnick, et
al., 2006).
According to Arnold, (2008), there are two approaches for the working
capital management. In the first approach the firms are relatively relaxed with
huge reserves of cash, more free extension of credits to customers and holding
high inventories. Such approach is adopted by high risk firms because they have
no buffer to avoid production short comings. There are many advantages of this
approach such as decreased cost, protection against price fluctuation, and increase
sales which led to high profitability and goodwill due to increase inventories and
good returns in the form of account receivables (Ternuel & Solano, 2007).
Effective working capital management plays a critical job within the
overall corporate strategy of an organization for creating shareholders value. It is
an important area for making comparison between liquidity and profitability of a
firm (Eljelly, 2004). A well manage working capital promotes a firm growth in the
market and also ensure maximization of shareholders value (Jarvis,
10
1996).Working capital is a life blood for the firm and its supervision is regarded
as the utmost imperative tasks of the management. Every firm whether it is large
or small, profit or non-profit, entailsindispensablevolume of working capital. It is
a vital factor for maintaining profitability, solvency, existence and liquidity
(Mukhopadhyay, 2004).
In the best amount of working capital, equilibrium would be obtained
between risk and effectiveness. Therefore, it is direly needed to constantly keep
vigilant check to hold appropriate level in a range of parts of working capital, i.e.,
accounts payable, accounts receivables, cash, and inventory etc. In broad
spectrum, current assets are measured as important components of total assets of a
firm. A company can obtain plants and machinery on lease basis and thus can
shrink its investments in long term assets, while the same practice cannot be
implemented for the different parts of working capital.
Mathur (2003) suggests that working capital policy may normally be
separated into three classes such as: Conservative policy, Aggressive policy and
Moderate policy. As per conservative approach, the company may desire to retain
slightly profound money and stock in running account or can commit funds in
easily convertible marketable securities, and similarly, securing itself with
elevated stocks of finished goods and raw materials. In an attempt to reduce the
risk of unavailability of merchandise and thus reduction in sales volume,restrictive
or Aggressive working capital policy may divert to enormous losses by perils of
stock out and the substantialdamage of production in addition to losing the sales
and undesirably influencing of the profitability of the company. In a judicious or
moderate policy, working capital level will be moderate, WC will be neither too
low nor too high, but just required.
In aggressive working capital management policy, in order to heighten
management of liquidity, firms tend to decrease cash conversion cycle by
dropping the inventory period and the accounts receivables period, while
spreading the accounts payables period. Aggressive WCM policy channelizes less
capital in short term assets as compared to long committed funds. As a result,
profitability would be increased but at the cost of damaging liquidity. But in case
of conservative approach to WCM, firms keep huge portion of equity in liquid
11
assets, but at the cost of profitability (Weinraub & Visscher 1998). Working
capital management shows the interval interim between genuine money uses on a
company's buying of fruitful assets and the retrieval of money proceeds from
deals, amid company's customary course of operations (Dong and Su, 2010).
Accordingly, working capital interfaces transient management of finance with
firms' vital decisions, influencing company's profitability, risks, and therefore its
value, notwithstanding for firms with great long-run prospects. The early studies
on this area recommend the presence of a direct connection between WCM and
firms' profitability. In this manner, firms can augment benefit and minimize
related dangers through a proficient management of working capital accounts. In
fact, supervisor will probably enhance money related execution through working
capital arrangements (Gitman & Sachdeva, 1982).
Regarding Cash flows, these are produced inside, being normal that
organizations with greater money cash flows and lower influence to admit more
exchange credit to clients so as to get an upper hand. Unexpectedly, these
organizations require less credit from suppliers (Teruel & Solano, 2010).
Fazzari and Petersen, (1993), showed that interest in working capital is
sensitive to profitability, proposing that organizations with bigger ability to
produce internal assets, have higher current resource levels, which may be
because of the lower expense of funds to put resources into working capital. There
is a negative connection with working capital requirements, recommending that
organizations with more prominent money cash flows have better working capital
management (Chiou, et al., 2006).
The on-going academic and organizational debate being pursued country wide that India should be granted MFN status and SAFTA is made vibrant. Therefore, it seems more demanding that Pakistan corporate sector should be properly audited and the management be improved to enable them more competitive. The SAFTA s reputational environment on the face of Indian firms competing with Pakistani firms to be operationally more promising for their stakeholders.
Hence, it is a dire need to conduct comparative analysis between Indian and Pakistani firms on various factors/ functions such as, Working Capital Management, investment environment and quality standards etc. Therefore, the study in hand is to investigate working capital management of different sectors
12
firms listed in Pakistan stock Exchange and Bombay Stock Exchange. The findings drawn would help to improve Pakistan’s operating and management procedures.
1.4 PROBLEM STATEMENT
Rehn, M. E. (2012)conducted research on Effects of working capital
management on company profitability of publically traded companies. For this
purpose, firms of two countries Finland and Sweden were studied. Therefore, it is
felt to carry out same kind of research study between Indian and Pakistani
companies. . In this context a comparative study on Pharmaceutical and chemicals
companies of Pakistan and Indian companies is materialized in order to scrutinize
how profitability is impacted by components of working capital management. It is
obvious that no research work was carried out in this regard earlier. Therefore, to
fulfil this gap, research work is undertaken in the Indian and Pakistani
Pharmaceutical and chemical companies.
This research study analyzes how working capital management
(WCM)affectthe profitability of Pharmaceutical and Chemical Industry of
Pakistan and India. This study also explains the level of efforts that should be put
by the management, in managing their working capital requirements. The result of
the study would aid that how value of shareholders wealth can be ameliorated by
management by managing the different tools of working capital. This study will
have significant contribution for the regulators and policy makers of both the
industries. Which will equip them with sufficient knowledge about these
industries and they would be better able to make their policy based on the findings
of the study.
1.5 OBJECTIVES OF THE STUDY
Objectives of the study are anticipated to direct to better clarity than
Research or investigative questions. Research Objective is an obvious, explicit
description that categorizes what the researcher desires to bring about as a
consequence of carrying out the research. Maylor and Blackmon (2005) suggest
13
that objective of research may be personal objectives of individuals. Therefore,
objectives may vary from person to person and organization to organization.
The aim of this study is to achieve following objectives.
1. To identify different components of working capital of the chemical
and pharmaceutical firms of Pakistan and India.
2. To investigate the impact of working capital components on
profitability of these firms.
3. To find out the difference in these WCM components in Pakistan and
Indian chemical and pharmaceutical firms.
1.6 JUSTIFICATION OF STUDY
There are different components being examined by academics as the
causes of productivity and earning of a firm, which incorporate as managingthe
working capital (WC). But there is likewise absence of study being led to
elements of resources contributing towards the productivity and profitability of
Pakistani and Indian Pharmaceutical and Chemical companies. Although, various
studies have been materialized thattells the impact of working capital management
on profitability of companies. But since, such kind of study has not been carried
out in previous researches. Therefore, keeping in view the importance of working
capital management, a study is carried out in order to understand, how
determinants of working capital management can affect the profitability of
Pharmaceutical and Chemical companies of both the countries. The purpose of
this study is to get comprehension about the tendencies of Pharmaceutical and
chemical companies to manage their working capital with more efficient and
effective manner.
This study willfulfil gap by examining on the impact of working capital
management on the firm’s profitability in pursuing working capital management
policy, which can contribute in more profitability by reducing the cost of the
business. This can help companies in understanding, whether to keep up more
inventory level or reduce the inventory by expediting accounts receivable turn
over, in order to fulfill short term current liabilities.
14
1.7 SCOPE OF THE STUDY
The study is very vital from many aspects. The working capital
management is an important area of study for both the managers and researchers.
All business activities of firms are operated around it. The scope of this research is
confined to the chemical and pharmaceutical industry of Pakistan and India. This
work can be utilized and helpful as the fundamentals for addition in any further
segment of the economy to study the effects of working capital management.
1.8 RESEARCH QUESTIONS
1. What are the different components of working capital of the chemical and
pharmaceutical firm of Pakistan and India?
2. Is there any relationship between working capital components and
profitability of these firms?
3. What is the level of impact of working capital components on profitability
of these firms?
4. Is there any significant mean difference in working capital management
components of selected firms in Pakistan and India?
1.9 RESEARCH SIGNIFICANCE
This study has multifold significance for both the academicians as well as
practitioners. This study has implication for the firm managers of the
Pharmaceutical and Chemical Industry in sense that it will show them clear
picture of the working capital management in relationship to the firm profitability
and liquidity practices in Pharmaceutical and Chemical Industry of Pakistan and
India. It will help them to know about the detriments of working capital
management, firm profitability and liquidity in case of Pakistani and Indian
Pharmaceutical and Chemical Industry. It helps managers to know how to manage
working capital in order to maximize firm profit in crisis.
15
1.10 RESEARCH CONTRIBUTION
This study is expected to broaden the scope of literature by providing body
of knowledge of WCM practices and its impact on the firm productivity and
liquidity of both Pakistani and Indian Pharmaceutical and Chemical Industry. This
study would enhance the knowledge about the working capital determinants and
how it affects the firm profitability especially in Pakistani and Indian context. This
study will assist in how company canmaximize shareholders’ wealth by
effectively managing current assets which lead to better profitability and
ultimately add into the price of common stock.
1.11 SCHEME OF THE STUDY
The study consists of five chapters as explain below.
Chapter No 1 provides an introduction to the study, problem statement of
the study, Research Objectives, Research Questions, research significance,
research contribution, scope of the study and limitations come across the study.
Chapter No 2 discusses the past work done on the topic, different theories
discussing the working capital management, deriving theoretical frame work
which led to development of hypotheses.
Chapter No 3 describes the research methodology adopted during the
conduct of the study. This chapter provides an overview of the type of the study,
population of the study, sample and sampling techniques used in the study, data
collection, statistical tools and techniques used in the study.
Chapter No 4 conducts and presents empirical analysis and findings of the
study by using following techniques such as Correlation analysis, common Effect
Model, Fixed Effect Model, Random Effect Model, Hausman test, Regression
Diagnostics and T tests etc.
Chapter No 5 describes about discussion conclusion and recommendation
on the research outcome and its consistency with the past research.
16
Chapter-2
LITERATURE REVIEW
2.1 WORKING CAPITAL
Working capital is used to run the daily operations and is also the capital
within the business that is most readily available (Sharma et al.2011). Working
capital defines as the difference between current assets and short-term liabilities
Ding et al. (2013). Current assets consist primarily of cash, stock and AR and
short term liabilities consist primarily of accounts-payable and short-term loans.
In manufacturing company Greene (2003), describes that working capital
is calculated based on the time when the raw material is purchased until payment
is received from the customer. This stream of activities starts when the raw
material is obtained but the capital is tied up first when the company pays its debt
to the supplier. During the process, the raw material is processed into the finished
product using enterprise resources involving payments for, among other supplies,
salaries and energy. This leads gradually to more and more capital tied up in the
product. Only when the customer pays for the product, the tied up capital releases
in the stream of activities.
WC consists of the company's cash flow which is expected to generate
input and payments within a year (Alavinasab & Davoudi, 2013). Working capital
is an essential capital used by the company in the short term. The value of the
company’s working capital is also often used as a measure to determine the
company's ability to pay its short-term costs. A low level of liquidity may lead to
the default while a too high liquidity does not provide an effective yield (Ding et
al.2013).
WCM is significant mechanism for boosting organizationproductivity
maintaining liquidity and facilitation of operating activities. The adequate amount
of working capital in a firm contributes in increasing firm profitability while the
inadequate amount of working capital adversely affects the daily operation and
17
firm financial performance (Horne and Wachowicz, 2000). Hill, M. D. et al.
(2010) defines the net working capital as current assets minus current liabilities.
Net working capital = Current assets – Current liabilities
The above components of working capital usually can be taken from
balance sheet of the organization. The current assets are those assets that derive
cash for one year and can be found on left hand side or asset side of the balance
sheet. Assets side of the Balance Sheet is also called Investment side. While
Liabilities and Owner Equity side of the Balance Sheet is called Financing side.
There are many constituents of working capital for example accounts receivables,
cash, cash equivalents, temporarysavings, prepaid expenses, and work in process.
Current liabilities or trade credits can be found on owner equity and liability side
or right hand side of the balance sheet. These liabilities are called short term
liabilities and must be paid back within a year. These liabilities are trade credits,
accrued liabilities and short term debt.
18
Working capital cycle refers to the process that starts with the acquisition of raw
material in the form of inventory. Inventory purchased thus is put into process and
is converted in to finished goods. Finished goods are then sold either on cash or
credit. The cash sale brings instant cash to the organization and made an increase
in working capital while credit sale brings account receivables for the firm, which
also increase the amount of working capital. The steps involved in this process are
shown in figure 2.1.
If there is more capital invested in working capital, it means more amounts
is stuck in nonproductive usage, if the firm can reduce the amount of working
capital without injuring the daily operational needs and liquidity of firm. This
Fig 2.1: Working Capital Cycle and other Cash flows
19
withdrawn amount can be invested somewhere in some project that will generate
profit while an access amount in working capital do not generate profit. Further
there are different steps in the working capital cycle and with each and every step,
there associates some expensesthat are known opportunity costs. Direct cost is the
cost of invested capital such as interest payable on debt, preferred dividend
payable to preferred stock holder and dividend payable to common stock holder.
While the opportunity cost is the amount of return that can be generated if the
amount was invested in other investment projects and lost due to investment of
that amount in working capital (Berry et al. 1990).
Working capital Management is one of the three major functions of
financial management of company i.e. capital structuring, capital budgeting and
working capital management of firm. There are most important two components
that arelong term finance and long term savingsas well as investment of firm
while the working capital relates to short term financing and short term investment
decision of Business Corporation (Sharma & Kumar, 2011). Working capital
management plays a real significant role in particularly trading firm,
manufacturing and distribution firm, as in these kind of companies probably half
of the capital is committed in working capital thus the proper management of WC
can boost the profit of these industries while inadequate management of WC in
these sectors can slump their profitability and badly affect their liquidity position
in market (Raheman & Nasr, 2007). It is obvious that even the firm profitability
is positive, the inadequate working capital management can lead the firm to
financial distress and bankruptcy because investing more and more in working
capital means more investment of funds that increase the cost of company while
the return of firm is positive but even then there is no healthy profit for firm after
distribution to shareholder which means there is no value based management
(Kargar & Bluementhal, 1994). Another reason for facing bankruptcy can be that
increase in an access amount in working capital can more easily make the firm
return below average (Raheman & Nasr, 2007).
The efficient working capital management is one that eliminates or at least
reduces the risk of nonpayment of current liabilities and stabilizes the change of
access amount in working capital (Eljelly, 2004). Prior to 1980 the concept of
20
working capital management was not too mature and working capital the
components were only cash, accounts receivables and accounts payable, these
components were managed by various manager in firm’s different level (Sartoris
& Hill, 1983). But the Sartoris and Hill (1983) reported a necessity for a cohesive
method in which three components must be combined and should be treated by
one manager. Which led to the bringing together all the three elements called
working capital management discussed as below.
2.2 COMPONENTS OF WORKING CAPITAL
Accounts receivable is normally a short term credit that firm allow to its
trustee customers for maximum 30 days normally. Most of the firms facing tough
competition normally use the credit as a strategy for retaining customers.
Obviously this strategy works well, but on the other hand if there are huge
receivable of a firm it can harsh the financial performance of firm (Berry and
Jarvis, 1990). Even though the trade credit has very main role in now a day
businessenvironment it is intolerable to retain customer and carry on business
without trade credit, therefore, the customer should be provided with such credit
but the amount of working capital on balance sheet must be constant for the year
(Firth, 1976). As the volume of accounts receivable increases, there will be
shortage of funds for daily operations and thus must be considered as an
opportunity cost.
According to Hampton and Wagner (1989) the accounts payable are
“when one firm purchases goods from another, the purchasing firm has to promise
the seller that it would pay for the purchased goods according to terms and
conditions of trade agreement. Till the payment of cash to a seller, the purchaser
records the transaction as accounts payable. The payables are short term loan or
the short term financing as well. There are different policies of different firm like
“2 in 12 net 30” which means if a company paid the amount in 12 days. It will
receive a discount of 2 percent but if fail to pay in 12 days the full amount should
be paid in 30 days. It means that 2 percent the firm pays only for 18 days’ delay
which becomes 40.3% for year. This 40.3 percent is many times more than normal
annual rates of return. Another policy of firm is only “net 30 “which mean there is
21
no discount and the payment should be made in 30 days (Leach & Melicher,
2009).
According to Firth, (1976) the third component of working capital is
inventory that consists of almost the major part of working capital of firm. As
inventory consists of large portion of firm working capital, a company therefore
needs due care in managing inventory holding. If there is a lot of inventory with a
firm there will be a high risk of inventory loss, there must be high storage expense
for such large amount of inventory and the access amount is stuck in working
capital that is in non-productive uses. The objective of proper managing of
inventory is to curtail the storing cost of inventory without injuring daily operation
and sale of the firm (Hampton & Wagner, 1989).
The volume of inventory a business firm uses plays a vital role in its
profitability. There can be different level of inventory that might be beneficial for
firms. The literature in inventory and firm profitability relationship asserted that
low inventory is very beneficial as with low inventory there must be high
inventory turnover and hence has low inventory cost and high profitability. On the
other hand, some scholar asserted that low inventory is associated with inventory
shortage risk in seasonal booms. Thus high level of inventory is preferable and
contributes to high profitability. The level of inventory a business must hold
depends on the nature of business firm. The most prominent motive of inventory
management is cost minimization that is built on “Transnational Cost Theory”
(Emery & Marques, 2011). To be efficient and competitive, the company should
minimize the level of inventory (Gaur et al., 2005). There are many other purposes
of inventory management discussed in the following paragraph with adequate
empirical evidences.
Lieberman et al, (2009) reported that the basic objective of high level of
inventory holding i.e. raw merchandise, work in progress and finished goods is to
meet seasonal high demand and reduce the risk of production stoppage and many
other unexpected complications in business environment. This notion is best
supported by the Cachon and Olivares (2010) who asserted that in United State
the auto mobile industry keeps a high level of inventory to meet their seasonal
fluctuations in demand. Another scholar Killick (2008) also proclaimed that
22
companies keeping high level of inventory to avoid stock outs thus variability of
sale determine the optimal level of inventory, the company must hold.
Managerial strategic decision has strong impact on the amount of
inventory holding. In seventeen and eighteen centuries the Japanese companies
expanded their business in United States. They also brought the new notion of
inventory management called just-in-time. According to just in time approach, the
businesses do not hold inventory in hand but order to supplier and deliver to
customers when demanded by customers. The just in time approach made the
Japanese firms to save much concern with inventory holding i.e. inventory
stocking and inventory obsolescence. The author investigated the US firms and
asserted that US firms in seventeen and eighteen centuries also reduce their
inventory level like Japanese companies to increase their sale (Gopalan, 2001).
Another motive for having high level of inventory in finished goods is the
cost of production Chen et al (2005). When the production cost is relatively low,
in order to produce at low cost the firms produce more finished goods now, before
the production cost increases (Blinder & Maccini, 1991)
Lieberman et al. (2009) conducted a study on inventory management and
firm accounting ratios in United States context. They studied the US auto mobile
companies of New York stock exchange. Their empirical finding reveals that
managerial and technological factors significantly alter the level of inventory, they
asserted that when technology setup take long time, it will automatically increase
the inventory level, although the per unit average price decreases the inventory
volume. They further proclaimed that managerial factor also affect the level of
inventory as more employees, job training, problem facing, handling training and
experience, often decrease the inventory level.
Lieberman et al (2009) additionally argued that companies that have
regular and frequent communications with their suppliers normally keep low level
of inventory in hand. The same idea was supported by the Richards and Laughlin
(2010). Who, asserted that communication with supplier and inventory holding in
needy times are the substitute.
23
Besides this, the macro economic variables and dynamics have significant
impact on the inventory holding level of public companies. Chen et al. (2005)
proclaimed that in period of raising interest rate the level of work in progress
reduces. While in the age of high inflation rate the level of raw material inventory
increased by manufacturing firms to avoid the effect of inflation in near future. It
is just because the firm wants to buy raw material now with relatively low price as
compare to the price after a certain period of time in the age of high inflation
period. They further argued that some times in the future, when manager
anticipate good market conditions and high sale, they will increase the inventory
of finished goods to meet high demand in future.
According to Deloof (2003) inventory management involves the tradeoff
amide cost and sale. If the firm wants to have a sky-scraping level of inventory, it
will increase the storage cost and increase menace of inventory loss. On the other
hand, it may damage, if it wants to reduce this cost and risk and decide not to keep
inventory in hand, and follow “just in time” strategy, there is always a chance of
seasonal increase in sale and if the inventory is not provided by supplier in time
that will result in low sale and shortage of sale and product will lead the most
loyal customer to buy from competitor. Thus the firm has to design an optimal
policy for inventory holding that will reduce the cost and increase profitability of
firm. The pros and cons of holding low or high amount of inventory can be seen in
following fig 2.3.
