Ip Suda Bur Final

7/29/2019 Ip Suda Bur Final

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The Impact of Working Capital Management on Profitability:

A Case Study of Dabur Nepal Private Limited

Ipsu Khadka

Roll Number: 10450085

P.U. Registration Number: 2009-2-45-0026

A Project Report Submitted to

Ace Institute of Management

Submitted for the degree of

Bachelor of Business AdministrationBanking and Insurance (BBA-BI)

Kathmandu

November, 2012


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DECLARATION

This project entitled, The Impact of Working Capital Management on Profitability: A

Case Study of DaburNepal Private Limited which is submitted by me in partial

fulfillment of the requirement for the award of BBA-BI degree of Pokhara University

comprises only my original work and due acknowledgement have been made to materials

used in the report.

Signature:

Name of Student: Ipsu Khadka

Date:


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BONAFIDE CERTIFICATE

Certified that this project report

(The Impact of Working Capital Management on

Profi tabil ity: A Case Study of Dabur Nepal Pr ivate L imi ted)

is the bonafide work of

(I psu Khadka)

who carried out the summer project work under my supervision. This report is forwarded

for examination.

Prakash C. Bhattarai Vijay Anand Sharma Timilsina

Supervisor Program Director

Signature:

Name of the External Examiner:

Date:


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Acknowledgment

The successful accomplishment and preparation of the report on The Impact of Working

Capital Management on Profitability: A Case Study of Dabur Nepal Private Limited

would not have been possible without the support and cooperation from different

personals who provided their valuable comments and made other significant

contributions.

First of all, I would like to thank Pokhara University for providing us a wonderful

opportunity of conducting practical research to compliment our theoretical knowledge of

working capital management. I am equally thankful towards Ace Institute of

Management and its directors for facilitating us with an advanced computer lab and well-

equipped library. I am also very grateful to Mr. Niranjan Phuyal, our Seminar in Working

Capital Management course instructor, for entrusting me this substantial assignment and

extending his support and guidance in accomplishment of this report.

It would be injustice if I forget to acknowledge Dabur Nepal Private Limited. Without

their annual reports, I would never have been able to produce this report. Different books,

articles, journals and thesis have been consulted in preparation of this report. Thus, I

would like to thank all those authors and publishers. Lastly, I would like to take this

opportunity to thank all those who have directly or indirectly helped me in the

preparation of this research report.

Ipsu Khadka

BBA-BI VI A


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Abstract

In this paper, the relationship between profitability and working capital management is

investigated. For the study, the data of Dabur Nepal Private Limited is taken for the

period of 10 years from 2002-03 to 2011-12. The purpose of this paper is to establish a

relationship between profitability, the cash conversion cycle and its components for the

firm. The results of the research showed that there is a positive relationship between CCC

and profitability. It also showed that there is a positive, negative, negative relation

between ICP and profitability, PDP and profitability, and ARP and profitability

respectively. But all these relations were statistically insignificant. This study contributes

to the literature on the relationship between working capital management and

profitability.


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INTRODUCTION

Background of the study

During the course of our study of working capital management, we have been reviewing

articles on issues of working capital of the different industries and of different countries

helping us gain theoretical knowledge. But practically, I am mostly familiar with the

working capital management of the banking industry as I am a student of BBA-BI which

specializes in banking and insurance. This report will analyze the financial statements of

a manufacturing company i.e. Dabur Nepal Private Limited to understand the effects of

working capital management on profitability of the company, combining the theoretical

and practical knowledge of working capital that we have gained so far.

Working capital is known as life giving force for any business organization and its

management is considered among the most important function of corporate management.

The management of working capital is very essential as it directly affects the efficiency

of a firm. Working capital management refers to efficient utilization of funds which leads

to sufficient cash flow in order to meet its short-term debt obligations and operating

expenses (Investopedia). And cash conversion cycle CCC length is considered among the

fundamental ingredients of the working capital management (Appuhami, 2008; Keown et

al., 2003; and Bodie and Merton, 2000).

Cash conversion cycle is the time it takes for a firm to convert its inputs into cashflows.

Its components are inventory turnover period, account receivable period, and payable

deferral period. Cash conversion cycle is invariably useful as a comprehensive measure

because it effectively takes into account the time lag between the expenditure for the

acquisition or purchases of raw materials and the collections from the debtors on account

of the of sales of finished goods (Padachi, 2006). It has been argued that an effective and

efficient handling of short term assets and the corresponding payables is really a question

of life and death for the business enterprises and has much to do with the continued

existence of the firms. (Jose et al.,1996).


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This report is the observation and analysis of financial information of Dabur Nepal

Private Limited in order to establish the relationship of the components of working

capital management and their significance on the profitability of the company. This is a

case study which will help us derive conclusions of the whole manufacturing industry.

This report thus emphasizes the significant factors to take into study in order to maximize

profitability.