24
Figure 2.2 Pros and cons of low and high Inventory (Source: Arnold, 2008)
The management of firm must treat all the three elements of WC and try to
find out the best amount of each element of WC. The optimal or the most
beneficial amount of WC is that which increase the value of firm and
shareholders’ wealth and stock value as well (Afza & Nazir 2007). In the words of
Lamberson, (1995) “In practical life the working capital management is the most
important issue in the firms, where all the Chief Finance Officers are trying
continually to find the maximum level of each component and overall working
capital of company.”
2.3 WORKING CAPITAL MANAGEMENT APPROACHES
What is the optimal quantity of working capital in a firm depends on firm
working capital management policy; Arnold (2008) asserted that there are two
approaches the first one involves large amount of cash in hand, large amount of
inventory and a high level of trade credit to customer, which is relatively relaxed
policy of working capital. The relatively relaxed policy is used by firms that face
a great degree of uncertainty where cushions are required for continuous operation
and avoiding stoppage of production. There are many benefits associated with this
policy i.e. shield against price variation, reduction in supply cost, sale increase,
profit maximize, goodwill developed with high amount of inventory and accounts
receivables (Ternuel & Solano, 2007). On the other hand, there are associated
some spots with this policy as well as high operating cost because of high level of
25
inventory holding, inverse impact of trade credit on the Goodwill of firm, more
chances of nonpayment to supplier and so on.
The second approach of working capital is the aggressive approach in
which the financial managers use as low amount of working capital as they can
reduce. This policy is implemented by the companies that operate in a high
stabilized business environment and keep small level of cash shield, low amount
of inventory and forces customers to pay the bills as early as they can. This
approach is criticized by a Chinese author, Wang (2002) who asserted that
decreasing the level of inventory can jeopardize the sale, the bright side of this
approach is only the cost reduction in inventory and accelerating accounts
receivables and the risk is low also as the receivables are low but the dark side of
the approach is the Goodwill, sale and profit reduction due to decrease in
inventory and shortening the span of short term credit to customers in the form of
receivables.
Whenever the financial managers try to reach the optimal amount of
working capital they are faced with problem of balancing the tradeoff amid
profitability and liquidity (Hill et al., 2010). This tradeoff is actually the option
between risk and returns. The riskier the investment is, the higher will be the
returns and vice versa. When considering the optimal amount of working capital
the managers have to understand and analyze both the positive as well as negative
aspects of working capital level.
A study of Caballero and Teruel (2013), shows that there are both
advantages and disadvantages of higher and lower levels of working capital. A
higher level of working capital can lead to the positive impact of the company's
results. Above all, there are two reasons for this. The first reason is an increase in
the company's sales, and the second reason is that companies can get significant
discounts for early payments of accounts payable. However, also means a higher
working capital costs. One reason for the cost increase can be movement of capital
financing, funding May lead to higher interest expenses and a higher credit risk.
To keep stock available can further contribute to increased costs, rents tend to rise
and other charges are linked to an increased inventory.
26
Researchers in different parts of the world have different opinions
regarding the approaches and optimal level of WC. For instance, Risks of reduced
working capital can lead to negative effects such as reduced sales and production
disruptions (Caballero et al. 2011). Therefore, according to Caballero and Teruel
(2013), reduction in working capital could also mean a reduction of outcome. A
lower level of working capital often means including less inventory and shorter
trade credits. According to Kieschnick et al. (2008) lower levels of inventories,
lead to worse customer service, and then a small stock of goods easily leads to the
goods for sale tend to run out and contributes to reduced sales. If goods are not
available, when there is demand in the market, then this often leads to customer
loss which affects both the running sales but can also lead to reduced sales in the
future.
Caballero et al. (2014) describes other negative effects which can be
attributed to a reduction in inventories tend to increase in CGS, and that the price
of goods easily fluctuates. This can be traced to higher production costs due to
production disruptions at less stock. Increased trade credits that often follow in the
wake of the WCM may be due to several reasons and can cause worsening
asymmetry between buyers and sellers. Curtailed trade credit often means the
buyer has no chance to check products and quality before payment. Other negative
effects are that sales, based on the reduced trade credit, have a tendency to
decrease in recessions and periods of low demand. In addition, the aforementioned
negative effects helping to supplier and customer relationships deteriorate and are
damaged. Supplier and customer relationships are often long term relationships
where trust between them has significant impact on future business. Curtailed
trade credit also means that Companies can lose significant revenue, and then the
investment in short-term trade credits gives better returns than listed securities.
The better the return is due to the buyer pays a higher interest rate for the granting
of trade credit than the market interest rate. Lower investments in working capital
also means often extended credit to providers, which in turn can lead to the
significant discounts that often, occurs at early payments may be lost (Caballero et
al. 2014).
27
2.4 LIQUIDITY
There are two ways to evaluate the liquidity of firm. The past literature has
used these measures to identify if there is any positive or negative association
among shortest cash conversion cycle and profitability of firm. Deloof (2003)
investigated the impact of working capital on firm financial performance in the
Belgium context. He inquired the listed firm of Belgium stock exchange. Using
the multiple regression and secondary data of 223 listed firms, he found a
significant positive impact of working capital on firm profitability in Belgium.
The author concluded that strong correlation among working capital management
and firm financial efficiency. He further argued that Belgium firm can enhance
and make healthier their business organization with curbing the cash conversion
cycle and cutting the inventory volume and accelerating the accounts receivable
process with shortening the number of days permitted to customer for payments.
Furthermore, firms that are less profitable usually delay the payment of their
different bills that inversely affect the firm goodwill and credit ability as well. The
cash conversion can be calculated as under:
CCC = Days sale outstanding + Numb of Days in inventory – Days
payable outstanding
Days sale outstanding = average receivables x 365 / Credit sale
Number of Days in inventory = average inventory x 365 / Annual cost of
sale
Days payable outstanding = average payable x 365 / annual purchases
The cash conversion cycle may have both positive as well as negative
impact on financial performance of firm. A positive impact reveals the best
number of days the firm must borrow and bond capital while waiting for payments
from debtors. While negative impact shows the number of days the company
should receive its receivables from customers before paying the creditors’
(Hutchison et al., 2006).
28
2.5 LIQUIDITY MEASURE
Liquidity measures are tools that measure the ability of business firm to
pay its short term liabilities. In other words, it calculates the smallperiod solvency
of companies to fulfill their commitment concerning their current liabilities. The
liquidity of firms can be measured with the following mechanics.
2.5.1 Inventory Turnover Ratio
Inventory turnover ratio is one of the Accounting turnover ratios, a
financial ratio. This ratio measures the number of times, on average; the inventory
is sold during the period. Its purpose is to measure the liquidity of the inventory
(Gentry et al. 1990).
2.5.2 Current Ratio
The current ratio is a type of ratio belongs to liquidity ratios. It is the ratio
showing firm ability to convert or bring their short terms finance out of their
assets. The current ratio calculated with the help of the formula given below:
������������ =�������������
������������������
2.5.3 Quick Ratio
Quick Ratio exhibits the capacity of anorganization to reimburse its instant
obligations out of its mainly quick assets (James, 2002). Increase in current ratio
and decrease in quick ratio indicate the higher inventory level and resultantly
higher inventory costs, such as inventory holding and ordering costs ( Nwaobia,
29
2015). The purpose of Quick Ratio is to get an insight whether the firm has the
capacity to recompense its matured instant obligations out of a good number of
quick assets or not. Inventory is eliminated from the short term assets, in order to
consider the most liquid part of working capital. In other words, acid test ratio has
got resemblance with current assets. The only difference between the two is
elimination of inventory from current assets in order to get quick assets. This ratio
is obtained by following formula:
����������� =������������� − �����������
������������������
2.5.4 Cash Ratio
This ratio exhibits the link between short term debt and cash. This
ratio indicates that how much amount of money in cash a company has to
reimburse its current debts (Peterson, 2003).
This ratio is obtained as under:
��������� =����
������������������
2.5.5 Total Assets Turnover Ratio
This ratio is a measure of analysing the efficiency of total assets in
producing sales as compared to previous years of company or by comparing with
other companies in an industry in an accounting period (Richards & Laughlin,
1980). It is solved by the following formula
����� =�����
�����������
These financial ratios provide a sound measure of understanding financial
position of companies and are helpful in comparing performance of various
industries with each other. Use of financial ratios extremely facilitate in assessing
performance of two industries and finding out impact of working capital on
profitability of companies.
30
2.5.6 Accounts Payable Turnover Period
This ratio is computed in order to ascertain the time period require to pay
short nature liabilities. In other words, this ratio describes how much times
payment is made to supplier of goods (Sandhar, 2010). Deferring payments for
longer time period can result into losing creditworthiness and good image of
company, while lessening credit period may create the problem of liquidity for the
company (Nwobia, 2015). Consideration for this ratio depends upon the trade
terms, which are obtained from the goods suppliers.
It is explained as follows
Accounts payable period= Accounts payable*365 days
Sales
2.5.7 Accounts Receivable Turnover Period
It shows the time requires converting receivable into cash. It relies upon the policy
of credit. It is normally proclaimed as the average period of collection. Company
may be compelled to increase debt collection period owing to stiff competition in
the market. Therefore, companies require keeping in view vigilantly the industry
competition, while giving trade credit to buying firms. Company can increase
sales volume in augmenting credit period. But it may harm liquidity position of
the company by prolonging credit period. It can result in bad debts, which may
become actual bad debts, if buying firms do not pay on maturity, or may delay
payments (Falope & Ajilore, 2009). The best policy for collection of receivables is
to expedite the collection of receivables and delaying payments to payable without
damaging the credibility of companies (James, 2002). It is elaborated as:
Accounts receivable turnover= Accounts receivable
Credit sales
31
2.6 PROFITABILITY
Profitability is usually measured through the profitability ratio which
measure the generation of profit in percentage i.e. percentage of assets,
investment, equity and sale. The good percentage of profitability plays an
important role in firm financing as the firm with good and sound profitability can
generate finance from creditors and investors without any hesitation (Peterson,
2003).
There are various prominent measures of profitability. Some commonly
used measures of profitability are discussed as under.
2.6.1 Net Profit Margin
Net profit margin is a common measure of profitability. It measures the
percentage of profit against each dollar of sale or it measures the net profit after
deduction of interest, dividend, taxes, operating and administrative expenses and
cost of material (Kieschnick et al.2013). The net profit margin ratio can be
calculated by dividing the Earning available for common shareholder on net sale
and multiplying the result by 100, the higher value of net profit margin is
preferred as it shows high rate of profit. The formula for calculating net profit
margin is given below,
Net Profit Margin =Earnings available to common shareholder / Net sale x 100
2.6.2 Return on Assets (ROA)
Managers and investors are always interested in rate of profit earned on
invested capital than the rate or % of sale. The firms which are capital intensive
prefer high percentage of profit on investment and this firm usually has high profit
margin but when they calculate the profit against invested capital they found it
less motivating.
Therefore, it will be more beneficial to observe the trend and level of profit
against assets of the company. For the purpose to compare the profitability of one
firm with another firm is to compare profitability of one firm on different time
32
periods. It is most fruitful to analyze the Earnings before interest and after tax
(EBIAT). This mechanism permits the managers to focus only on the profit
generated solely from the operation and without the effect of the way assets are
financed (Bertoneche & Knight, 2001).
The return on assets ratio is a common tool that measures the ability of the
firm that to what extent the company utilizes its all available assets, in other words
how efficient the managers of the company are, or the ability of management to
utilize the available assets efficiently. This ratio measures the profit percentage
against each dollar of available assets (Weston and Brigham (1977, p. 101)).The
higher value of return on assets is preferred as it means high rate of return against
each dollar of assets. The return on assets can be calculated with the following
formula,
Return on Assets =Earnings available to common shareholder / Total Assets x 100
2.6.3 Gross Operating Profit
Gross operating profit ratio is another measure of firm profitability that
measures the percentage of profit generated against each dollar of operating assets
Weston & Brigham, 1977). Gross operating profit can be calculated by sale minus
cost of goods sole divided by total assets minus financial assets,
Gross operating profit = (sale - CGS) / (Total assets – Financial assets)
2.6.4 Return on Investment
The most common practice to measure the profitability of firm is to
compare net income with total assets of the company, but unfortunately this
method does not incorporate the effect of financing of assets as there are different
financial structures of different companies. Thus it does not provide a reliable
result for all firms with diverse financial structure (Bertoneche & Knight, (2001).
Return on investment can be calculated by dividing the net income by the total
assets.
33
Return on investment = Net income / Total assets
2.6.5 Relationship between WCM and Profitability
The relationship between working capital management and profitability of
firm has achieved an admirable focus in recent years. There is a lot of work on
WCM and profitability of firm around the globe. Various empirical studies have
conducted on the topic under study both in developing and developed world.
Given the dissimilarities in the economic condition of developed and developing
world there is controversial notions about the optimal working capital and its
impact on profitability. Many studies around the world have been conducted to
investigate the relationship between working capital management and financial
performance of firms. The empirical results of these studies are different from one
another; some authors asserted that there exists a strong positive correlation
between working capital management and profitability of firm while others
proclaimed that there exists a negative relationship. The studies on working
capital management and profitability of firm have used different independent
variables to analyze the impact of and used different statistical models i.e. linear
regression, multiple regression and correlation matrix. This segment of the thesis
presents the chronology of past research in both developing and developed
economies with the aim to understand the working capital management
relationship with profitability of firm and to find out gap in research.
Falope and Ajilore (2009) conducted a study on working capital
management impact of manufacturing firms in Nigerian context. They studied 50
listed firms of Nigeria stock exchange with their penal data using regression
analysis. They used the data of these firms from 1996 to 2005. They found a
negative association of working capital management with financial performance
of Nigerian listed firms. They asserted that cash conversion cycle, days sale
outstanding and inventory turnover has inverse relation with return on assets
(ROA). They argued that large inventory means high amount is tied up in
inventory and in non-productive usage which impacts negatively the profitability
of firms, the long time period of Accounts receivable also has negative impact on
return on assets which means huge amount has been bounded in credit transaction
thus lowering cash to operating activities and affect return on assets (ROA). While
34
the accounts payable, days payable outstanding has positive correlation with
return on assets as when payment are not made, it made the company able to
conduct business with others fund. They further concluded that companies with
high profit employ more restrictive credit policy and short cash conversion cycle
which maximize the profit of company.
Raheman and Nasr (2007) investigated the impact of working capital
management of accounting ratios in Pakistani context. They used different
measures such as net operating profit (NOP) Tobin’s Q, return on invested capital
(ROI), return on equity (ROE) and return on assets (ROA). They investigated 94
listed companies of Karachi stock exchange (KSE). Their finding revealed a
significant negative impact of accounts receivable, accounts payable, inventory
turnover and cash conversion cycle. They concluded that long period of account
receivable impact the profitability in inverse direction as more capital is stuck in
working capital and hence affect ROA, ROE, Tobin’s Q and ROI. They asserted
on the relationship of inventory and profitability that long period of inventory
means low sale or low volume of sale per day and hence low profitability. They
further proclaimed that companies which are in financial distress normally delay
the payments of their bill and thus impact both profitability and credit ability.
These arguments are further supported by Raheman and Nasr (2007) who stated
that decreasing the cash conversion period can boost profit significantly as cash
conversion cycle decreases the inventory turnover, days receivable outstanding
will automatically accelerate that ultimately increase profitability.
2.7 THEORIES OF LIQUIDITY
The “liquidity position” of a company indicates its ability to pay its liabilities,
which is, does the company have plenty of cash to pay the utility bills? Balance
sheet of a company provides a clear view of the working capital management at
the particular point of time. There are two theories of liquidity
1) Trade off theory.
2) Pecking order theory.
35
2.7.1 Trade off Theory of Liquidity
Trade-off theory argued that companies usually set a target level of
liquidity just to balance the benefit of having cash and cost of that cash. The
cost of holding cash includes low return rate due to liquidity premium and tax
cost associated with this liquid asset sale and purchase transaction. The
benefits of cash holding for the firms are twice; in first the firm does not pay
transaction cost when raising capital. Second the firm can use liquid assets to
finance its activities and when the other sources of finance are very strict and
expensive. The liquidity theory is again very essential for current study to
reduce the cost of each working capital components and maximize the benefits
of each component of working capital to maximize the overall wealth of the
shareholders.
2.7.2 Pecking Order Theory of Liquidity
This theory developed as a consequence of asymmetric information
available in financial markets, that is, the company managers frequently have
more and in-depth information concerning the business condition of their firms
than potential outside investors. Sebastian (2010) investigated Dutch firm’s
solvency and liquidity and their empirical impact on the financial decision making
process. He found, that company solvency and liquidity work together with
hedging, information and debt channels. The hedging channels and information
rise equity-value of corporations that helps to keep stable dividend payments and
most vitally cut volatility in cash flow. Thus the theory supports the researcher to
understand deeper the supplementary determinants of firm’s liquidity.
2.8 GROUNDS FOR AND VALUE OF WCM
Most companies have significant sums tied up in working capital. Control
of working capital has a significant role in the company's profitability. WCM is
also an important element for the company's financial management (Deloof,
2003). Since corporate disposition of capital has a significant impact on the
company’s profitability, this means that the economic operator spends a
substantial part of their working to determine how current assets and short-term
36
liabilities should be divided. There is a continuous work in the WCM to invest in
working in a manner that provides the primary return. The goal of WCM means
thereby achieving the most optimal working capital as possible (Arunkumar &
Radharamanan, 2012). To achieve this goal, one should keep a balance of
investments in working on the basis of profitability and risk. The decision to
reduce working capital tends to increase corporate cash flow and profitability, but
also the risk.
Enterprises should change and adapt its capital only if the benefits of the
change exceed the costs of change (Caballero & Teruel, 2013). According to
Rafuse (1996), an extensive working capital and wrong decisions in connection
with the WCM leads to the situation where resources are used inefficiently and
contributes to disruptions in the company's flow of liquidity, business and
profitability. Similar views are presented by Alavinasab and Davoudi (2013), who
argue that a management that does not have the ability to control working capital,
which means that having an extensive amount of WC, can be a wrong decision,
which can lead the company into bankruptcy. It is therefore, important to
understand the level of working capital required for optimal profitability.
Caballero and Teruel (2013) describe that there may be unforeseen events
within the WCM, which are difficult to influence. Unforeseen changes in the
environment lead to significant changes in working capital and the impact on the
company WCM. There can be several reasons for these changes, such as changes
in monetary policy, the proportion of affairs of the companies’ bankruptcies and
bad debts. All these can prevent WCM from reaching the goals.
2.9 SUMMARY OF THE PAST RESEARCH
The table below shows the summary of past research on the topic under
study. The table consists of six columns with name of author and year of
publication; second column indicating the concerned country in the sampled of
the research; third column indicates the sample size for empirical analysis; the
fourth column shows the statistical model used to analyze the collected data; fifth
column shows the independent variables whose effect was analysed on dependent
variables and last column shows the impact of independent variables that is the (+)
37
sign indicates the positive impact and (-) sign indicates the negative impact of the
concern independent variable on the dependent variable and (0) sign indicates no
relationship of dependent and independent variable.
38
Table 2.1: Summary of Studies on the relationship between WCM and Profitability
AUTHOR (S)/DATES
COUNTRY
SAMPLE
METHOD
Dependent Variable
Independent Variables
Results
Abuzayed(2012)
Jordan
93
FE Regression
GOI Inventory holding period (IHP) Accounts receivable period (ARP)
Accounts payable period (APP) Cash conversion cycle Size (CCC)
Statistically significant, positive relationship between IHP and GOI. Statistically significant, positive relationship between ARP and GOI. Statistically significant, negative relationship between APP and GOI. Statistically significant, positive relationship between CCC and GOI.
Afeef (2011)
Pakistan
40
OLS Regression
ROA Inventory holding period Accounts receivable period Cash conversion cycle Current ratio (CR) Natural log of sales Growth (NLS) Financial leverage ( FL) Accounts payable period
Statistically significant, positive relationship between IHP, ARP, and ROA. Statistically significant, positive relationship between CCC, CR, NLS and ROA. Statistically insignificant, negative relationship between FL and ROA. − + + −
39
Ahmadiet al. (2012)
Iran
333
OLS Regression
NOP Inventory holding period Accounts receivable period Cash conversion cycle Accounts Payable Period
Statistically significant, positive relationship between IHP, ARP, CCC and NOP. Statistically significant, negative relationship between APP and NOP
Charitou et al (2010)
Cyprus
43
Multiple regression analysis
ROA Cash conversion cycle Size (SZ) Sale Growth (SG) Current Ratio (CR)
Debt ratio (DR)
Statistically significant, positive relationship between CCC, size of firm, growth in sales, CR and ROA Statistically significant, negative relationship between DR, and ROA.
Christopher and Kamalavalli(2009)
India
14
Panel data analysis
ROI Cash turnover ratio (CTR) Current assets to operating income (CATOI) Leverage Current asset to total asset (CATA) Debtors turnover ratio (DTR) Current ratio
Statistically significant, negative relationship between CTR, CATOI Leverage and ROI.
Statistically significant, positive relationship between CATA, DTR, CR and ROI
40
Deloof(2003) Belgium
1009
Correlation analysis Regression analysis
GOI Inventory holding period Accounts receivable period Cash conversion cycle Natural Log of Sale Sales growth Financial Leverage Fixed financial assets (FFA)
Statistically significant, positive relationship between IHP, ARP, CCC and GOI.
Statistically significant, positive relationship between NLS, SG and GOI. Statistically insignificant, positive relationship between Leverage, FFA and GOI.
Dong and Su (2010)
Vietnam
130
Correlation matrix, Multiple regression analysis
GOI Inventory holding period Accounts receivable period Cash conversion cycle Natural Log of sales Debt ratio
Statistically significant, positive relationship between IHP, ARP, CCC and GOI. Statistically significant, positive relationship between NLS, debt ratio and GOI.
Eljelly(2004)
Saudi Arabia
145 Correlation Regression
NOI Cash Conversion Cycle Current ratio Natural Log of Sales
Statistically significant, Positive relationship between CCC, CR and NOI. Statistically significant, positive relationship between NLS and NOI
41
Enqvistetal. (2012)
Finland
1136
OLS Regression
ROA Inventory holding period Accounts receivable period Cash conversion cycle Current ratio Debt ratio, Accounts payable period, Natural Log of Sales Growth
Statistically significant, positive relationship between IHP, ARP, CCC, Cr and ROA.
Statistically significant, negative relationship between, DR, APP, NLS Growth and ROA.
Falope and Ajilore (2009)
Nigeria
50
Correlation Pooled regression
ROA Inventory holding period Accounts receivable period Cash conversion cycle Size Sales growth Debt
Statistically significant, positive relationship between IHP, ARP, CCC and ROA. Statistically insignificant, positive relationship between size, Sales Growth, Debt and ROA.
42
Garcia-Teruel and Martinez-Solano (2007)
Spain
8872
Panel data Analysis
ROA Inventory holding period Accounts receivable period Cash conversion cycle Firm size Sales growth Leverage
Statistically significant, positive relationship between IHP, ARP, CCC and ROA. Statistically insignificant, positive relationship between size, Sales Growth, Debt and ROA.
Ganesan(2007)
India
349
Correlation, regression, ANOVA
ROA Cash conversion Cycle Accounts Receivable Period Inventory Holding Period Accounts Payable Period Days working capital (DWC)
Statistically insignificant, positive relationship between CCC, ARP and ROA. Statistically significant, negative relationship between IHP, APP, DWC ROA.
Gillet al. (2010)
USA
88
Pearson correlation analysis WLS regression
GOP Cash conversion cycle Inventory Holding Period Accounts Receivable Period Natural Log of sales Debt ratio Fixed financial asset ratio
Statistically insignificant Negative relationship with GOP. Statistically significant, positive relationship between IHP, ARP GOP. Statistically significant, positive relationship between NLS and GOP. Statistically insignificant, positive relationship between DR and GOP.
43
Kaddumi and Ramadan(2012)
Jordan
49
FE Regression
ROA Inventory holding period Accounts receivable period Cash conversion cycle Net trade cycle (NTC) Gross working capital (GWC) Size Investment growth opportunities (IGO) Liquidity Accounts payable period
Statistically significant, Positive relationship between IHP, ARP, CCC, NTC, GWC and ROA.
Statistically insignificant, positive relationship between Size, IGO, Liquidity and ROA. Statistically significant negative relationship between APP and ROA.
Karadumanet al (2011)
Turkey
127
RE regression
ROA Inventory holding period Accounts receivable period Cash conversion cycle Size, Debt ratio, Sales growth
Accounts Payable Period
Statistically significant, positive relationship between IHP, ARP, CCC, Size, debt ratio SG and ROA.
Statistically significant, negative relationship between APP and ROA.
44
Lyroudiand Lazaridis (2000)
Greece
683
Regression
NPM Cash conversion cycle Inventory conversion period Receivable conversion cycle Debt to asset ratio Current ratio Quick ratio Accounts payable period
Statistically significant, positive relationship between IHP, ARP, CCC, DR and NPM. Statistically in significant, positive relationship between CR, QR and NPM. Statistically significant, negative relationship between APP and NPM.
Lazaridis and Tryfonidis (2006)
Greece
131
Regression analysis
GOP Cash conversion cycle Inventory control period Debtors control period Fixed financial assets Financial debt Payment control period
Statistically significant, positive relationship between IHP, ARP, CCC and GOP. Statistically insignificant, positive relationship between FFA, FD and GOP. Statistically significant negative relationship between APP and GOP.
45
Mathuva (2010)
Kenya
30
Pooled OLS/ Fixed effect regression
NOP Accounts receivable Period Inventory control period Cash conversion cycle Accounts payable Period Leverage Age of Firm Size
Fixed financial assets ratio
Statistically significant, Positive relationship between IHP, ARP, CCC and NOP. Statistically insignificant, negative relationship between APP and NOP. Statistically significant, positive relationship between Leverage and NOP. Statistically insignificant, positive relationship between age of firm, size of firm and NOP.
Mohammad and Saad (2010)
Malaysia
172
Linear Multiple Regression
ROA Current liability to total asset (CLTA) Total Asset Turnover Current Asset to total asset (CATA) Debt to Assets Ratio Current Ratio Cash Conversion Cycle
Statistically, significant negative relationship between, CLTA, and ROA. Statistically insignificant positive relationship between CATA, DTA, CR and ROA
Moss and Stine (1993)
USA
1717
Regression analysis
ROI Cash conversion cycle Current ratio Quick ratio
Statistically, insignificant Positive relationship between CCC, CR QR and ROI.
46
Napompech (2012)
Thailand
255
OLS Regression
GOP Inventory holding period Accounts receivable period Accounts payable period Cash conversion cycle Fixed Financial Assets Ratio Debt ratio Size
Statistically significant, Positive relationship between IHP, ARP, APP, CCC and GOP. Statistically insignificant, positive relationship between FFA, FD, Size and GOP.
Nobaneeand ALHajjar(2009a)
USA
5802
GMM
OI Cash conversion cycle Inventory conversion period Accounts payable period Payment collection period
Statistically significant, Positive relationship between IHP, ARP, APP, CCC and OI. .
Nobanee; andALHajjar(2009b)
Japan
2123
Regression analysis
ROI Receivable collection period Inventory Holding period Accounts Payable period Cash conversion cycle
Statistically significant, Positive relationship between IHP, ARP, APP, CCC and ROI
47
Nobaneeetal. (2009)
USA
5802
Generalized Method of Moments (GMM)
OI Receivable collection period Inventory conversion period Accounts Payable period Cash conversion cycle Quick ratio Debt to Equity ratio (DER)
Statistically significant, positive relationship between IHP, ARP, APP, CCC and OI. Statistically insignificant, positive relationship between QR and OI. Statistically significant, positive relationship between DER and OI.
Nobanee(2009)
USA
5802
GMM
OI Cash conversion cycle Inventory Accounts receivable Accounts payable
Statistically significant, Positive relationship between IHP, ARP, APP, CCC and OI.
Padachi(2006)
Mauritania
59
Correlation Fixed Effect Model/Pooled OLS
ROA
Inventory holding days Accounts receivable days Accounts payables days Cash conversion cycle Natural Log of sales
Statistically significant, Positive relationship between IHP, ARP, APP, CCC and ROA. Statistically significant positive relationship between NLS and ROA.
48
2.10 TRADE CREDIT AS A COMPONENT OF WORKING CAPITAL
Trade credit refers to the transaction of sale or purchase on credit. In
today’s business world, majority of business transactions take place on credit.
Trade credit is significant for financial managers, because it results in generation
of either receivables or payables. Both these have a direct impact on working
capital. It can be taken from the supplier and it can also be given to customers.
Both are very essential for business firms especially in a competitive industry. In
a competitive environment if a firm wants to penetrate market and retain existing
customer, it must give trade credit to its new and old customers. Likewise, if
suppliers want to retain their customers in competitive market, they must provide
customers with facility of trade credit. Various scholars are studying and focusing
to analyze why the companies receive and provide trade credit and why not firms
do business on cash, if the market is competitive for all business firms. The
existing body of knowledge represents deferent theories that justify why business
firms receive and provide trade credit based on merits of trade credit to supplier
and customer as well (Teruel & Solano, 2010).
When supplier gives trade credit to the firms, it is recorded by firms as accounts
payable. But when trade credit is given by the firms to its customers, it is recorded
as accounts receivable. The trade credit is received and given for achieving the
following motives.
Figure2.4: The trade credit relationships; Source: Petersen and Rajan, 1997: 668)
49
2.10.1 Financial Motives
The foremost aim of the trade credit is to examine the creditworthiness of
customer. Normally suppliers provide trade credit to customers for 30 days with
condition like 2/10 net 30. Which means the concerned firm can receive 2 percent
discount if paid the bill in 10 days, if failed to pay in ten days, the full amount of
bill must be paid in 30 days which involved a rate of interest for thirty days. This
transaction can analyze the creditworthiness of firm as if the customer paid in ten
days means customers are financially sound, whereas the failure indicates that
firm is in financial distress and must monitor closely (Teruel & Solano, 2010).
2.10.2 Operational Demand
The trade credit facilitates to operate in most efficient way. The trade
credit also makes possible the cost minimization with separation of payments and
goods delivery (Teruel & Solano, 2010). It is just because separation minimizes
the problem of shortage of money at the time of delivery. Emery (1987) asserted
that trade credit provides the customer with much flexibility in coping with
seasonal fluctuation in demand; the rising demand can be met without investing
much capital in working capital and handling it with appropriate amount of trade
credit. The scholar further proclaimed that supplier must reward the customer who
purchases the materials in low demand session.
In the words of Teruel and Solano (2010) the suppliers should relax the
conditions regarding trade credit to reduce the cost of too much inventory which
will be damaged if lay idle for long period. Thus by giving more trade credit the
firm can reduce inventory cost. This notion is same as asserted by the Chinese
author Long (1993), who proclaimed that firmshaving variables demand must
extend more trade credit to customers than companies with established demand of
product.
2.10.3 Commercial Motive
Another motive of trade credit is utilization of Price discrimination
strategy. By providing customers with discount and delayed payment, supplier can
50
use price discrimination strategy and maximize their sale and profit margin (Mian
& Smith, 1992). There are two main approaches for this strategy. First One is to
allow discount to customers and second one is to allow customers to pay after a
certain period of time which is actually price reduction according to time value of
money, the price discrimination theory was empirically tested by the Petersen and
Rajan (1997). Their empirical results indicate that companies whose profit margin
is higher, can boost their net profit by increasing sale with granting more trade
credit to its customers. Increasing sale through high trade credit is beneficial only
for those firms who have high profit margin, as the profit from increased sale
usually exceed the cost of providing more credit to customers (Teruel & Solano,
2010).
2.10.4 Offering Delayed Payment to Guarantee Product Quality
Another motive of the trade credit is to check and examine the product
quality. This idea was first put forward by the Smith in 1987 who asserted that
firm provides trade credit to customer for assessing the quality of product before
payment is made. The supplier grants trade credit to new customers who are
unfamiliar with firm product and are using the supplier product for the first time in
order to make the customer loyal and satisfied of product. The suppliers sign an
agreement with customers to use the products and if satisfied make payment in
time, if it is difficult to check the quality of product, the supplier extends the time
for payment further long, when the customers are fully satisfied with products,
they make payment to suppliers and become loyal customers of suppliers (Lee &
Stowe, 1993). Thus the trade credit is a good tool for assessing the product
quality.
Teruel and Solano (2010) asserted that trade credit is very beneficial for
attracting and retaining customers. Therefore, it is strongly recommended to new
business firms to provide more and more trade credit to customers to penetrate in
several markets. The same idea is put forwarded by the Long et al. (1993) who
proclaimed that small business firms and even large business firms who’s product
quality is good but lacking reputation, must extend trade credit to it customer to
make aware the customers of their product quality and penetrate in more markets.
According to Pike et al. (2005) who investigated the trade credit impact on
51
profitability, asserted that in UK, US and Australia the trade credit is used to
reduce the information irregularities between customer and supplier when product
quality is a base of dealing.
Terue and Solano (2010) investigated the use of trade credit by small and
medium firms. They argued that small and medium firms normally find it very
difficult to obtain credit from financial institutions and thus the trade credit by
supplier is very important and beneficial for small and medium firms. They
further proclaimed that firms who gain material with relative cheap price extend
more trade credit with favourable term and conditions to its customers, they also
found that trade credit can be used as price discrimination strategy and the firm
having low sale can boost their sale volume by extending more trade credit to its
existing and new customers to reach economy of scale.
Petersen and Rajan (1997) investigated the theory of granting or using
trade credit. They proclaimed that supplying firms rely on good credit worthiness
firms for extending trade credit but these firms usually focus the financial
institution for credit when the interest rate is favourable and thus uses low amount
of trade credit. This finding is in support of the theory that supplying firms have
advantage over the financial institutions in short term credit. They also found that
supplying firm extend more credit to customers when they are duly interested in
survival of its most valuable customers, they also found the evidence of price
discrimination through trade credit.
2.11 HYPOTHESIS DEVELOPMENT BASED ON LITERATURE
Usama (2012) investigated the impact of many working capital factors on
firm profitability in Pakistan context, he investigated 18 manufacturing firms of
Karachi stock exchange (KSE) and used pooled least square to analyze the result,
Usama inquire the seven independent variables of working capital i.e. inventory
holding, accounts payable, receivables, cash conversion cycle, size, debt ratio and
financial assets ratio. The empirical result indicated the strong positive impact of
size, financial asset ratio and debt ratio on corporate profitability while the other
four variable cash conversion, inventory holding, payable and accounts receivable
52
have negative impact on financial performance of manufacturing industry. The
scholar recommended that manufacturing companies of Pakistan invest almost 50
percent of their capital in working capital. Therefore, it is very essential for this
kind of firm to properly manage their working capital, the failure of which can
force the firm to bankruptcy. Therefore, manufacturing firm can enhance their
financial performance by reducing the cash conversion cycle, accounts receivable
period, for which an aggressive policy must be used and should be financed with
liquid assets, the accounts payable must be paid in agreed time to shield the credit
ability and Goodwill of the firm. Many researchers concluded that accounts
payable should be delayed to utilize supplier capital for own business but actually
this will affect the credit worthiness of firm in long run. The inventory holding
volume must be reduced to decrease damage of raw material due to long time
remaining in store and accelerate inventory turnover. Further size, debt ratio and
financial asset ratio must be reducing to have sound financial performance.
Enqvist, et, et (2012) conducted a study on 1130 Finish firms using
ordinary least square techniques and explored the independent variable i.e. CCC,
inventory holding period, accounts payable, accounts receivable, debt ratio,
current ratio and operating income, growth and return on assets (ROA) as
dependent variable. They found a strong and significant positive impact of current
ratio, operating income, growth on return on assets (ROA) while all the remaining
variables in this model was negatively correlated to return on assets (ROA). They
recommended that Finish firms can increase stock value of firms by increasing the
current ratio, operating income and growing more and more while reducing the
cash conversion cycle, inventory holding period, accounts receivables and debt
ratio to increase the return on assets.
Safdar (2012) in his research found a significant effect of return on assets
and size of the capital. In the same study, he also discovered that there is negative
relationship between return on assets and average collection period, average
inventory turnover, current ratio, debt ratio, cash conversion cycle, and payment
period in Pakistani manufacturing firms.
Harris (2005) pointed out that working capital management is a basic and
clear idea of guaranteeing the galvanization's capacity to support the distinction
53
between the short term assets and short term liabilities. A definitive target of any
firm is to expand shareholders’ wealth and augmenting shareholders wealth can be
accomplished by a firm amplifying its profitability. A firm that wishes to boost
profitability must strike a harmony between current assets and current liabilities
and subsequently staying informed concerning the liquidity and productivity
exchange off. Protecting liquidity and profitability of the firm is a critical target,
as expanding profits to the detriment of liquidity, can convey significant issues to
the firm and the other way around. Working capital management is thought to be a
critical component to dissect the company's execution while leading regular
operations. There are prospects of unevenness of current assets and current risk
amid the life cycle of a firm and productivity will be influenced if this happens.
Nobanee & Alhajjar (2009) conducted research study on the working
capital and corporate financial performance in Japanese context. They analysed
the 2123 listed firm of Tokyo stock exchange and used their penal data for
analysis of the relationship among two variables. They study this non-financial
corporation for the period of fourteen years from 1990 to 2004. They used the
accounting measure return on assets (ROA) as a proxy of profitability of stated
firms. They argued that all the four elements of working capital were negatively
correlated to financial performance of non-financial corporations of Tokyo stock
exchange listed firms except accounts payable which had positive impact on firm
financial performance in Japan.
They further asserted that managers can boost the profitability by simple
technique of making short the inventory holding period, collecting in time the
receivables. The positive association of payable with profitability means that those
companies who do not pay quickly their bills and wait long for paying current
liabilities, command significantly higher profitability than those firms who pay the
bills in the first possible movement. The cash conversion cycle and profitability
relation asserts that shortening the cash conversion cycle can help in increasing
the cash inflow which ultimately contributes in good financial performance.
Sen and Oruc (2009) investigated the impact of working capital on firm
financial performance. They studied the 49 production firm listed at Istanbul stock
exchange for the period of thirteen years using return on assets for measurement
54
of profitability. Their findings revealed a strong negative impact of receivables,
inventory holding period and cash conversion cycle on firm financial performance
while the accounts payable period indicated a relatively significant positive impact
on profitability of production companies of Istanbul listed companies.
According to Deloof (2003), enormous firms had committed abundant
cash in current assets of the business. Therefore, it can be anticipated that by
efficiently and effectively utilizing working capital, firms would have remarkable
fall out on profitability of their businesses. As per the application of regression
and correlation tests, it was established that there existed a noteworthy negative
association between gross operating income and inventories, accounts payables,
the number of day’s accounts receivable of Belgian firms. According to these
finding, it is suggested, that organizations could increase worth for the
stockholders by judiciously plummeting the inventories and number of days’
accounts receivable to an appropriate level. It is also in harmony with the view
that the pessimisticrelationship among profitability and accounts payable would
pave the way for the less gainful firms to stay for lengthy time to disburse their
bills.
Wang (2002) conducted a study on Taiwan listed companies to examine
the impact of working capital on corporate profitability. Their findings indicate a
strong negative association among all the working capital components and
corporate financial performance of Taiwan listed firms.
Mathuva (2010) conducted the same study in Kenya and investigated
deferent variables of working capital and profitability measures. He investigated
cash conversion cycle, accounts receivable period, accounts payable period,
current ratio, fixed financial assets ratio, size of business, age of business,
leverage, inventory holding period and net operating profit as dependent variable,
the author used pooled ordinary least square, fixed effect regression to examine
the cause effect relationship. The scholar found a positive association among
account payable, inventory holding period, size of business, age of business, fixed
financial assets ratio and net operating profit while a negative association among
the accounts receivable, cash conversion cycle, leverage and net operating profit
of Kenyans firms. The author further proclaimed that Kenyans firms can increase
55
their profitability through increasing the inventory holding period, by taking long
time to pay short term business credit, expanding the business in industry while
the age of business is also positive correlated but firm management cannot
manipulate the age of business as it’s a matter of time period the business is in
industry. Moreover, decreasing the day’s receivable outstanding, cash conversion
cycle and financial leverage will contribute in boosting corporate profit.
Mohamad and Saad (2010) conducted a study on Malaysian listed firm to
inquire the impact of working capital management and firm financial
performance. They studied 172 registered and listed firms of Malaysian stock
exchange by using the leaner multiple regressions. They inquired the independent
variables, current assets to current liability ratio, cash conversion period, current
liability to total assets ratio, current asset to total asset ratio and total debt to total
assets ratio. They found a significant positive association among current assets to
total assets ratio, total debt to total assets ratio and return on assets. The current
assets to current liability ratio, cash conversion and current liability to total assets
ratio have negative impact on returns on assets of Malaysian listed firms.
H1The quick ratio has significant impact on chemical and pharmaceutical
firm’s profitability
H2The assets turnover ratio has significant impact on chemical and
pharmaceutical firm’s profitability
H3 The current ratio has significant impact on chemical and pharmaceutical
firm’s profitability
H4 the accounts receivable turnover has significant impact on chemical and
pharmaceutical firm’s profitability
Hutchison (2006) demonstrated a straight relationship between smaller
Cash Conversion Cycle and higher profitability. Alipour (2011) examined the no
significant differenceamong the cash conversion cycle and profitability for
resources. It means shorter cash conversion cycle expand the benefit and vice
versa. Kamath (1989) conducted the study on retailing firms and presumed that
there was an inverse relationship between cash conversion cycle and profitability.
It implies that productivity improved by diminishing the cash conversion cycle.
56
Business cash holdings offer a pair of attributes. Firm operators along with
shareholders have got unique viewpoint connected with cash holdings. Empirical
scientific tests by means of research workers have got furnished evidences to
guide unique theoretical versions. Opler (1999) verifies these determinants along
with significance connected with holdings cash and with valuable securities by
means of learning this widely exchanged medium.
Ferreira & Vilela (2004) research determinants connected with cash
holdings pertaining to businesses in EMU nations by utilizing section information
for that time period 1987-2002 along with results usually are in keeping with this
trade-off model. They suggested that cash holdings have a positive impact due to
availability of investment avenues and flow of cash and these cash holdings are
adversely impacted by the size, assets convertibility into cash, and debts. They
further described that loans from Banks and holdings of cash, have opposite
relationships. So it advocates the idea that keeping congenial and sound contacts
with commercial and Development financial institutions will pave the way to keep
less amount of liquidity for unforeseen situations. Because banks will give support
in terms of cash in times of urgency, due to sound and close relationships.
Mikkelson and Partch (2003) verify this managing functionality along with
other qualities connected with businesses for any period of five-year. Firms‟
having more than 25% of these possessions in cash along with cash equivalents in
order to find which businesses under consideration “resembles as well as greater
than this functionality connected with businesses related by means of dimension
along with industry”. The evidence on the role connected with corporate
governance along with company expenses in determinant connected with
corporate cash holdings is pretty poor in a provided country. Black et al. (2006)
stated that the use of overseas information cross-country presents selected
supporting results of this admiration. They further argued that overseas
information via numerous nations will allow this diversification in numerous
aspects, such as legitimate conditions, investor safeguard, and title composition
along with investment capital promotes trends, which can be related to company
expenses in several quantities.
57
Shin and Soenen (1998) efficient working capital management (WCM) is
very important for creating value for the shareholders. The way working capital
was managed had a significant impact on both profitability and liquidity. The
relationship between the length of Net Trading Cycle, corporate profitability and
risk adjusted stock return was examined using correlation and regression analysis,
by industry and capital intensity. A strong negative relationship between lengths
of the firm’s net trading cycle and its profitability. In addition, shorter net trade
cycles were associated with higher risk adjusted stock returns.
Deloof (2003) investigated the relationship between working capital
management and firm financial performance in Belgium context. He studied the
Belgium stock exchange listed companies’ data for the period of 10 years. He
used multiple regression models to predict the impact of working capital
management on profitability of listed firm; the scholar found a strong negative
impact of working capital on Belgium listed companies. The author argued that in
Belgium companies a lengthy cash conversion cycle has a real negative impact on
firm profitability. It is most important for Belgium firm in order to have sound
financial performance to expedite the cash conversion cycle through a relatively
aggressive policy regarding trade credit to customer and volume of inventory
holding. The scholar further recommended that if firm maintained short cash
conversion cycle, low accounts receivable, low inventory volume that will result
in high inventory turnover will contribute in reducing bad and doubtful debts and
increasing profitability.
Laziridis and Tryfonidis (2006) conducted study on the impact of working
capital on the profitability of trading firm in Greece context. They investigated the
Greece stock exchange registered firm. The scholars analysed the secondary data
of this firm from 1992 to 2005 using correlation matrix and multiple regressions
Model. They asserted that working capital components has strong negative impact
on trading firm of Greece. They argued that trading firm of Greece do not pay
proper attention to the working capital management and thus invest and stuck a
major portion of capital in working capital that affect cash profitability of trading
firms.
58
Samiloglu and Demirgunes (2008) conducted research in turkey to
understand the relationship between working capital of firms and their financial
performances. Their findings reveal a negative correlation between cash
conversion cycle and return on assets (ROA), while relationship between days
accounts payable were not significantly correlated to return on assets of turkey
stock exchange listed firms. Karaduman et al. (2011) also investigated the turkey
listed companies to investigate the impact of working capital management and
firms’ financial performance. They account measures i.e. return on assets (ROA),
return on equity (ROE), return on invested capital (ROI) and Tobin’s Q for
dependent variable profitability. They used independent variables such as
accounts receivables, inventory holding period, accounts payable period and cash
conversion cycle. They analysed the data from the financial statement of these
firms for the period of 10 years. They found a negative impact of cash conversion
cycle on ROA, ROE, ROI and Tobin’s Q, the relationship amide payables period
was also negative and significant while the relationship among receivables,
inventory holding period and profitability ROA, ROE, ROI and Tobin’s Q was
positive and significant.
Nobanee and Alitajjar (2009) investigated the 5802 non-financial firm of
USA to examine the association among working capital components except
inventory holding, their empirical results indicate an inverse impact of all working
capital components on firm profitability. This result made them to conclude that
making short the inventory holding time span can significantly boost the stock out
cost of inventory that can eventually cause the company’s sale to decrease and
thus worse the profitability. It is also recommended that accelerating the accounts
receivables collection by using aggressive credit policy can upshot in high net
income to sale and high operating cash flow to sale. The negative association of
accounts payable period indicates that taking long time to pay short term debt and
current liability can harm the Goodwill, credit repute of the firm and hence
profitability in long run. The cash conversion cycle negative coefficient indicates
that making short the cash conversion means lowering the amount invested in
working capital will boost the profitability of US listed firms.
59
Gill et al. (2010) investigated the US firm to examine the relationship
among working capital components and corporate profitability and unlike other
researchers he found a significant positive impact of cash conversion cycle on
financial performance of US firms while the negative association of accounts
receivable with the profitability of firms. They asserted that firms can maximize
the shareholder wealth and stock value by efficiently managing their trade credit
policy either to relaxed, aggressive or relatively aggressive. They further
recommended that by reducing the time span of cash conversion cycle and
expedite the accounts receivable; US firms can achieve their financial objective
and can boost stock value of company as well.
Zariyawati et al. (2009) conducted a study in Malaysian context. They
studied 148 listed firms of kulalampure stock exchange; they used operating
income to total sale, current ratio, cash conversion cycle and leverage. They
applied pooled ordinary least square to predict the variation in operating income
due to the all above independent variable. They found a negative impact of cash
conversion cycle on the corporate profitability of Malaysian firm. They further
asserted that Malaysian firm can enhance their profitability by shortening the cash
conversion cycle, accelerating collection of accounts receivable, minimizing
inventory holding and waiting long to pay its short term liabilities.
Padachi, (2006) conducted a research study on the impact of working
capital management and firm performance in Mauritian context. The scholar
investigated gross working capital, working capital requirement, leverage and
short term financing. The author found a positive relationship among working
capital requirement, working capital management and negative impact of financial
leverage and short term financing on the corporate profitability.
Samiloglu and Demirgunes (2008) inquired the association between
working capital management and return on assets in turkey region. They use
multiple regression models for the purpose of predicting change in return on assets
due to independent variables i.e. debtor conversion cycle, inventory conversion,
cash conversion, size financial assets, growth and leverage of Turkish listed firms.
Their empirical result indicates a strong positive impact of growth on return on
assets while the size of firm, financial assets and cash conversion cycle do not
60
have any impact, neither positive nor negative association with the return on
assets of firm. Although the leverage, inventory conversion and debtors’
conversion cycle have inverse relation with return on assets of Turkish listed
firms. They further proclaimed that Turkish firms can increase their profitability
by expanding their business more in local and international market, and reducing
the time span for conversion of cash, debtors and financial leverage.
Christopher and Kamalavalli (2009) studied the 14 corporate hospitals of
India using their penal data. They studied current ratio, cash conversion ratio,
leverage, current assets to operating income, current assets to total assets, quick
ratio, growth and debtor turnover ratio as independent variables and return on
assets (ROA) as dependent variable. Their analysis revealed a positive impact of
debtor turnover ratio, growth, quick ratio and current assets to total assets and
negative impact of cash conversion ratio, current ratio, leverage and current assets
to operating income on the returns on assets (ROA). The author recommended
that in Indian context if the corporate hospital wants to increase their profitability
they must boost their debtor turnover ratio, quick ratio, current assets to total
assets ratio and must grow their hospital services and must reduce the ratio of cash
conversion, current ratio, decrease the financial leverage, and current assets to
operating income.
Ahmadi et al. (2012) investigated the impact of working capital
management on corporate financial performance of manufacturing industry of
Iran. They analysed the data of 333 Tehran stock exchange listed companies and
used ordinary least square to examine the impact of accounts receivables, accounts
payables, inventory volume and cash conversion cycle of Iran manufacturing
industry. They discovered that all the four independent variables i.e. cash
conversion, inventory volume, receivables and payables have negative impact on
the net operating profit of manufacturing industry of Iran, thus in order to
maximize profitability and shareholders’ wealth it is strongly recommended to
reduce the cash conversion cycle time span, reduce the days receivables
outstanding, reduce the days payable outstanding and decreasing the inventory
holding volume.
61
Napompech (2012) inquired the impact and association among different
components of working capital and corporate operating profitability in Thailand
context. The scholar investigated the 225 trading companies of Thailand stock
exchange using ordinary least square regression model. The author studied seven
independent variables i.e. cash conversion period, accounts receivables, accounts
payables, inventory holding, debt ratio, size of business firm and fixed financial
assets ratio and gross operating profit as dependent variables. The author found a
positive impact of only size of the business firm on the gross operating profit
while all other variables were found negatively correlated to gross operating profit
of Thailand manufacturing industry. The author asserted that in Thailand all the
above variables are negatively correlated to gross profitability of firm thus to
boost the profit the period of inventory conversion, cash conversion, accounts
receivables, accounts payable must be reduced.
Karaduman et al. (2011) investigated the association among different
working capital components and financial performance of corporation in turkey
context. They analyzed communication companies listed at Istanbul stock
exchange and used their penal data through fixed effect regression model. They
inquired seven independent variables, such as inventory turnover, accounts
receivable, accounts payable, size of firm, and sale growth of company, debt ratio,
and cash conversion period. They used return on assets as proxy measure for
profitability of corporations. Their analysis revealed that there is a strong and
significant positive impact of size of firms and sale growth of company on
accounting measure return on assets of Turkish firms, while the debt ratio, cash
conversion period, size of firm, accounts payable, receivable and inventory
turnover has negative impact on communication firm of turkey. They further
asserted that Turkish companies can increase their profitability through increasing
the sale and expanding business while reducing the time to collect receivable
payable, cash conversion period and holding a short amount of inventory.
H5 the inventory turnover has significant impact on chemical and pharmaceutical
firm’s profitability
H6 the accounts payable turnover has significant impact on chemical and
pharmaceutical firm’s profitability
62
Abuzayed (2012) investigated the Jordon’s listed firms with the objective
to examine the relationship between working capital management and firm
profitability. The scholar applied fixed effect regression model on 93 listed
companies of Jordon’s stock exchange. The author investigated the 10
independent variables i.e. cash conversion, receivables, payables, inventory
holding, size, growth, GDP, fixed financial assets, leverage and variation in net
operating income and used gross operating income as proxy for profitability of
firms. The author found a positive association of all independent variable with
profitability of Jordon’s firms except the two variables cash conversion cycle and
variation in net operating income which has negative impact in Gross operating
profit of Jordon’s listed companies. The author further recommended that in order
to have good profit the listed firm should shorten the cash conversion cycle and
reduce the variation in net operating income while boosting all other variables
under study.
Harris, A. (2005) conducted the study on 30 listed Pakistani non-financial
firms to explore the relationship between working capital management and
corporate profitability of non-financial firms. In this respect, they proposed that
there was a negative relationship between firms' gross benefit and the number of
day's inventories, account payable and cash conversion cycle.
Following hypothesis may be incorporated on the basis of above discussion.
H7 Cash conversion cycle has significant impact on chemical and
pharmaceutical firm’s profitability
63
2.12 THEORETICAL FRAME WORK BASED ON LITERATURE REVIEW
WCM
H1
H2
H3 PROFITABILITY OF
FIRM
H4
H5
H6 H6 DEPENDANT
VARIABLES
H7
Independent Variables
Figure2.5: Theoretical Frame Work Based On Literature Review
QUICK RATIO
CURRENT RATIO
INVENTORY TURNOVER RATIO
ACCOUNTS REC TURNOVER
RATIO
ACC/PAY TURNOVER RATIO
ASSETS TURNOVER RATIO
CASH CONVERSION CYCLE
ROA
ROE
64
2.13 HYPOTHESES OF THE STUDY
On the basis of above literature, the following hypotheses have been developed
for the current study.
H1: Quick ratio has significant impact on chemical and pharmaceutical firm’s
profitability
H01 Quick ratio has no significant impact on chemical and pharmaceutical
firm’s profitability
H2 Assets turnover ratio has significantimpact on chemical and pharmaceutical
firm’s profitability
H02 Assets turnover ratio has no significantimpact on chemical and
pharmaceutical firm’s profitability
H3 Current ratio has significantimpact on chemical and pharmaceutical firm’s
profitability
H03 Current ratio has no significantimpact on chemical and pharmaceutical
firm’s profitability
H4 Account receivable turnover has impact on chemical and pharmaceutical
firm’s profitability
H04Account receivable turnover has significantimpact on chemical and
pharmaceutical firm’s profitability
H5 Inventory turnover has significant impact on chemical and pharmaceutical
firm’s profitability
H05 Inventory turnover has no significantimpact on chemical and
pharmaceutical firm’s profitability
H6 Accounts payable turnover has significant impact on chemical and
pharmaceutical firm’s profitability
H06 Accounts payable turnover has no significantimpact on chemical and
pharmaceutical firm’s profitability
H7 Cash conversion cycle has significant impact on chemical and
pharmaceutical firm’s profitability
H07 Cash conversion cycle has significant no impact on chemical and
pharmaceutical firm’s profitability.
65
The following sets of specific hypothesis are being tested for Pakistani and Indian chemical and pharmaceutical firms.
Hypothesis for Pakistani Firms (ROA as dependent Variable)
H01: There is no significant relationship between current ratio and ROA of Pakistani chemical and pharmaceutical firms
H1: There is a significant relationship between current ratio and ROA of Pakistani chemical and pharmaceutical firms
H02: There is no significant relationship between quick ratio and ROA of Pakistani chemical and pharmaceutical firms
H2: There is a significant relationship between quick ratio and ROA of Pakistani chemical and pharmaceutical firms
H03: There is no significant relationship between assets turnover ratio and ROA of Pakistani chemical and pharmaceutical firms
H3: There is a significant relationship between assets turnover ratio and ROA of Pakistani chemical and pharmaceutical firms
H04: There is no significant relationship between accounts receivable turnover ratio and ROA of Pakistani chemical and pharmaceutical firms
H4: There is a significant relationship between accounts receivable turnover ratio and ROA of Pakistani chemical and pharmaceutical firms
H05: There is no significant relationship between inventory turnover ratio and ROA of Pakistani chemical and pharmaceutical firms
H5: There is a significant relationship between inventory turnover ratio and ROA of Pakistani chemical and pharmaceutical firms
H06: There is no significant relationship between cash conversion cycle ratio and ROA of Pakistani chemical and pharmaceutical firms
H6: There is a significant relationship between cash conversion cycle ratio and ROA of Pakistani chemical and pharmaceutical firms
H07: There is no significant relationship between accounts payable turnover ratio and ROA of Pakistani chemical and pharmaceutical firms
H7: There is a significant relationship between accounts payable turnover ratio and ROA of Pakistani chemical and pharmaceutical firms
66
ROE as dependent Variable
H01: There is no significant relationship between current ratio and ROE of Pakistani chemical and pharmaceutical firms
H1: There is a significant relationship between current ratio and ROE of Pakistani chemical and pharmaceutical firms
H02: There is no significant relationship between quick ratio and ROE of Pakistani chemical and pharmaceutical firms
H2: There is a significant relationship between quick ratio and ROE of Pakistani chemical and pharmaceutical firms
H03: There is no significant relationship between assets turnover ratio and ROE of Pakistani chemical and pharmaceutical firms
H3: There is a significant relationship between assets turnover ratio and ROE of Pakistani chemical and pharmaceutical firms
H04: There is no significant relationship between accounts receivable turnover ratio and ROE of Pakistani chemical and pharmaceutical firms
H4: There is a significant relationship between accounts receivable turnover ratio and ROE of Pakistani chemical and pharmaceutical firms
H05: There is no significant relationship between inventory turnover ratio and ROE of Pakistani chemical and pharmaceutical firms
H5: There is a significant relationship between inventory turnover ratio and ROE of Pakistani chemical and pharmaceutical firms
H06: There is no significant relationship between cash conversion cycle ratio and ROE of Pakistani chemical and pharmaceutical firms
H6: There is a significant relationship between cash conversion cycle ratio and ROE of Pakistani chemical and pharmaceutical firms
H07: There is no significant relationship between accounts payable turnover ratio and ROE of Pakistani chemical and pharmaceutical firms
H7: There is a significant relationship between accounts payable turnover ratio and ROE of Pakistani chemical and pharmaceutical firms
67
Hypothesis for Indian Firms (ROA as dependent Variable)
H01: There is no significant relationship between current ratio and ROA of Indian chemical and pharmaceutical firms
H1: There is a significant relationship between current ratio and ROA of Indian chemical and pharmaceutical firms
H02: There is no significant relationship between quick ratio and ROA of Indian chemical and pharmaceutical firms
H2: There is a significant relationship between quick ratio and ROA of Indian chemical and pharmaceutical firms
H03: There is no significant relationship between accounts receivable turnover ratio and ROA of Indian chemical and pharmaceutical firms
H3: There is a significant relationship between accounts receivable turnover ratio and ROA of Indian chemical and pharmaceutical firms
H04: There is no significant relationship between inventory turnover ratio and ROA of Indian chemical and pharmaceutical firms
H4: There is a significant relationship between inventory turnover ratio and ROA of Indian chemical and pharmaceutical firms
H05: There is no significant relationship between cash conversion cycle ratio and ROA of Indian chemical and pharmaceutical firms
H5: There is a significant relationship between cash conversion cycle ratio and ROA of Indian chemical and pharmaceutical firms
H06: There is no significant relationship between accounts payable turnover ratio and ROA of Indian chemical and pharmaceutical firms
H6: There is a significant relationship between accounts payable turnover ratio and ROA of Indian chemical and pharmaceutical firms
ROE as dependent Variable
H01: There is no significant relationship between current ratio and ROE of Indian chemical and pharmaceutical firms
H1: There is a significant relationship between current ratio and ROE of Indian chemical and pharmaceutical firms
H02: There is no significant relationship between quick ratio and ROE of Indian chemical and pharmaceutical firms
H2: There is a significant relationship between quick ratio and ROE of Indian chemical and pharmaceutical firms
H03: There is no significant relationship between accounts receivable turnover ratio and ROE of Indian chemical and pharmaceutical firms
68
H3: There is a significant relationship between accounts receivable turnover ratio and ROE of Indian chemical and pharmaceutical firms
H04: There is no significant relationship between inventory turnover ratio and ROE
of Indian chemical and pharmaceutical firms
H4: There is a significant relationship between inventory turnover ratio and ROE of
Indian chemical and pharmaceutical firms
H05: There is no significant relationship between cash conversion cycle ratio and ROE of Indian chemical and pharmaceutical firms
H5: There is a significant relationship between cash conversion cycle ratio and ROE of Indian chemical and pharmaceutical firms
H06: There is no significant relationship between accounts payable turnover ratio and ROE of Indian chemical and pharmaceutical firms
H6: There is a significant relationship between accounts payable turnover ratio and ROE of Indian chemical and pharmaceutical firms
69
Chapter-3
RESEARCH METHODOLOGY
3.1 INTRODUCTION
The social sciences have two main theoretical perspectives: the positivist,
which seeks to get the facts and causes of social phenomena independently of the
subjective states of the subjects, second is the phenomenology, which seeks to
understand social phenomena from the views point of the authors. The positivist
paradigm, since the nineteenth century is based on quantitative and experimental
research, and influenced the use of the same methodology of the natural sciences
to the humanities and social sciences. On the other hand, the phenomenological
paradigm holds that, in the social sciences and humanities, it is impossible to
separate the thought of emotions, that subjectivity and values are valid and should
be reflected in the way research is conducted. Framework in a social world
presents permanent changes. These two epistemological approaches hold different
conceptions about the nature of knowledge and reality. On the one hand, the
traditional paradigm positivist, rationalist, empirical-analytic, objectivist,
quantitative and other hermeneutic, or interpretive naturalist, subjectivist,
qualitative. Morgan and Smircich (1980), to discuss the problem of epistemology
based on the two extreme paradigms, they maintained that there were different
global views that involved in different fields for knowledge about the social
world. An objectivist vision of the social world as a concrete structure encourages
an epistemological position that emphasizes the importance of studying the nature
of relations between the elements of that structure. On the other hand, the
subjectivist vision sees reality as a projection of the mind of human, whose focus
is to understand the process by which human beings embody their relationship
with their own world. Based on this perspective, each paradigm would have its
place in building knowledge of the humanities and social sciences. Based on these
paradigms, surveys can assume greater emphasis on quantitative or qualitative
approach. Stake (1995) points out three major differences shown in Table 3
below:
70
Table3.1: Differences between quantitative and qualitative method
Differences Quantitative approach Qualitative Approach
1) Search purpose
Explanation and control Search for the causes and effects. An important goal is generalization.
Cases are particularities treated as errors. The issues typically are the relationship between small numbers of variables.
Search for understanding relationships complex of all that is an important goal is to particularity and complexity case. The questions are geared toward a phenomenon, a case demand patterns of relationships.
2) Research paper
Impersonal Personal interpretation is limited
Folk’s Personal interpretation is fundamental research. Dense descriptions, understanding experimental and realities manifold.
3) Kind of knowledge Uncovered Built
According to Gill and Biger (2013)) study can be classified in three
different ways according to their objective: exploratory, descriptive and
explanatory. Exploratory research aims to provide more familiarity with the
research problem. The descriptive research aims to describe the characteristics of
a given population or phenomenon or establish relationships between variables.
Finally, the Explanatory research aims to identify the factors that determine or
contribute to the occurrence of phenomena. From the standpoint of technical
procedures, Gill and Biger (2013)) classifies types of research:
1. Bibliographic research, drawn from published material;
2. Information retrieval, constructed from material which has not received
analytical treatment;
3. Experimental research when determining an objective study, selects the
variables that would be able to influence it, defines the forms of control
and observation of the effects that the variable has on the goal;
4. Collection, made from the direct interrogation of persons;
5. Case study involves the investigation of one or a few learning objectives
in detail;
6. research ex-post
7. Action research, when the researcher and the research objective are
involved in a cooperative and participatory manner
8. Participatory research, when it develops from the interaction between
researchers and members of the investigated situations.
In this sense, this study is characterized as an embedded search in the
positivist paradigm, a quantitative approach with descriptive purpose, in exploring
the relationship between profitability and working capital and explanatory aim to
identify the factors that determine capital management spin.
Figure 3.1: Saunder Onion Research Diagra
.
71
Case study involves the investigation of one or a few learning objectives
post-fact, when the experiment is done after the fact;
Action research, when the researcher and the research objective are
ooperative and participatory manner
Participatory research, when it develops from the interaction between
researchers and members of the investigated situations.
In this sense, this study is characterized as an embedded search in the
a quantitative approach with descriptive purpose, in exploring
the relationship between profitability and working capital and explanatory aim to
identify the factors that determine capital management spin.
Figure 3.1: Saunder Onion Research Diagram is used to explain thoroughly
Research Design
Case study involves the investigation of one or a few learning objectives
fact, when the experiment is done after the fact;
Action research, when the researcher and the research objective are
Participatory research, when it develops from the interaction between
In this sense, this study is characterized as an embedded search in the
a quantitative approach with descriptive purpose, in exploring
the relationship between profitability and working capital and explanatory aim to
m is used to explain thoroughly
72
3.2 RESEARCH DESIGN
3.2.1 Research philosophy
This study is quantitative study. The study is directed towards the
philosophy of Positivism as per the saundar’s Onion diagram. Positivism is
quantitative in nature and is based on the notion that whatsoever is studied, can be
confirmed by the help of quantitative methods of research (Smith, 1998).
3.2.2 Research Approaches
Deductive and inductive approaches are used for the purpose of doing
research. In the deductive approach we derive some phenomenon from general to
specific. While in case of inductive approach, it is vice versa. In this study,
deductive approach of research is used. This work dissectsbond between the firm
working capital management with profitability. This study is descriptive and co-
relational in nature in sense as the study provides distributional proprieties of the
firm regarding profitability and working capital management. In real sense the
study establishes association/relationship and is an explanatory type of
investigation in which relationship is tested between the various elements of the
working capital management and firm profitability. In this context, the following
important facets are considered.
3.2.2.1 Population of the Study
For this study,the target market (population) is the Pharmaceutical and
Chemical Industry of Pakistan and India. The population consists of all those
listed pharmaceutical and chemical companies in Pakistan Stock Exchange of
Pakistan and BOMBAY stock Exchange of India which includes 86
pharmaceutical and chemical firms of Pakistan and 175 of India. Thus the results
of the study may be generalized to the pharmaceutical and chemical firms of both
countries. A pharmaceutical company is involved in a business of drugs and is
linked with the pharmaceutical industry. Pharma enterprises carry out research
and development, manufacturing and marketing of variety of medicines and drugs
to be used as a way of treatments for numeroussicknesses or syndromes. As the
73
drug companies develop and produce medicines with chemical process and
procedures the word pharmaceutical and chemical means the companies that
produce and sell medication. The pharmaceutical and chemical must not be
considered different industry for this study.
3.2.2.2 Sampling Technique and Sample of the Study
Random sampling is conducted in both of the countries pharmaceutical
and chemical industries. The support for the choice of random sampling can be
traced back to the hall mark work done by Saunder (2007) in his well-known book
“Research Methods for Business Students.” The sample of the study consists of 42
Pharmaceutical and chemical companies listed in Pakistan Stock Exchange, while
42 pharmaceutical and chemical companies listed in Bombay stock Exchange of
India. The data of 5 years from 2008 to 2012 of each company is collected from
their respective financial statements for Pakistani and Indian Sampled
Pharmaceutical and chemical companies. The 42 companies from both countries
have selected randomly, for 5 years which constitute 210 observations for
Pakistan and 210 observations for India collectively there are 420 observations for
analysis and these observations are quite enough for one study as Bryman and
Bell (1998) asserts that single study can be conducted with 100 observations to
generalize the result on the whole population.
3.2.3 Research Strategy
Research strategy provides mechanism for seeking goals of research, and
establishes way of achieving those goals or objectives. (Saunders et al., 2009).
In this study, secondary data has been used for research purpose. This
study is based on secondary data of Pakistani and Indian Pharmaceutical and
Chemical Industries. The data for this research is panel data as the data relates to
many pharmaceutical and chemical firms and various years from 2008 to 2012,
the data has been gathered from financial statements of all organizations being
part of the sample. The data has obtained from the financial statements of listed
companies at Pakistan Stock Exchange, BOMBAY stock Exchange and official
websites of the firms.
74
3.2.4 Time Horizons
Research study is a time consuming activity. Therefore, longitudinal study
was conducted as per saundar onion diagram. Since, this research is about the
panel Data, ranges from 2008 to 2012 (Saunders et al., 2009). The reason behind
the selection of this time period is to examine the possible effect of the financial
crises of 2008 and its post effects on the financial markets of both countries i.e.,
India and Pakistan. The financial catastrophe of 2007–2008, also familiars as
the international financial crisis and the 2008 financial crunch. Economists
acknowledge it to be the most severe financial problems since the Great
Depression of 1930’s. It is started with the onset of problem in the subprime
mortgage market in the United States, and evolved into a matured global banking
catastrophe with downfall various well known monetary organizations. A global
financial distress that began in 2008 can have substantial influence on authorities.
The financial downturn (mainly the 19997, Asian financial problems) have proven
that the influence on community’s fitness and wellbeing can be serious.
3.2.5 Techniques and Procedures
Collection of Data and analysis of Data is the last layer in the above
mentioned diagram. In this, researcher has to make certain that there is no
partiality in collection and interpretation of data. In this context, Data is analysed
as per the established theoretical framework. In interpretation of data, data is
analysed against the theoretical framework. Data obtained through Secondary
sources, is further processed for hypothesis testing.
3.2.5.1 Statistical Analysis Techniques
Secondary data can be analysed in different ways depending upon the nature of
research problem and the research question to address. As mentioned earlier, it’s
an explanatory research; therefore, its main focus is to find out the explanatory
relationship between working capital, its components and profitability of
pharmaceutical firms of Pakistani and Indian industries. Extensive literature in
this regard is available for the purpose of analysis between dependent and
independent variables. The appropriate techniques for the current study are
75
correlation, Descriptive statistics and panel data regression models. These are
discussed in the following sections.
3.2.5.1.1 Correlation Analysis
Correlation shows the degree of linear association between two variables.
Its value ranges from 0 to +1 and -1. The coefficient of 0 correlations suggests no
association between two variables, +1 shows perfect positive association while -1
represents perfect negative association between the two variables. Moreover, the
value of correlation may be less than 1 or more than 0.
The correlation analysis has been used to examine if there exist any
association among the independent and dependent variables of the study. The
correlation analysis serve two aims the correlation among different variable and
the direction of association. Besides, it is also the assumption of regression thus
after correlation analysis we can decide either we can run regression or not.
3.2.5.1.2 Panel Regression Model
There are different kinds of data, such as cross sectional data, time series
data and longitudinal or panel data. Cross sectional data refers to the data when
we are interested in finding out the analysis for one or more than one entities
across a single point of time. Time series data refers to the data which is collected
for more than one entity across different intervals of time. Panel data refers to the
data collected for similar entities across different intervals of time. It is to keep in
mind that every kind of data collected, requires a different procedure of analysis in
econometrics. The data used in this study is panel data; therefore we have applied
the procedure of panel data regression, which is as follow;
3.2.5.1.3 Pooled Regression Model
In this process, initially, pooled ordinary least square regression has been
performed to observe the relationship between the panel data variables. This can
make it easy to examine and concise the interpretation of the data. In panel data
regression the first step is to perform pooled regression model.
76
3.2.5.1.4 Fixed Effect Model
In the next phase fixed effect model has been used for analysis of panel data.
Fixed effect model is based on hypothesis that states that the error term across
units varies none randomly over time. If the error term varies none randomly
across different intervals of time, we say that fixed effect model is an appropriate
model for panel data regression.
3.2.5.1.5 Random Effect Model
In the 3rd stage in panel regression, random effect model has been performed
for panel data. Random effect model assumes that the error term across entities
over time is not fixed and shows a random behavior. It means that the error term
across entities is random over the period of time. If it is the case, the appropriate
model for the panel data is random effect model.
3.2.5.1.6 Chow Test
In the next phase of panel regression, chow test has been performed. Chow
test enables us to decide a better model between fixed effect model and pooled
regression model. In fact, it makes a comparison between the two approaches and
then suggests an appropriate model for the study. Chow test hold the hypothesis
that pooled regression model is an appropriate model for the study. It is tested on
the basis of p value. At 5 % level of significance, if the p value of the test is less
than 0.05, the null hypothesis is rejected and it is concluded fixed effect model is
an appropriate model of the study. If the p value of the test is greater than 0.05,
then we do not reject the null hypothesis and concluded that pooled regression in
an appropriate model for the study.
3.2.5.1.7Breusch Pagan (LM) Test
In the next stage in panel regression, a comparison between pooled
regression model and random effect model has been made with the help of
Breusch Pagan (LM) test. Here the decision criterion is once again the p value of
the test. This test holds the hypothesis that pooled regression is an appropriate
model for the data. If the p value of the test is less than 0.05, at 5% level of
77
significance, the null hypothesis is rejected and random effect model is the
suggested model for the study. If p value is greater than 0.05, we do not reject our
null hypothesis and pooled regression model is an appropriate model for the study.
3.2.5.1.8Hausman Test
In order to draw a comparison between random effect and fixed effect
models, hausmann test has been performed. Hausmann test hold the hypothesis
that random effect model is an appropriate model for the study. The decision
criteria is p value of the hausmann test. . Hausmann test hold the hypothesis that
random effect model is an appropriate model for the study. The decision criteria is
p value of the hausmann test. At 5 % level of significance, if the p value is less
than 0.05, we reject our null hypothesis and conclude that fixed effect model is an
appropriate model for the study. If the p value is greater than 0.05, we dont reject
our null hypothesis and conclude that random effect model is an appropriate
model for the study.
Teruel and Solano (2006) have used pooled regression model while testing
for the relationship between working capital on profitability. However,
Dermirgunes and Samiloglu (2008) and Mathuva (2010) supported panel data
analysis and suggested to test random vs. fixed effect. They supported fixed effect
model because fixed effect model can better explain the variations in firm
profitability with respect to working capital management.
3.3 RESEARCH MODEL
The current study is aimed to explore the relationship between working capital
management and profitability of pharmaceutical companies of Pakistani and
Indian firms. For this purpose, working capital has been taken as independent
variable while profitability of firms is considered as dependent variable. Working
capital is further measured through its well-known proxies i.e., current ratio, quick
ratio, asset turnover ratio, inventory turnover ratio, accounts receivable turnover
ratio, accounts payable turnover ratio and cash conversion cycle, while dependent
variable is measured through its two proxies i.e., return on assets (ROA) and
return on equity ( ROE). Both the models are given as follow;
78
ROA= β0+β1QRit+β2ASTTOit+ β3CRit +β4INVTRit+β5ARTRRit+ β6APTRDit +
β7CCCit+ai+uit
ROE = β0+β1QRit+β2ASTTOit+ β3CRit +β4INVTRit+β5ARTRRit+ β6APTRDit +
β7CCCit+ai+uit
Where
ROA [RETURN ON ASSETS (Dependent Variable)]
ROE [RETURN ON EQUITY (Dependent Variable)]
QR (Quick Ratio)
CR (Current ratio)
ATRD (Total assets turnover)
INVTRD (Inventory turnover)
ARECTRD (Accounts receivable turnover)
APTRD (Accounts payable turnover)
CCC (cash conversion cycle)
β0 refers to the constant term
βrefers to the coefficients
uit refers to the error term
3.4 OPERATIONALIZATION OF VARIABLES OF THE STUDY
The main variables used in this study are Current Ratio, Quick Ratio,
Assets Turnover Ratio, Inventory Turnover Ratio, Account Receivable Turnover,
Account Payable Turnover Ratio and Cash Conversion Cycle as independent
variables while, Return on total assets and Returns on equity used as a measure of
79
profitability. Literature based definition and support for the computation is given
below.
3.4.1 Returns on Total Assets
This ratio measures a company's earnings after tax against its total assets.
The ratio is deliberated as agauge of exactly how excellently a company is
exhausting its assets to create earnings afterprescribedcommitments must be paid.
The dependent variable profitability was measured in different ways by
researchers, Shin and Soenen (1998) adopted in their study operating income plus
depreciation, divided by total assets and total revenue. Lyroudi and Lazaridis
(2000) used three measures: return on investment, return on equity and net profit
margin. Deloof (2003) considered as profitability measure, the operating gross
profit calculated as sales cost divided by total investment in assets less financial
assets, to remove the effect of stakes in other companies. The dependent variable
profitability used in this study is operationalized by Returns on Assets, calculated
by Net income divided by total assets, and commensurate with the methodology
used by Lazaridis and Tryfonidis (2006) and Deloof (2003). The decision by this
measure of profitability is justified by the fact to explore the relationship of the
operational effect of working capital management in operating profitability and
Returns on Equity calculated by Net income divided by total equity
Return on Assets can be calculated by using the following formula:
��� =���������
�����������(Lazaridis and Tryfonidis, 2006)
Where:
ROA=Return on ASSETS
3.4.2 Return on Equity
It is the ratio which is obtained by dividing net income by owner equity.
This ratio tells about the equity contribution in net income of the business.
��� =���������
����������� (Lazaridis and Tryfonidis, 2006)
80
Where
ROE= Return on Equity
3.4.3 Inventory Turnover Ratio
Inventory turnover ratio is one of the parts of efficiency ratios. It analyses
the amount of times, on average; the inventory is disposed of throughout the
period. Its rationale is to determine the marketability of the stock. The higher is
the ratio the better it would be and will have encouraging impact on the firm
productivity (Raheman and Nasr 2007). The Inventory Turn Over is obtained by
pursuing the following formula.
������ =���������������
���������(Raheman and Nasr 2007).
Where:
INVTRD = Inventory Turnover Ratio
3.4.4 Current Ratio
This ratio is the part of liquidity ratios. It exhibits the position of a firm to
recompense its immediate commitments out of its liquid assets. The higher is the
ratio, the more liquid would be the firm but the least gainful it would be, as
liquidity is inversely related to that of the firm profitability. While the lower ratio,
would lead to higher level of profitability associated with high level of risk. Thus
there exists negative relationship between the current ratio and firm profitability
(Raheman and Nasr 2007 and Osisioma 1997). Formula for the calculation of this
ratio is given below.
������������ =�������������
������������������ (Raheman and Nasr 2007).
81
3.4.5 Quick Ratio
Quick Ratio measures the maneuver of a firm to recompense its instant
onuses out of its mainly quick assets. Quick Ratio provides an insight to the firms
in order to familiar with the capability of firms to reimburse its maturing current
debts out of its quick assets or not. In order to obtain quick assets, inventory is
eliminated from the current assets of the firm, as inventory is comparably less
liquid assets among parts of current assets. The higher amount of cash and
receivables may bring more liquidity in firm operations but lower the firm
profitability. However, lower ratio would lead to reduce the firm quick ratio and
increases the firm risk and profitability (Raheman and Nasr 2007 and Osisioma
1997). The following formula is followed for the calculation of this ratio.
���������� =�������������������������
������������������ (Osisioma, 1997)
3.4.6 Account Receivables Turnover Ratio
It elaborates the turnover of receivables throughoutperiod of accounting. It
expresses how swiftly the sale is converted in to receivables in one accounting
period. The higher is the ratio the higher would be the inventory conversion in to
sale and the higher would be the firm profitability. Thus there is positive
association of the receivables turnover ratio with firm profitability (Falope and
Ajilore 2009. This study is based on the number of days of the calculation setting
for each component presented by Shin and Soenen (1998). The number of days of
receivables is considered by dividing accounts receivable by sales.
This can be calculated as under:
������ =�����������������
����� (Falope and Ajilore, 2009)
Where:
ARECTR = Account Receivable Turnover Ratio
82
3.4.7 Account Payables Turnover Ratio
This is a measure of the turnover of payables throughout an accounting
period. It measures how rapidly the sale is converted in to cash and is paid off in
one accounting period. The higher is the ratio the higher would be the payables
and the lower would be the firm liquidity and higher would be the firm
profitability. Thus there is positive association of the payables turnover ratio with
firm profitability (Falope and Ajilore 2009). The Accounts Payable Turn Over is
obtained by dividing the balance of Accounts payables for sales by Inventory.
This can be calculated as under:
���� =��������������
��������� (Falope and Ajilore, 2009)
APTRD = Account Payables Turnover Ratio
3.4.8 Cash Conversion Cycle. (CCC)
This is the calculation of cash flow that is required to compute the time it
requires a firm to takes a company to transform its assets in merchandise and other
input of resources into cash. Lyroudi and Lazaridis (2000), along with Deloof
(2003), used the cash conversion cycle, measured by days of accounts receivable
plus inventory, less accounts payable, to measure management efficiency the
working capital in days. This study opted to use the concept of cash conversion
cycle (CCC), also called the cash conversion cycle, to measure the level of
working capital. This measure, traditionally known and used in many studies,
measures the period of time between the payment of procurements of raw
materials and the receipt of finished products sales and involves components that
are more related to the operating cycle, reflecting the process of purchasing,
production and sales (Lazaridis & Tryfonidis, 2006). It is calculated by the
number of days of accounts receivable plus the number of days of inventory
minus the number of days of accounts payable.
Cash Conversion Cycle =Days inventory outstanding+ Days sales outstanding-
Days payable outstanding.
83
3.4.9 Assets Turn Over
This ratio is used to know about the assets efficiency of generating sales.
This ratio is a measure through which company can assess that how much sales
has been generated by efficiently utilizing of Assets. This ratio is obtained through
the given formula.
�������������� =��������
����������� (Falope and Ajilore, 2009)
Table 3.1 Variables with Formulas
Variable Name Formulas
Return on Assets ROA =NETINCOME
TOTALASSETS
Return on Equity ROE =NETINCOME
TOTALEQUITY
Inventory turnover ratio INVTRD =COSTOFGOODSSOLD
INVENTORY
Current Ratio CurrentRatio =CurrentAssets
CurrentLiabilities
Quick Ratio QuickRatio =CurrentAssets − Inventories
CurrentLiabilities
Account receivable turnover ratio ARECTR =AccountReceivable
Sales
Account payable turnover ratio APTR =AccountPayable
Inventory
Cash Conversion Cycle Days inventory outstanding+ Days sales
outstanding- Days payable outstanding.
84
Figure 3.2: Cash Flow Timeline and operational activities in the short-term of a
typical industrial company
85
Chapter-4
ANALYSIS AND FINDINGS
This chapter provides first the analysis of Pakistani companies and then
the Indian firms have been analysed. The analysis is performed in the following
sequence.
Section 1 Analysis of Pakistani firms
Section 2 Analysis of Indian firms
Section 3 Comparative analysis
4.1 ANALYSIS OF PAKISTANI FIRMS ROA AS DEPENDENT VARIABLE
This section provides empirical analysis of 42 pharmaceutical and
chemical firms of Pakistan. The data for these companies have been gathered for 5
years, from 2008 to 2012. At first correlation analysis is carried out to analyse the
relationship among different independent variables under study and dependent
variable, after this a common effect regression and fixed effect model has been
applied and the result of both regressions have been interpreted and the
comparison to determine the most consistent of both has been made. Chow test
has been performed in order to select the best appropriate model between pooled
regression and fixed effect model. In addition, Brusch Pagan Lm test has been
performed in order to select the most appropriate model between pooled
regression and random effect model. Next a random effect model has been run and
the results of fixed effect and random effect have been compared through
Hausman test to check the most consistent model for this research. As there are
two dependent variables in model i.e. Returns on Asset (ROA) and Returns on
Equity (ROE) therefore the above step by step process has been run twice for two
dependent variables. In regression Wooldridge test for checking serial correlation
or auto correlation has also been carried out. The Heteroscedasticity test is carried
out in order to confirm whether the Data is valid for further analysis or not.
Similarly, VIF test has been performed for the detection of multi co linearity. In
86
addition, the augmented Dicky fuller test for the unit root has been performed for
the stationarity of data.
The same approach is again repeated for the analysis of Indian firms, and
at the end, the comparison of Pakistan and Indian firms have been made. In order
to know the statistically significant difference among the management of quick
ratio, current ration, assets turnover ratio, account receivable turnover ratio,
account payable turnover ratio, inventory turnover ratio and cash conversion cycle
of Pakistan and Indian pharmaceutical firms, T test for each individual variable is
also conducted.
Table 4.1 Augmented Dicky Fuller Unit root test (Pak)
Variable Critical Value P value at 5%
ROA -2.883 0.000
ROE -2.876 0.000
CR -2884 0.000
QR -2.885 0.000
INTR -2.845 0.000
ARCTR -2.799 0.000
APTR -2.883 0.000
ATR -2885 0.000
CCC -2.883 0.000
The above table 4.1 shows the output from Augmented Dicky fuller unit
test for the stationarity of data in the variables. The ADF basically test the
hypothesis that there are unit roots in data and the data is not stationary at level.
From stationarity of data we mean that a data which gives the same and constant
inter temporal structure. In simple words, a data is said to be stationary if its low
order statistics such as mean value, standard deviation, and higher order statistics
such as kurtosis and skewness are independent of the time and give uniform
pattern across the time. If data is not stationary at level, it is quite possible that it
will become stationary at higher levels i.e., lag1, lag2 and so on. If it is the case,
ordinary least square cannot be applied on such kind of time series data. The table
87
shows the critical values with the p values of every variable. In the first row ROA
is shown with its critical value of -2.833 and significant value of 0.000. In the next
row we have a critical value of -2.876 and P value of 0.000 for ROE. In addition,
CR has a critical value of -2.884 and p value of 0.000. Similarly, the critical value
of QR is slightly different than the value of CR i.e., -2.885 with the same p value.
In the same way, INVTR, ARCTR, APTR, ATR and CCC have critical values of -
2.845, -2.779, -2.883, -2.885 and -2.883 respectively. All these variables have p
values equal to 0.000. So we reject our null hypothesis and determined that our
data is free of unit roots and it is stationary at level.
Table 4.2 Summary statistics
variables observations Mean Std. Deviation Minimum Maximum
ROA 210 1.263126 .0419502 1.19511 1.34021 ROE 210 1.448015 .0229337 1.41132 1.49912
CR 210 4.411667 .0800094 4.33 4.63 QR 210 2. 55719 .259912 2.02 2.97
APTRE 210 3.306238 .0695414 3.13 3.39 ARECTR 210 3.815238 .2780868 3.19 3.99
INVTR 210 4.581095 .2794719 4.18 4.89 ATR 210 2.451095 .2164154 2.13 2.83
CCC 210 5.044905 .1313866 4.75 5.19
4.2 DESCRIPTIVE
The above table (4.2) shows the description of data with some very
important information and statistics. Descriptive statistics is one of those
techniques which help us to study the nature and structure of data. Descriptive
enables us to study the behaviour and natural pattern of data. It is widely used for
the preliminary analysis in quantitative research studies. One of the main
advantages of the descriptive statistics is that it gives us a very quick and short
look of the data for the presence of any kind of outliers. Descriptive enables us to
“feel the data.” Looking at the above table (4.2) the mean value for ROA is 1.26,
pcr 4.41, pqr 2.55 paptrd 3.30 parectrd 3.81, pinvtrd 4.58, patrd 2.45 and pccc
5.044. All these values lie in the same acceptable range and there is no probability
of the presence of outliers in our data. The same can be confirmed from the
minimum and maximum values for all these variables. The minimum value for
88
ROA is 1.195 while its maximum value is 1.340. Similarly, pcr has minimum
value 4.33 and maximum value 4.63. All these values confirm that range of our
data is normal and no outliers are present in our data. Similarly, the descriptive
statistics for ROE of Pakistani firms is given. For instance, the mean value is 1.44,
the standard deviation is 0.022 while minimum value is 1.41 and maximum value
is 1.49.
Table 4.3 Correlation Matrix
VARIABLELES ROA QR ATR CR ARECTR INVTR APTR CCC
ROA 1.0000
QR 0.4039 1.0000
ATR 0.0453 0.1124 1.0000
CR -0.1855 -0.1141 -0.0280 1.0000
RECTR 0.3076 0.2447 0.0929 0.5902 1.0000
INVTR 0.1405 0.0460 -0.0264 -0.4029 0.5044 1.0000
APTR -0.4105 -0.0632 0.0464 0.2098 -0.2782 -0.0175 1.0000
CCC 0.1815 -0.1960 0.0680 -0.0280 -0.2450 -0.1615 0.1431 1.0000
4.3 CORRELATION
The above table of correlation matrix reveals the relationship of dependent
variable returns on assets ROA and the explanatory variables i.e. Quick Ratio,
Assets Turnover Ratio, and Current Ratio, Accounts receivable Turnover,
Inventory Turnover, Accounts payable Turnover and Cash Conversion Cycle.
The matrix indicates that the correlation between quick ratio and return on
assets is 0.4039, which proclaims that there exists a strong positive association
between the two stated variables. Further variables Quick Ratio, Assets Turnover
Ratio, Current Ratio, Accounts receivable Turnover, Inventory Turnover,
Accounts payable Turnover and Cash Conversion Cycle have correlation values of
0.0453, -0.1855, 0.3076, 0.1405, -0.4105 and 0.1815 respectively. We can
conclude that those variables which have correlation coefficient equal to or above
89
the value of 0.30 have moderate correlation between them, while variables above
the coefficient value of 0.50 are considered to be strongly related with each other.
Similarly, variables having negative correlation coefficient signs are inversely
related with each other and coefficient with positive signs are directly related with
each other. In the same line, a positive sign will indicate that upsurge in one
variable will also escalate the other variable by the corresponding amount.
90
Table 4.4 Common Effect Model
ROA CO-EF S.ERR T P>|T|
QR .0673844 .0087602 7.69 0.000
ATR -.0041884 .0101991 -0.41 0.682
CR .0680055 .0350117 1.94 0.053
ARECTR .0306908 .0112924 2.72 0.007
INVTR .0191149 .0092992 2.06 0.041
APTR -.246352 .0331469 -7.43 0.000
CCC .1268252 .01786 7.10 0.000
CONS .7710778 .2432641 3.17 0.002
R-SQ = 0.463 Adj R-SQ = 0.4452F value = 24.96 Prob> F =0.0000
4.4 COMMON EFFECT MODEL
The common effect model above reveals the F value of 24.96 indicating
that model is good fit, as its value is above 4. Thus it is concluded that variables
under study are quite relevant to the dependent variables ROA and ROE of the
pharmaceutical and chemical firms of Pakistani industry, Prob> F =0.0000 which
is far below 0.10 and support the above statement. The R-SQ value of model is
0.4638 asserting that 46.38 % change in ROA is due to the QR, ASTR, CR,
ARECTR, APTR, INVTR and CCC. If these variables change by 1 %, these cause
ROA to change by 46 %. The coefficients column shows the coefficients of each
individual variable. The QR, ATR, CR, ARECTR, INVTR, APTR and CCC have
coefficient value of 0.067, -0.004, 0.068, 0.030, 0.019, -0.246, 0.126 and 0.771
respectively asserting that 1 % change in these variable will cause the
corresponding change in ROA of these firms.
The T column shows the T-value of all variables, the T-value of QR in
7.69 that shows a very high and significant Positive impact of QR on the ROA.
This result supports the first hypothesis of the study which is quick ratio has
impact on firm profitability, while discard the null hypothesis that is quick ratio
has no impact on firm profitability, prob> p value is 0.000 asserting that the
impact of QR on ROA is quite significant.
91
The ATR has the T-value of -0.41 indicating that the assets turnover has
negative impact on ROA but it is not significant as its value is below 1.96 which
is the acceptance regime for the impact to be considered as significant, thus the
results supports the null hypothesis that the assets turnover has no impact on
profitability. The CR has T-value of 1.94 revealing a strong and significant
positive impact of current ratio on ROA of Pakistan pharmaceutical and chemical
firms’ profitability, the t-value 1.94 of course is not as strong as the quick ratio
and remained insignificant at 5 % level of significance. Therefore, it also supports
the null hypothesis that there is no significant impact of current ratio on
profitability. Looking at the p value for Cr from the above table which is 0.053,
slightly above the acceptable range of p value i.e., 0.05, hence confirmed that
there is no significant bond between Cr and ROA of Pakistani pharmaceutical and
chemical firms.
The account receivable turnover ratio has T-value of 2.72 indicating a
strong and significant positive impact of ARECTR on ROA of Pakistan
pharmaceutical firms. The corresponding p value is 0.007 again designates a
significant impact of ARECTR on ROA of pharmaceutical and chemical firms.
These values, T-value and prob> p value support the fourth hypothesis H4: the
accounts receivable turnover hassubstantialbearing on the ROA of pharmaceutical
firms. Inventory turnover got the T-value of 2.06 and prob> p value of 0.041again
shows the strong and significant positive impact of INVTR on the ROA of
pharmaceutical firms as the T-value is larger than 1.96 and p-value is less than
0.05. Both these values support the fifth hypothesis H5: the inventory turnover has
significant impact on ROA of pharmaceutical firms while do not accept the null
hypothesis
Accounts payable turnover has the T-value of -7.43 and prob> p value
0.000 asserting that accounts payable turnover has very significant negative
impact on ROA of pharmaceutical firms, the p-value is also strongly significant,
these result support the sixth hypothesis H6: the Accounts payable turnover has
noteworthyinfluence on the ROA of pharmaceutical firms .The cash conversion
cycle has T-value of 7.10 and p-value of 0.000 presenting a very strong and
vibrant positive impact on ROA of pharmaceutical firms’ financial performance.
92
Both of these results are very significant, supporting the seventh hypothesis H7:
cash conversion cycle has impact on ROA of Pakistani pharmaceutical and
chemical organization’s profitability.
Table 4.5 Fixed-Effects Model
ROA CO-EF S.ERR T P>|T|
QR .0689359 .0089563 7.70 0.000
ATR -.0043104 .0104096 -0.41 0.679
CR .0679395 .0352222 1.93 0.055
ARECTR .0299245 .0114092 2.62 0.009
INVTR .0191947 .009394 2.04 0.042
APTR -.2422558 .0334635 -7.24 0.000
CCC .1277891 .0179856 7.11 0.000
_CONS .7518521 .2446921 3.07 0.002
R-sq: = 0.4651 F= 24.60 p= 0.000
4.5 FIXED-EFFECT MODEL
The fixed-effect model above shows the R-sq value of 0.4651 which
means the model is very good fit and explains the 46 % change in dependent
variable ROA, it reveals that 46.51% change in ROA of pharmaceutical and
chemical firms of Pakistan are due to the specific variables under study. The F-
value is 24.60 which is also very significant and showing the model fitness is very
good. The p value is 0.000 the third measure confirming the good model fitness as
its value is very significant.
The coefficients of QR, ASTR, CR, ARECTR, APTR, INVTR and CCC are
0.068, -0.004, 0.067, 0.029, 0.019, 0.242 and 0.127 respectively. All these
coefficients values represent almost the same result as CEM model asserted in the
above section
93
Table 4.6 Chow Test for ROA (Pak)
Variable Chi2 Value Probability of Chi2
ROA 174.72 0.000
4.6 CHOW TEST
The above table (4.6) is an out from the chow test, performed for the
comparison between pooled regression and fixed effect model. The chow test
holds the hypothesis that, pooled regression is an appropriate model for the data.
In order to reject this hypothesis, we need to have p value less than 0.05 at 5 %
level of significance. Looking at the above table, the chi2 value is much higher
than the required value (4.00) with a p value of 0.000 hence indicating highly
significant results. So it is concluded, based on the above test that fixed effect
model is a suitable model as compare to pooled regression.
Table 4.7 Bruesch Pagan Test for ROA (Pak)
Variable Chi2 Value Probability of Chi2
ROA 6.32 0.040
4.7 BRUESCH PAGAN TEST
Bruesch pagan test serve the purpose of choosing an appropriate model for
the study between pooled regression and random effect model. Looking at the
above table (4.7), the chi2 value for the test is 6.32 having a p value of 0.040,
hence it is derived that, random effect model is an apt model for the study.
94
Table 4.8 Random-Effects Model
ROA CO-EF S.ERR Z P>|Z|
QR .0673844 .0087602 7.69 0.000
ATR -.0041884 .0101991 -0.41 0.681
CR .0680055 .0350117 1.94 0.052
ARECTR .0306908 .0112924 2.72 0.007
INVTR .0191149 .0092992 2.06 0.040
APTR -.246352 .0331469 -7.43 0.000
CCC .1268252 .01786 7.10 0.000
CONS .7710778 .2432641 3.17 0.002
R2 = 0.4650 F= 25.45 P= 0.000
4.8 RANDOM-EFFECT MODEL
The random-effect model above has the same result as CEM model. The
R-sq value is .4650, and p value is 0.000, these values indicate good model fitness
with independent variables in model explaining 46% change in ROA of
pharmaceutical and chemical firms of organizations. The coefficients value and
contribution of independent variables are the same as discussed in CEM, the T
values and P value are also the same as in CEM.
Table 4.9 TheHausmantest
Test chi2 Prob>chi2
Hausman 1.49 0.9826
4.9 HAUSMAN TEST
The Hausman test has been used to examine either the fixed effect model
is consistent or random effect model. The Hausman test produced the prob> p
value of 0.9826 that is not noteworthy because it is above 0.05 the minimum value
of p to be significant. And according to Hausman if the p value is not significant
then it will be concluded that random effect model is more consistent and efficient
for this particular research. According to Greene (2007) if the chi2value of
95
Hausman test is significant then fixed effect model will be consistent and random
will not be consistent, ifchi2 is insignificant then both fixed and random effect will
be consistent but the random effect will be efficient as well thus random effect
must be preferred and yet the test above reveals the insignificant value of
chi2asserting that both fixed and random effect are consistent but the random
effect is efficient. In this waywe preferred the random effect for the study.
4.10 ROE AS A DEPENDENT VARIABLE
TABLE 4.10 CORRELATION ANALYSIS
ROE QR ATR CR ARECTR INVTR APTR CCC
ROE 1.0000
QR 0.3239 1.0000
ATR 0.0832 0.1124 1.0000
CR -0.1401 -0.1141 -0.0280 1.0000
ARECTR 0.1920 0.2447 0.0929 -0.5902 1.0000
INVTR 0.1451 0.0460 -0.0264 -0.4029 0.5044 1.0000
APTR -0.0830 -0.0632 0.0464 0.2098 -0.2782 -0.0175 1.0000
CCC 0.2874 -0.1960 0.0680 -0.0280 -0.2450 -0.1615 0.1431 1.0000
96
The above table of correlation matrix reveals the relationship of dependent
variable returns on assets ROE and the explanatory variables i.e. Quick Ratio,
Assets Turnover Ratio, Current Ratio, Accounts receivable Turnover, Inventory
Turnover, Accounts payable Turnover and Cash Conversion Cycle.
The matrix indicates that the correlation between quick ratio and returns
on equity is 0.3239, which proclaims that there exists a positive association
between the two stated variables further variables, Assets Turnover Ratio, Current
Ratio, Accounts receivable Turnover, Inventory Turnover, Accounts payable
Turnover and Cash Conversion Cycle have correlation values of 0.0832, -0.1401,
0.1920, 0.1451, -0.0830, and 0.2874 respectively. We can conclude that those
variables which have correlation coefficient equal to or above the value of 0.30
have moderate correlation between them, while variables above the coefficient
value of 0.50 are considered to be strongly related with each other. Similarly,
variables having negative correlation coefficient signs are inversely related with
each other and coefficient with positive signs are directly related with each other.
A negative correlation sign specifies that augmentation in one variable will be
lessening the other with the same amount. In the same line, a positive sign will
indicate that surge in one variable will also augment the other variable by the
corresponding amount.
Table 4.11 Common Effect Model
ROE CO-EF S.ERR T P>|T|
QR .0324288 .0054967 5.90 0.000
ATR .0009036 .0063995 0.14 0.888
CR .0255251 .0219685 1.16 0.247
ARECTR .0129289 .0070855 1.82 0.070
INVTR .0126687 .0058349 2.17 0.031
APTR -.0314167 .0207984 -1.51 0.132
CCC .0765005 .0112064 6.83 0.000
_CONS .860835 .1526387 5.64 0.000
R-SQ = 0.2936Adj R-SQ = 0.2692 F= 12 p= 0.000
97
4.11 COMMON EFFECT MODEL
The common effect model above reveals the F value of 12 indicating that
model is good fit, as its value is above 4. Thus it is concluded that variables under
study are quit relevant to the dependent variable ROE of the pharmaceutical and
chemical firms of Pakistan industry, Prob> F =0.0000 which far below 0.10
support the above statement. The R-SQ value of model is 0.2936 asserting that 29
% change in ROE is due to the QR, ASTR, CR, ARECTR, APTR, INVTR and
CCC. If these variables changes by 1 %, it causes ROE to change by 29 %. The
coefficients column shows the coefficients of each individual variable. The QR,
ATR, CR, ARECTR, INVTR, APTR and CCC have coefficient value of 0.0324,
0.0009, 0.025, 0.012, 0.012, -0.031, and 0.076 respectively asserting that 1 %
change in these variables will cause the corresponding change in ROE of these
firms.
The T column shows the T-value of all variables, the T-value of QR is
5.90 that show a very high and significant Positive impact of QR on the ROE.
This result supports the first hypothesis of the study which is that quick ratio has
significant impact on firm profitability while reject the null hypothesis that is
quick ratio has nosignificant impact on firm profitability. The result of t value is
further confirmed with the probability i.e., p value for QR is 0.021 asserting that
the impact of QR on ROE is quite significant.
The ATR has the T-value of 0.14, indicating that the assets turnover has no
significant impact on ROE as its value is below 1.96 which is the acceptance
regime for the impact to be considered as significant, thus the results supports the
Null hypothesis Ho: that assets turnover has no significant impact on firm
profitability and rejects the alternative H2. The CR has T-value of 1.16, revealing
a positive impact of current ratio on ROE of Pakistani pharmaceutical and
chemical firms’ profitability, the t-value is 1.16 which is of course not as strong as
the quick ratio. As the t value is less than 1.96, so we don’t reject our null
hypothesis for Cr and conclude that Cr has no significant impact on ROE. The
confirmation for the acceptance of null hypothesis is made with the probability of
consistency of coefficients, which is above the acceptable value of 0.05.
98
The account receivable turnover ratio has T-value of 1.82, indicating a
strong and positive impact of ARECTR on ROE of Pakistani pharmaceutical
firms, the corresponding value for the probability is 0.070 again designates
aninsignificant impact of ARECTR on ROE of pharmaceutical and chemical firms
at 5% level of significance. These values are significant only on 7 % and above,
but these are not the widely followed measures for the level of significance. On
the basis of these values i.e., t and p, we don’t reject our null hypothesis and
concluded that there is no significant impact of ARECTR on ROE.
Inventory turnover got the T-value of 2.17 and prob> p value of 0.031
showing the strong and significant positive impact of INVTR on the ROE of
pharmaceutical firms as the T-value is greater than 1.96 and p-value is less than
0.05. Both these values support the fifth hypothesis H5: the inventory turnover has
significant impact on ROE of pharmaceutical firms while rejecting the null
hypothesis Ho: the inventory turnover has no significant impact on ROE of
pharmaceutical firms. Accounts payable turnover has the T-value of -1.51 and p
value 0.132 asserting that accounts payable turnover has negative but not
significant impact on ROE of pharmaceutical firms as the T-value is less than
1.96, the p-value is also not significant, hence we conclude that APTR have no
significant impact on ROE. The cash conversion cycle has T-value of 6.83 and p-
value of 0.000 showing a very strong and significant positive impact on ROE of
pharmaceutical firm’s financial performance. Both of these results are highly
significant, supporting the seventh hypothesis H7: cash conversion cycle has
significant impact on ROE of Pakistani pharmaceutical and chemical
organizations’ profitability while rejecting the null hypothesis Ho: the cash
conversion cycle has no significant impact on ROE of pharmaceutical and
chemical firms.
Table 4.12 Fixed-Effects Model
ROE CO-EF S.ERR T P>|T|
QR .0329545 .0056257 5.86 0.000
ATR .0007941 .0065385 0.12 0.903
CR .0249845 .0221239 1.13 0.260
99
ARECTR .012657 .0071664 1.77 0.079
INVTR .0128239 .0059006 2.17 0.031
APTR -.0287167 .0210192 -1.37 0.173
CCC .0769185 .0112972 6.81 0.000
_cons .8514351 .1536967 5.54 0.000
R2= 0.2959 F= 11.89 p= 0.000
4.12 FIXED-EFFECT MODEL
The fixed-effect model above shows the R-sq value of 0.2959, which
means the model is very good fit and explains the 29% change in dependent
variable ROE, it reveals that 29% change in ROE of pharmaceutical and chemical
firms of Pakistan are due to the specific variables under study. The F-value is
11.89 which are also very significant and showing the model fitness is very good.
The p value is 0.000 the third measure, confirming the good model fitness as its
value is very significant.
The coefficients of QR, ATR, CR, ARECTR, APTR, INVTR and CCC are
0.032, 0.000, 0.024, 0.012, 0.012, -0.028 and 0.76 respectively. All these
coefficients values represent almost the same result as CEM model asserted in the
above section, thus it is concluded that both CEM and FEM reported same results.
Table 4.13 Chow test for ROE
Variable Chi2 Probability of Chi2
ROE 174 0.000
4.13 CHOW TEST FOR ROE
The above table (4.13) is an out from the chow test, performed for the
comparison between pooled regression and fixed effect model. The chow test
holds the hypothesis that, pooled regression is an appropriate model for the data.
In order to reject this hypothesis, we need to have p value less than 0.05 at 5 %
level of significance. Looking at the above table, the chi2 value is much higher
than the required value (4.00) with a p value of 0.000 hence demonstratinghighly
100
significant results. So it is concluded based on the above test that fixed effect
model is an appropriate model as compare to pooled regression.
Table 4.14 Bruech Pagon Test for ROE (Pak)
Variable Chi2 Probability of Chi2
ROE 5.41 0.034
Bruesch pagan test serve the purpose of choosing an appropriate model for
the study between pooled regression and random effect model. Looking at the
above table (4.14), the chi2 value for the test is 5.41 having a p value of 0.034,
hence it is established that, random effect model is an applicable model for the
study.
Table 4.15 Random-Effects Model
ROE CO-EF S.ERR Z P>|Z|
QR .0324288 .0054967 5.90 0.000
ATR .0009036 .0063995 0.14 0.888
CR .0255251 .0219685 1.16 0.245
ARECTR .0129289 .0070855 1.82 0.068
INVTR .0126687 .0058349 2.17 0.030
APTR -.0314167 .0207984 -1.51 0.131
CCC .0765005 .0112064 6.83 0.000
_CONS .860835 .1526387 5.64 0.000
R2 = 0.2958wald chi2 = 83.97 p value = 0.000
4.15 RANDOM EFFECT MODEL
The random-effect model above has the same result as CEM model. The R-sq
value is 0.2958, the waldchi2 is 83.97 and p value is 0.000, these values indicate
good model fitness with independent variables in model, explaining 29.58%
change in ROE of pharmaceutical and chemical firms of organizations. The
coefficients value and contribution of independent variables are the same as
discussed in CEM, the T values and P value are also the same as in CEM.
101
Table 4.16 Hausmantest
Test chi2 Prob>chi2
Hausman 1.02 0.9945
4.16 HAUSMANTEST
The Hausman test has been used to examine either the fixed effect model
is consistent or random effect model. The Hausman test produced the prob> p
value of 0.9945that is not significant because it is above 0.05, the minimum value
of p to be significant. According to Hausman, if the p value is not significant then
it will be concluded that random effect model is more consistent and efficient for
this particular research. According to Greene 2007 if the chi2value of Hausman
test is significant then fixed effect model will be consistent and random will not
be in consistent, ifchi2is insignificant then both fixed and random effect will be
consistent but the random effect will be efficient, thus random effect must be
preferred and yet the test above reveals the insignificant value of chi2 asserting
that both fixed and random effect are consistent but the random effect is efficient
thus we preferred the random effect model for our study.
4.17 REGRESSION DIAGNOSTICS TESTS
Table 4.17 Testing For Serial Correlation
F( 1,6) 0.214
Prob> F 0.6603
The Wooldridge test has been performed for the detection of any kind of
serial correlation between the values. The result shown in the table above (4.17)
indicates p value of 0.6603 which asserts that there is no serial correlation and the
data is well adequate for further analysis.
Table 4.18 Heteroskedasticity tests (Pak)
chi2 0.81
Prob> chi2 0.3681
102
The Heteroscedasticity test has been performed in order to check for the
problem of unequal variance shown by the residual value. The above table (4.18)
reveals that the probability of presence of heteroscedasticity is 0.3681 which is far
above the critical value of 0.05, hence it is concluded that our data is free from the
problem of heteroscedasticity.
Table 4.19 Test for Multi co linearity
variables VIF 1/VIF ARECTR 2.11 0.473718 CR 1.68 0.595312 INVTR 1.45 0.691656 CCC 1.18 0.848376 APTR 1.14 0.879182 QR 1.11 0.901107 ATR 1.04 0.958863 Mean VIF 1.39
One of the major assumptions of CLRM is that the data must be free from
the co linearity problem among explanatory variables. It means that when two or
more regressors are in a very strong linear relationship, it leads to the problem of
multi co linearity. The presence of multi co linearity has very adverse effects on
the magnitude and signs of coefficients. It means that if the two variables are in
strong co linear relationship with each other, their individual or combine effect on
dependent variable will be affected adversely. Therefore, the signs of coefficients
may be misleading. The remedy for the presence of multi co linearity is to drop
the problematic variable and then check for the effects.
Looking at the above table (4.19) we can safely say that all our regressors
have VIF values less than 10, hence there is no problem of multi collinearity in
our data and we are sure that the signs and magnitudes of our coefficients are
consistent. Another measure for the detection of multi co linearity in the above
table is the tolerance level of each independent variable. Tolerance level is the
inverse of the VIF value. The threshold tolerance value for an independent
variable is 0.10. It means that if the tolerance value for a variable is less than 0.10,
we would say that there exist, the problem of multi co linearity in that variable.
103
Looking at the above table (4.19), the tolerance values can be located in the last
column of the table. All these values are much higher than the required value
(0.10), hence it is concluded that there is no problem of multi co linearity in our
data.
104
SECTION 2
4.4 ANALYSIS OF INDIAN FIRMS ROA AS DEPENDENT VARIABLE
Table 4.20 Descriptive Statistics (Indian)
variables observations Mean Std. Deviation
Minimum Maximum
ROA 210 1.374594 .0427427 1.256232 1.45221 ROE 210 1.781015 .0229337 1.74432 1.83212 CR 210 2.251571 .0218719 2.22 2.29 QR 210 2.38181 .0729526 2.26 2.47 CCC 210 3.184381 .0660567 3.11 3.33 APTR 210 4.279571 .0661903 4.18 4.41 INVTR 210 5.25181 .0640093 5.12 5.37 ARECTR 210 5.374905 .1313866 5.08 5.52
The above table (4.20) shows the description of data with some very
important information and statistics. Descriptive statistics is one of those
techniques which help us to study the nature and structure of data. Descriptive
enables us to study the behavior and natural pattern of data. It is widely used for
the preliminary analysis in quantitative research studies. One of the main
advantages of the descriptive statistics is that it gives us a very quick and short
look of the data for the presence of any kind of outliers. Looking at the above
table (4.20) the mean value for IROA is 1.37, cr 2.20, qr 2.38 aptrd 4.27 arectrd
5.37, iinvtrd 5.25, atrd 4.27 and iccc 5.37. All these values lie in the same
acceptable range and there is no probability of the presence of outliers in our data.
The same can be confirmed from the minimum and maximum values for all these
variables. The minimum value for ROA is 1.25 while its maximum value is 1.450.
Similarly, IROE has minimum value 1.74 and maximum value 1.83. All these
values confirm that range of our data is normal and no outliers are present in our
data.
105
Table 4.21 Augmented Dicky fuller Unit root test (Indian)
Variable Critical Value Probability at 5%
ROA -2.833 0.000
ROE -2.789 0.000
CR -2.823 0.000
QR -2.799 0.000
ARCTD -2.833 0.000
APTD -2.842 0.000
INVTRD -2.890 0.000
CCC -2.833 0.000
The above table 4.21 shows the output from Augmented Dicky fuller unit
test for the stationarity of data in the variables of Indian Pharmaceutical firms. The
ADF basically test the hypothesis that there are unit roots in data and the data is
not stationary at level. From stationarity of data we mean that a data which gives
the same and constant inter temporal structure. In simple words, a data is said to
be stationary if its low order statistics such as mean value, standard deviation, and
higher order statistics such as kurtosis and skewness are independent of the time
and give uniform pattern across the time. If data is not stationary at level, it is
quite possible that it will become stationary at higher levels i.e., lag1, lag2 and so
on. If it is the case, ordinary least square cannot be applied on such kind of time
series data. The table shows the critical values with the p values of every variable.
In the first row ROA is shown with its critical value of -2.833 and significant
value of 0.000. In the next row we have a critical value of -2.789 and P value of
0.000 for ROE. In addition, CR has a critical value of -2.82 and p value of 0.000.
Similarly, the critical value of QR is slightly different than the value of CR i.e., -
2.79 with the same p value. In the same way, INVTR, ARCTR, APTR, and CCC
have critical values of -2.895, -2.83, -2.843, -2.885 and -2.833 respectively. All
these variables have p values equal to 0.000. So we reject our null hypothesis and
conclude that our data is free of unit roots and it is stationary at level.
106
Table 4.22 Correlation Table (Indian)
VARIABLES ROA ROE CR QR CCC APTR INVTR ARECTR
ROA 1.0000
ROE 0.8906 1.0000
CR 0.2477 0.2259 1.0000
QR 0.7803 0.6208 0.3691 1.0000
CCC -0.7959 -0.6782 -0.5741 -0.7651 1.0000
APTR -0.8632 -0.8525 -0.2236 -0.5868 0.7239 1.0000
INVTR -0.5216 -0.3515 -0.1172 -0.4719 0.5232 0.7298 1.0000
ARECTR 0.2062 0.2874 -0.0921 -0.0239 0.0203 -0.1130 0.1689 1.0000
The above table (4.22) of correlation matrix reveals the relationship of
dependent variable returns on assets ROA and the explanatory variables i.e. Quick
Ratio, Current Ratio, Accounts receivable Turnover, Inventory Turnover,
Accounts payable Turnover and Cash Conversion Cycle. The matrix indicates that
the correlation between quick ratio and returns on assets is 0.7803 which
proclaims that there exists a strong positive association between the two stated
variables as its correlation value is far above the 0.05 which is the acceptance
point of correlation.
Further variables, Inventory Turnover (-0.52) Accounts receivable
Turnover (0.20), Accounts payable Turnover (-0.86), Current Ratio (0.24), qr
(0.78) and Cash Conversion Cycle have correlation values of -0.7959. Looking at
these values, it can be said that Inventory turnover, accounts payable turnover and
CCC have negative relationship with ROA, while accounts receivable turnover,
Current ratio and quick ratio have positive relationship with ROA. Among these
variables, Accounts payable turnover (-0.86), quick ratio (0.78) and Cash
conversion cycle (-0.79) have strong association with ROA, while Inventory
turnover, Accounts receivable turnover and current ratio have somewhat weak
association with ROA.
The above table (4.22) also depicts the correlation between ROE and other
independent variables. It can be perceived from the table that CR has a correlation
107
coefficient of 0.23 with ROE. It means that one unit change in CR will change
ROE with 0.23 units. Both these variables have positive relationship with each
other as depicted by the positive sign, which means that an increase of 1 unit in Cr
will increase the profitability with 0.23 units. Similarly, QR is also positively
related with ROE, having a very high correlation coefficient value (0.62). In
addition, ICCC have an inverse relationship with ROE, indicating that asurge of 1
unit in ICCC will decline ROE with 0.67 units and vice versa. Moving down the
column, we have a coefficient value for APTR (-0.85), which shows an inverse
relationship with ROE.
Table 4.23 Pooled regression ROA (Indian)
ROA CO-EF S.ERR Z P>|Z|
CR 0.259 0.517 5.01 0.020
QR 0.223 0.18 11.99 0.000
CCC 0.138 0.029 4.77 0.034
INVTR 0.166 0.021 7.62 0.000
APTR -0.445 0.026 -16.85 0.000
ARCTR 0.334 0.034 9.823 0.000
R2 = 0.91 7 Adjusted R2 = 0.912 F= 376, p= 0.000
The above table (4.23) shows the output obtained from the pooled
regression model. In this model, ROA is used as dependent variable, while cr, qr,
iccc, aptrd, iinvtrd are used as independent variables. The first column of the table
shows the variable labels. In the next column, the coefficient values for the
independent variables have been shown. The coefficients in this table serve two
purposes. First it shows the direction of relationship between dependent and
independent variable. Secondly, it shows the magnitude of change that will be
drawn in a dependent variable by a particular dependent variable. Looking at the
above table, it can easily be concluded that Cr, QR, ARCTR, INTR, ICCC have
positive relationship with ROA, while APTRD is negatively related with ROA.
The second purpose of coefficients values is to determine the magnitude of
change. Looking at the table it can be seen that the beta value of cr is 0.25, which
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shows that 1 unit change in cr will change ROA by 0.25 units but in the same
direction. Similarly, 1 unit change in qr will change ROA by 0.22 units in the
same direction. In the same line, 1 unit change in iccc will change ROA with 0.13
units directly. In addition, 1 unit change in aptrd will change ROA with 0.44 units
negatively and finally 1 unit change in iinvtrd will change ROA with 0.16 units.
The next important measure in this table is the T column. T values
basically show that whether or not the particular variable is statistically
significantly related with the dependent variable. The criteria for the decision are
the value of 1.96 in absolute terms. Looking at the table, it can be said that all
variables have T values greater than 1.96, hence their relationship with ROA is
said to be statistically significant.
The CR has T-value of 5.10, revealing a strong and significant positive
impact of current ratio on ROA of Indian pharmaceutical and chemical firms
‘profitability; the t-value -5.10 of course is as strong as the quick ratio and thus
supports the third hypothesis H3: the current ratio has impact on the profitability
of pharmaceutical firms. The prob > p value is 0.000 which is less than the 0.05
asserting the significant impact on current ratio on profitability of firms,
supporting the alternative hypothesis and rejecting the null hypothesis
The account receivable turnover ratio has T-value of 9.823 indicating a
strong and significant positive impact of ARECTR on ROA of Indian
pharmaceutical firms the corresponding value of p value 0.000 again designates a
significant impact of ARECTR on ROA of pharmaceutical and chemical firms.
These values, T-value and prob > p value support the fourth hypothesis H4: the
accounts receivable turnover has significant impact on the ROA of pharmaceutical
firms while rejecting the null hypothesis.
Inventory turnover got the T-value of 7.62 and prob > p value of 0.000,
again it shows the strong and significant positive impact of INVTR on the ROA of
pharmaceutical firms as the T-value is greater than 1.96 and p-value is less than
0.05. Both these values support the fifth hypothesis H5: the inventory turnover has
significant impact on ROA of pharmaceutical firms while rejecting the null
hypothesis. Accounts pay able turnover has the T-value of -16.89 and prob > p
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value 0.000 asserting that accounts payable turnover has very significant negative
impact on ROA of pharmaceutical firms, the p-value is also very significant, these
results support the sixth hypothesis H6: The Accounts payable turnover has
significant impact on the ROA of pharmaceutical firms while rejecting the null
hypothesis. The cash conversion cycle has T-value of 4.77 and p-value of 0.000
showing a very strong and significant positive impact on ROA of pharmaceutical
firm’s financial performance. Both of these results are very significant, supporting
the seventh hypothesis H7: cash conversion cycle has significant impact on ROA
of Indian pharmaceutical and chemical organizations’ profitability while rejecting
the null hypothesis.
Table 4. 24 Chow test (Indian)
Test Chi2 Prob of Chi2
Chow 292 0.000
The above table 4.24 is an output for the chow test, performed in order to
select an appropriate model between pooled regression and fixed effect model.
The test holds the hypothesis that pooled regression is an appropriate model for
the study. The chi2 value and its probability show that we have to reject the null
hypothesis and conclude that fixed effect model is an appropriate model for the
study.
Table 4.25 Fixed-Effects
ROA CO-EF S.ERR Z P>|Z|
CR 0.263 0.524 5.03 0.000
QR 0.225 0.188 11.99 0.000
ICCC 0.134 0.294 4.57 0.000
INVTR 0.167 0.022 7.60 0.000
APTRD -0.446 0.026 -16.74 0.000
ARCTRD 0.028 0.007 14.14 0.000
R2 = 0.917, F= 369, p= 0.000
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The above table (4.25) shows the output obtained from the fixed effect
regression model. In this model, ROA is used as dependent variable, while cr, qr,
iccc, aptrd, iinvtrd are used as independent variables. The first column of the table
shows the variable labels. In the next column, the coefficient values for the
independent variables have been shown. The coefficients in this table serve two
purposes. First it shows the direction of relationship between dependent and
independent variable. Secondly, it shows the magnitude of change that will be
drawn in a dependent variable by a particular dependent variable. Looking at the
above table, it can easily be concluded that Cr, QR, ARCTR, INVTR and CCC
have positive relationship with ROA, while APTR is negatively related with
ROA.
The next important measure in this table is the T column. T values
basically show that whether or not the particular variable is statistically
significantly related with the dependent variable. The criteria for the decision are
the value of 1.96 in absolute terms. Looking at the table, it can be said that all
variables have T values greater than 1.96, hence their relationship with ROA is
said to be significant statistically.
Table 4. 26 Bruesh Pagan Test for ROA (Indian)
Test Chi2 Prob of Chi2
Bruesh Pagan 6.8 0.000
As explained earlier, Bruesch Pagan test is performed for the selection of
best model betweenrandom effect model and pooled regression model. The result
of chi2 and its probability shows that random effect model is an appropriate model
for the study.
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Table 4.27 Random-Effects
ROA CO-EF S.ERR Z P>|Z|
CR 0.259 0.517 5.01 0.000
QR 0.223 0.186 11.99 0.000
ICCC 0.138 0.029 4.77 0.034
INVTR 0.166 0.021 7.62 0.000
APTRD -0.445 0.026 -16.85 0.000
ARCTRD 0.334 0.034 9.823 0.000
R2 = 0.917 Wald chi2 = 2257.59 Prob >chi2 = 0.0000
RANDOM-EFFECT MODEL
The random effect model shows result in table 4.27. The results are almost
same as the fixed effect model with slight differences in coefficients. T values and
the respective probability of all independent variables show significant
relationship between independent and dependent variables.
Table 4.28 Hausman Test
Test Chi2 Prob of Chi2
Hausman 1.042 0.942
The Hausman test has been used to examine either the fixed effect model
is consistent or random effect model. The Hausman test produced the prob> p
value of 0.942 that is not significant because it is above 0.05. According to
Hausman test, if the p value is not significant then it will be concluded that
random effect model is more consistent and efficient for this particular research.
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4.5 ROE AS A DEPENDENT VARIABLE
Table 4.29 Correlation Matrix
VARIABLES ROA ROE CR QR CCC APTR INVTR ARECTR
ROA 1.0000
ROE 0.8906 1.0000
CR 0.2477 0.2259 1.0000
QR 0.7803 0.6208 0.3691 1.0000
CCC -0.7959 -0.6782 -0.5741 -0.7651 1.0000
APTR -0.8632 -0.8525 -0.2236 -0.5868 0.7239 1.0000
INVTR -0.5216 -0.3515 -0.1172 -0.4719 0.5232 0.7298 1.0000
ARECTR 0.2062 0.2874 -0.0921 -0.0239 0.0203 -0.1130 0.1689 1.0000
The above table of correlation matrix reveals the relationship of dependent
variable returns on equity ROE and the explanatory variables i.e. Quick Ratio,
Current Ratio, Assets Turnover Ratio, Accounts receivable Turnover, Inventory
Turnover, Accounts payable Turnover and Cash Conversion Cycle.
The matrix indicates that the correlation between quick ratio and returns
on equity is 0.62, which proclaims that there exists a strong positive association
between the two stated variables as its correlation value is far above the 0.05
which is the acceptance point of correlation. Further variables, Current Ratio
(0.23), Accounts receivable Turnover (0.28), Inventory Turnover (-0.35),
Accounts payable Turnover (-0.852) and Cash Conversion Cycle (-0.67) have
correlation relationship with ROE. All these values are far above the 0.05
asserting that the correlation among these explanatory variables and the ROE is
very significant. Inventory turnover ratio, accounts payable turnover ratio and
cash conversion cycle are negatively while accounts receivable turnover, quick
ratio and current ratio are positively correlated to dependent variable ROE.
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Table 4.30 Common Effect Model
ROE COEFFECIENT STANDARD ERROR
Z P>Z
CR .0257773 .0245998 -1.05 0.295 QR .0799399 .0088513 9.03 0.000 CCC .0126662 .0138301 0.92 0.360 APTR -.4094358 .0125645 -32.59 0.000 INVTR .2191724 .0104129 21.05 0.000 ARECTR .0093604 .0034505 2.71 0.007 _CONS 2.159166 .0910555 23.71 0.000
R2 = 0.934 Adjusted R2= 0.935 Wald chi2 = 2928.6 Prob> chi2 = 0.0000
The above table 4.30 shows the output for pooled regression. Cr, qr, iccc,
aptrd, iinvtrd, iarctrd have coefficient values of 0.025, 0.079, .0126, -0.409, 0.219,
and 0.009 respectively, asserting that 1unit change in these variable will cause the
corresponding change in ROE of these firms. Similarly, T values of cr, iccc shows
insignificant relationship with ROE. While T values of QR, APTR, INVTR and
ARECTR show significant relationship with ROE.
Table 4.31 Chow Test for ROE (Indian)
Test Chi2 Prob of Chi2
Chow 228 0.000
The above table 4.31 shows results from chow test. On the basis of chi2
value and its probability, it can be said that fixed effect model is an appropriate
model for the study.
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Table 4.32 Fixed Effect Model
ROE COEFFECIENT STANDARD ERROR
T P>T
CR .0245157 .0250081 0.98 0.328 QR .079955 .0089859 8.90 0.000 CCC .012915 .014589 0.92 0.359 APTR -.4093137 .0127236 -32.59 0.000 INVTR .2191512 .0105111 20.85 0.000 ARECTR .0094338 .0034868 2.71 0.007 _CONS 2.154591 .0923349 23.34 0.000
R2 = 0.934 F = 476.3 Prob > F = 0.000
Table 4.33 Breusch Pagan Test for ROE (Indian)
Test Chi2 Prob of Chi2
Bruch Pagan 34 0.000
The above table 4.33 shows results for the bruesch Pagan test, performed
in order to decide a good fit between random effect model and pooled regression
model. The results suggest that random effect model should be used for the study.
Table 4.34 Random-Effects
ROE COEFFECIENT STANDARD ERROR
T P>T
CR .0257773 .0245998 1.05 0.295 QR .07993999 .0088513 9.03 0.000
CCC .012662 .0138301 0.92 0.360 APTR -.4094358 .0125645 -32.59 0.000 INVTR .21911724 .0104129 21.05 0.000
ARECTR .0093604 .0034505 2.71 0.007 _CONS 2.159166 .0910555 23.71 0.000
R2 = 0.934 Wald chi2 = 2928.6 Prob > chi2 = 0.0000
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Table 4.35 Hausman Test
Test Chi2 Prob of Chi2
Hausman 24.58 0.000
The Hausman test has been resorted to examine either the fixed effect
model is consistent or random effect model. The result from the Hausman test
showed that fixed effect model is an appropriate model for the study.
4.6 REGRESSION DIAGNOSTICS
Table 4.36 Testing For Serial Correlation
H0: no first-order autocorrelation F (1, 6) = 0.281
Prob> F = 0.6965
The Wooldridge test has been performed in order to check for the problem
of serial correlation in data. The hypothesis of the test is that there is no auto or
serial correlation in data. The result shows the insignificant p value which asserts
that there is no serial correlation and the data is well adequate for further analysis.
4.37 Heteroskedasticity Test of Indian Data
Ho: Constant variance chi2 (1) = 1.89
Variables: fitted values Prob>chi2 = 0.1041
The data is also checked for the presence of the problem of unequal
variance of the residual terms. The hypothesis is that the variance of residual is
constant and independent of cross sections. The results show an insignificant
relationship; hence the data is free from the problem.
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Table 4.38 Multi co linearity
variables VIF 1/VIF CCC 4.97 0.201229 APTR 4.12 0.242827 INVTR 2.65 0.378053 QR 2.48 0.402795 CR 1.72 0.580154 ARECTR 1.22 0.817167 Mean VIF 2.86
The data is also checked for the presence of multi co linearity. When the
VIF test for multi co linearity is performed, two variables i.e., ATR and INVTR
seem to be highly related with each other in Indian data. Later on it was decided to
drop one of these variables. Accordingly, ATR was dropped. By doing so, the
problem of multi co linearity was resolved as depicted by the revised VIF values.
The results are shown in the above table 4.38. It can be gotten from the above
table, that the VIF values for all variables are below 10.00, hence there is no
chance of presence of multi co linearity. The tolerance values for all variables are
also above 0.10, hence it can be concluded that our data is free of multi co
linearity problem.
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SECTION 3
4.7 T-TESTS FOR COMPARISON OF WCM IN PAKISTAN AND INDIA (PAIRED T-TEST)
In order to match two means which are from the similar entity, or related
components, the paired sample t test is used. Its aim is to analyse whether it is
statistically evident that there exists mean difference between paired variables on
a specific consequence that is drastically dissimilar from zero. It is also called a
parametric test (Deloof, 2003). Following are the hypothesis to be considered for
acceptance or rejection.
Ho There is no mean difference between two sampled variables
H1 There is mean difference between two sampled variables.
Table 4.39 Quick Ratios
VARIABLE OBS MEAN S.ERR STD. DEV. [95%CONF]
PQR 210 2.55719 .0179356 .259912 2.521833 2.592548
IQR 210 3.10181 .0050342 .0729526 3.091885 3.111734
DIFF 210 -.5446191 .0150862 .2186192 -.5743597 -.5148786
Mean(diff) = mean (pqr - iqr11) t = -36.1006 p= 0.000
Table 4.40 Assets Turnover Ratios
VARIABLE OBS MEAN S.ERR STD. DEV. [95%CONF]
PATR 210 2.451095 .0149341 .2164154 2.421654 2.480536
IATR 210 5.292524 .0028366 .0411069 5.286932 5.298116
DIFF| 210 -2.841429 .0149689 .2169203 -2.870938 -2.811919
Mean(diff) = mean(patr - iatr) t = -11.93 p= 0.000
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Table 4.41 Current Ratios
VARIABLE OBS MEAN S.ERR STD. DEV. [95%CONF]
PCR 210 4.411667 .0055212 .0800094 4.400782 4.422551
ICR 210 3.171572 .0015093 .0218719 3.168596 3.174547
DIFF 210 1.240095 .0065622 .0950949 1.227159 1.253032
Mean (diff) = mean (pcr – icr)t=188.9763 p= 0.000
Table 4.43 Account receivable Turn Over
VARIABLE OBS MEAN S.ERR STD. DEV. [95%CONF]
PARECTR 210 3.815238 .0191898 .2780868 3.777408 3.853069
IARECTR 210 5.374905 .0090665 .1313866 5.357031 5.392778
DIFF 210 -1.559667 .0231449 .3354015 -1.605294 -1.514039
mean(diff) = mean(parectr - iarectr) t = -67.3870 p= 0.000
Table 4.44 Inventory turn over
VARIABLE OBS MEAN S.ERR STD. DEV. [95% CONF]
PINVTR 210 4.581095 .0192854 .2794719 4.543076 4.619114
IINVTR 210 5.25181 .0044171 .0640093 5.243102 5.260517
DIFF 210 -.6707143 .0210852 .305553 -.7122812 -.6291474
mean(diff) = mean(pinvtr - iinvtr) t = -31.8098 p= 0.000
Table 4.45 Account Payable Turn Over
VARIABLE OBS MEAN S.ERR STD. DEV. [95%CONF]
PAPTR 210 3.306238 .0047988 .0695414 3.296778 3.315698
IAPTR 210 5.149571 .0045676 .0661903 5.140567 5.158576
DIFF 210 -1.843333 .0050377 .0730034 -1.853265 -1.833402
Mean (diff) = mean(paptr - iaptr11) t = -3.7 p= 0.000
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Table 4.46 Cash Conversion Cycle
VARIABLE OBS MEAN S.ERR STD. DEV. [95%CONF]
PCCC 210 5.044905 .0090665 .1313866 5.027031 5.062778
ICCC 210 5.044905 .0090665 .1313866 5.027031 5.062778
DIFF 210 0 0 0 0 0
Mean(Diff) = mean(pccc - ccc) t = 3.56 p= 0.000
Table 4.47 Return on Assets
VARIABLE OBS MEAN S.ERR STD. DEV. [95%CONF]
PROA 210 1263.126 2.894839 41.9502 1257.419 1268.833
IROA 210 1.374594 .0029495 .0427427 1.368779 1.380408
DIFF 210 1261.752 2.891938 41.90817 1256.051 1267.453
Mean(diff) = mean(proa1 - iroa) t = 436.2997 p= 0.000
Table 4.48 Returns on Equity
VARIABLE OBS MEAN S.ERR STD. DEV. [95%CONF]
proe 210 1.448015 .0015826 .0229337 1.444895 1.451135
iroe 210 1.781015 .0015826 .0229337 1.777895 1.784135
diff 210 -.333 3.89e-09 5.63e-08 -.333 -.333
Mean(diff) = mean(proe - iroe) t = -8.6 p= 0.000
The above T-tests of all the variables under study reveal almost the same
results; the t-test result of each variable indicates the number of observations,
Mean and Std. Dev for each variable in test. The T value and their respective
probability in all the cases is 0.000 which is far below than the critical value,
therefore the null hypothesis of “ there is no mean difference” has been rejected
and the alternative hypothesis of there is a significant mean difference” has been
accepted.
Therefore, it is concluded that there is statistically significant mean
difference among quick ratio, current ration, assets turnover ratio, account
120
receivable turnover ratio, account payable turnover ratio, inventory turnover ratio
and cash conversion cycle of Pakistan and Indian pharmaceutical firms.
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Chapter-5
CONCLUSION AND RECOMMENDATIONS
5.1 CONCLUSION
This section of thesis provides information about the concise outcome of the
study. As mentioned earlier, the study has its focus on investigating the
relationship between working capital management and profitability of Pakistani
and Indian firms. In order to measure the profitability, ROA and ROE has been
chosen as proxies for dependent variable, while Cr, qr, ARCTR, INVTR, APTR,
ATR and CCC have been utilized as independent variables. The same set of
dependent and independent variables are selected for Indian firms as well. It is to
keep in mind that, while calculating regression models for Indian data ATR has
been dropped intentionally due to inflated values of variance. The focus of the
study is pharmaceutical and chemical sectors of both these countries as a sample
for the study. Forty-two companies from Indian and forty-two companies from
Pakistan are selected and the data from 2008 – 2012 has been collected. The data
is analysed with the help of STATA 14. A number of statistical techniques are
applied in order to find a meaningful result from the data. In the following section,
a summary of the results, obtained in the previous chapter, have been presented.
The study primarily focuses on four research questions. One of these being
the identification of the key components of working capital that could have a
possible effect on the profitability of the firms. After an extensive literature
review, the researcher is finally able to answer the question. The key variables
identified in this process are liquidity ratios (Current and quick ratios), asset
turnover ratios (ARCTR, INTR, ATR), the short term solvency ratio (APTR) and
the cash conversion cycle (CCC) of a firm. A summary of the key components of
working capital, identified by different researcher across the globe, is provided in
chapter 2, table 2.1. For instance, Abuzayed (2012) have identified that the major
determinants of working capital are INVTR, ARCTR, APTR and CCC.
Similarly, Afeef (2011) have identified INVTR, ARCTR, APTR, CCC, and CR
as key variables for working capital. The author added one more variable i.e.,
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sales growth as one of the major determinants for the working capital. The
findings of these authors are confirmed by the study of Ahmadi et al. (2012),
when they concluded with the same determinants for working capital. In the light
of these findings, it can safely be concluded that the study has addressed the first
question with fruitful outcome.
The second important question addressed by the current study is to
identify, whether or not there exist a relationship between working capital
components and profitability of the selected firms? If there is any relationship
between these two sets of variables, what would be the possible direction of the
relationship? After careful investigation and focused data analysis the researcher
came to a conclusion that both in Pakistan and Indian, the liquidity ratios i.e., Cr
and QR are positively related with the profitability of pharmaceutical and
chemical firms. It means that the liquid an organization, the smoother will be its
current operations and the better will be its profitability. We can find the support
for our result from the literature. For instance; Charitou et al (2010) in his study
have found the same positive relationship between Cr and profitability of the firms
in Cyprus. In the same line, the study conducted by Afeef (2011) in Pakistan also
has the positive relationship between Cr and profitability of the firms. In addition,
Christopher and Kamalavalli (2009) are also of the same opinion about the
relationship between Cr and ROA and ROE in Indian firms.
Moving further, Asset turnover is found to be negatively related with the
ROA of the selected firms in Pakistan. The literature seems to be in line with our
findings about the relationship between Asset turnover ratio and ROA and ROE.
For example; the findings of the study of Muhammad and Saad (2010) have
confirmed an inverse relationship between these two variables. As discussed
earlier, ATR was dropped from regression analysis in Indian firms due to highly
inflated variance values, therefore it doesn’t appear in Indian firms’ analysis.
Moreover, the short term assets management ratios i.e., ARCTR, INVTR and
CCC are found to be directly related with the profitability of the selected Pakistani
and Indian firms. It is evident from the previous literature that, for an efficient
working capital management, an organization needs to have a better short term
assets management. The efficient and effective an organization in terms of its
123
short term assets management, the better it will be in terms of its profitability. We
can find the evidence in support of our study. For instance; the study conducted by
Deloof (2003) has found the same positive relationship between INVTR, ARCTR,
CCC and profitability of the firms. Similarly, dung and Su (2010) have confirmed
a direct relationship between INVTR, ARCTR, CCC and profitability of the firms.
On the other hand, Accounts payable turnover (APTR) is found to be inversely
related with ROA and ROE of the selected firms both in Pakistan and India. The
negative relationship between these two variables is obvious as promptly payment
of our current liability decreases the insolvency risk and hence the profitability
will move up.
As discussed earlier, that the current study has selected samples for two
different countries i.e., Pakistan and India. Therefore, the same data analysis
procedure has been performed for Indian firms as well. The outcome from this
section, have confirmed that Current ratio, quick ratio, inventory turnover,
accounts receivable turnover and cash conversion cycle have positive relationship
with profitability of the selected Indian firms, while Accounts Payable turnover in
days has negative relationship with profitability of the selected Indian firms. In the
light of the above arguments, it can be concluded that the study has successfully
addressed its second research question.
The third research question addressed by the current study is whether or
not the established positive and negative relationships between dependent and
Independent variables are significant. In simple words it means that the
relationship identified as a result of the fulfilment of research question 2 is
consistent or not. Moving back to the previous section (chapter 4), it is very clear
that all the selected independent variables are statistically significant in
relationship with profitability of the Pakistani firms except ATR and Cr.Moreover,
ARCTR is statistically significant in its relationship with ROA while insignificant
with ROE. Similarly, APTR is statistically significant with ROA and statistically
insignificant with ROE. In addition, QR, INVTR and CCC are statistically,
significantly and positively related with profitability of the Pakistani firms while
APTR is statistically, significantly and negatively related with ROA of Pakistani.
Its relationship with ROE is the same except that of statistically, insignificant
124
relationship.
In the Indian context, the results are slightly different than Pakistani firms.
Here the current ratio is statistically significant in its relationship with ROA while
insignificant with ROE. Similarly, CCC is statistically significant with ROA and
insignificant with ROE. The results from Indian firms show that QR, INVTR and
ARCTR and APTR are statistically significantly related with both ROA and ROE
Finally, it is concluded on the basis of paired sample t test that there is
statistically significant difference between the mean values of working capital
management in Pakistan and India.
5.2 RECOMMENDATIONS
The current research investigated the impact of working capital
management by taking into consideration the quick ratio, current ratio, total assets
turnover, accounts receivable turnover, account payable turnover, inventory
turnover and cash conversion cycle. Therefore, based on research study the
following important points are recommended.
1) Liquidity ratios such as quick ratio and current ratio have positive and
significant impact on profitability of both Pakistani and Indian pharmaceutical
companies. On the basis of the outcome of the study, financial managers,
policy makers are recommended to have a sound focus on the liquidity ratio in
order to have adequate cash available in the counter.
2) The study also recommends a narrow focus on the management of short term
assets such as INVTR, ARCTR, and CCC because these are strongly
positively and significantly related with profitability. Hence these should be
carefully managed.
3) The study recommends that short term insolvency can affect the profitability
in adverse direction.
125
5.3 FUTURE RESEARCH
1) It is suggested that the current research used ROA and ROE as
profitability proxies in future research other measures like Return on
Capital Employed, and Return on Current Assets should be
investigated as these measures will approximately have some different
result.
2) The current research investigated the Chemicals and pharmaceutical
firms of Pakistan and India; in future research, some other industries
should be investigated to confirm the findings of current research.
3) The current study investigated the pharmaceutical and chemical firm of
Pakistan and India which are both developing countries, it is
recommended to investigate the pharmaceutical and chemical firms in
other emerging economies as well.
4) The scope of the literature may be broadened by including other
variables such as culture aspects of the different countries and
practices, competition in different industries.
5.4 LIMITATIONS OF THE STUDY
1. There are many Pharmaceutical and Chemical companies in operation in
both India and Pakistan, but financial data of only those firms is available
which are listed with the Pakistan Stock Exchange and BOMBAY Stock
Exchange. Therefore, secondary data is used in this study. It is a difficult
task to access the financial statements of non-listed companies or private
limited companies. Therefore, due to accessibility and authenticity
problem of data, the data of listed Pharmaceutical and Chemical
companies of Pakistan Stock Exchange and BOMBAY stock Exchange are
considered.
2. The research work is confined to Pharmaceutical and Chemical Sectors of
Pakistan and India only with a limited scope of time period.
126
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APPENDIX-1
LIST OF PAKISTANI FIRMS
S.No Company Name
1 MandviwalaMauser Plastic Industries Ltd
2 Nimir Industrial Chemicals Ltd.
3 Linde Pakistan Ltd.
4 Lotte Pakistan PTA Ltd.
5 Pakistan PVC Ltd.
6 Sanofi-Aventis Pakistan Ltd.
7 Wah Nobel Chemicals Ltd.
8 Sardar chemical Industry Ltd
9 Searle Pakistan Ltd.
10 Shaffi Chemical Industry Ltd.
11 Otsuka Pakistan Ltd.
12 Pakistan Gum & Chemicals Ltd.
13 Wyeth Pakistan Ltd
14 Sitara chemical industry Ltd.
15 Sitara peroxide Ltd.
16 United distributor pakistan Ltd.
17 Abbott Laboratories (Pakistan) Ltd.
18 Agritech Ltd.
19 Dewan Salman Fibre Ltd.
20 Dynea Pakistan Ltd.
21 Ferozsons Laboratories Ltd
22 Gatron (Industries) Ltd
23 Ittehad Chemicals Ltd.
24 Leiner Pak Gelatine Ltd.
25 Highnoon Laboratories Ltd.
26 ICI Pakistan Ltd.
27 Biafo Industries Ltd.
28 Buxly Paints Ltd.
147
29 Agro limited
30 Dawod Hercules LTD
31 Engro Corporation Ltd
32 Engro Polymer & Chemicals Ltd
33 BAWANAY AIR PRODUCTS LTD
34 BERGEER PAINTS OF PAKISTAN
35 GHANI GOSES LTD
36 GLAXOSMTHKLINE LTD
37 Clariant Pakistan Ltd
38 Colgate Palmalive Ltd
39 Data Agro Ltd.
40 Descon chemicals Ltd.
41 DesconOxychem Ltd.
42 Ghani Cases Ltd.
148
LIST OF INDIAN FIRMS
S.No. Company name
1 ABL Biotechnologies Ltd
2 Aarey Drugs & Pharmaceuticals Ltd
3 Aayush Food & Herbs Ltd.
4 Abbott India Limited
5 Biofil Chemicals & Pharmaceuticals Ltd
6 Bliss GVS Pharma Ltd
7 Brabourne Enterprises Ltd
8 Brawn Pharmaceuticals Ltd
9 Brooks Laboratories Ltd.
10 Elder Projects Ltd
11 Electrosteel Castings Ltd.
12 Caplin Point Laboratories Ltd
13 Celestial Labs Ltd
14 Centenial Surgical Suture Ltd.
15 Dujohn Laboratories Ltd.
16 GlaxoSmithKline Pharmaceuticals Limited
17 Godavari Drugs Ltd
18 Harleystreet Pharmaceuticals Ltd
19 Hester Biosciences Ltd
20 Jagsonpal Pharmaceuticals Ltd
21 Jenburkt Pharmaceuticals Ltd
22 Matrix Laboratories Limited
23 Medicamen Biotech Ltd
24 Neuland Laboratories Ltd
25 Novartis India Limited
26 Nutraplus Products (India) Ltd
27 Piramal Life Sciences Ltd
28 Plethico Pharmaceuticals Ltd
29 Principal Pharmaceuticals & Chemicals Ltd
30 SreeRayalaseema& Allied Chemicals Ltd
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31 Standard Medical & Pharmaceuticals Ltd.
32 Sterling Biotech Ltd
33 Torrent Pharmaceuticals Limited
34 Trans Asia Corpn. Ltd
35 Tonira Pharma Ltd.
36 Torrent Pharmaceuticals Limited
37 Trans Asia Corpn. Ltd
38 Venus Remedies Ltd
39 Veronica Laboratories Ltd
40 Vista Pharmaceuticals Ltd
41 Zandu Pharmaceutical Works Ltd
42 Zenotech Laboratories Ltd
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