Company Profile: Dabur Nepal Private Limited

Dabur Nepal Private Limited was set up as an independent group company in 1992 which

is a subsidiary of Dabur India Limited. Dabur India Limited is a leading Indian consumer

goods company with interests in HairCare, Oral Care, Health Care, Skin Care, Home

CareandFoods. Dabur Nepal, set amidst the verdant greens and towering mountains of

the Himalayan of Nepal, has established a unique bond of technology and preservation.

The guiding force behind Dabur's growth and success has been the wealth of nature and

its limitless capacity to support life. With their overall vision of eco-sustenance and to

expand Dabur's resource and production base, Dabur Nepal Private Limited was set up.

With its successful operation, Dabur Nepal has set some of the highest business standards

with ultra-modern production facilities manufacturing premium products like Real fruit

juices Vatika Hair Care products, Dabur Hajmola and Dabur Honey both for the domestic

as well as international markets. Over the period of two decades, Dabur has established

itself as a strong nationwide brand, selling in over 20,000 retail outlets throughout Nepal.

Statement of the problem

The importance of working capital components on profitability has been established

theoretically, but these theories are not examined practically in Nepal. With the help of

this study, the extent of the impact of working capital components over profitability of a

firm if there is any is shown. It basically investigates the established theoreticalknowledge of working capital management in practical workings of manufacturing

companies of Nepal, taking Dabur Nepal Private Limited as the sole sample.

The questions that I would like to address in this study are:

- What are the relationships of the components of working capital management andprofitability of Dabur Nepal Pvt. Ltd.?


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- How does the cash conversion cycle relate to profitability of Dabur Nepal?- Do the working capital management practices of Dabur Nepal Pvt. Ltd. concur

with the established theories of working capital management?

Objectives of the study

The main object of this paper is to provide some empirical evidence on the relationship

between working capital management and profitability for manufacturing companies,

using Dabur Nepal Pvt. Ltd. as a case study for the period of 10 years from 2002/03 to

2011/12. Another important objective is to fulfill the requirement set by Pokhara

University for course completion of BBA-BI, sixth semester.

This objective is fulfilled with the help of following specific objectives:

To examine the effects of inventory turnover period on profitability of DaburNepal.

To examine the effects of payable deferral period on profitability of Dabur Nepal. To examine the effects of account receivable turnover period on profitability of

Dabur Nepal.

To examine the effects of overall cash conversion cycle on profitability of DaburNepal Private Limited.

Literature Review

The concept of working capital management of firms has been investigated time and

again by different researchers and academicians. It is such a tool which can define a

significant portion of a firms overall efficiency and profitability. The main used

independent variable defining WCM is the Cash Conversion Cycle (CCC). The idea of

CCC was pioneered by Richards and Laughlin (1980) as a powerful tool for measuring

how well a firm is employing its WCM practices. Gentry et al. (1990) concluded that a

firms market worth was invariably associated with the CCC. CCC basically shows how

long a firm takes to convert resource inputs into cash flows (Quayyum, 2012).

Authors such as Deloof (2003), Shin and Soenen (1998), Laziridis and Tryfonidis (2006),

Garcia-Teruel and Martinez-Solano (2007), Samiloglu and Demirgunes (2008),

Karaduman et al. (2011), Uyar (2009) and Wang (2002), whom did research in


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respectively Belgium, USA, Greece, Spain, Turkey, Turkey, Turkey and Japan and

Taiwan all found a negative relation between WCM, using the CCC, and firm

profitability. This negative relation is in line with the theoretical aspect of working capital

management which says shortening the cash conversion cycle so that your money is not

tied up in the production process any longer than necessary leads to higher profits. This

means that a firm will have higher profitability by having a WCM policy which results in

the lowest possible accounts receivables and inventories and the highest amount of

accounts payables.

Contradicting evidence is found by Gill et al. (2010), whom did research in the USA and

found a positive relation between CCC and a firms profitability. Such evidence is also

found by Sharma and Kumar (2011) in India. They found evidence of a positive relation,

which means that loosening the three parts of a firm working capital management leads to

higher profit. They argue that this is caused by the fact that India is an emerging market

and reputations of creditworthiness of firms are not fully developed and therefore many

companies loosen their working capital management. Another reason they state is that

only profitable firms can loosen their working capital and therefore its because these

firms are profitable, that they loosen their working capital management and not the other

way around. (Baveld, 2012)

In terms of related studies executed by researchers in terms of the components of cash

conversion cycle, the following table (Table 1) presented below summarizes the

individual relationships of account payable period, inventory turnover period and payable

deferral period with profitability of firms found by different researchers.

All these different studies give us the results and conclusions of those researches already

conducted on the same area for different countries and environment from different

aspects. What can be concluded from the previous research studies conducted is thatthough most studies found the existence of traditional, theoretical relationships between

the components of working capital management and profitability, there have been studies

resulting in contradictions to each of those relationships as well. On basis of these

researches done in different countries, the methodology of the research has been

formulated.


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Table 1: Effects of individual parts of the cash conversion cycle (Baveld, 2012)

Effect

Variable

Significant negative relation on a firms

profitability

Significant positive

relation on a firms

profitability

Number of days

Accounts

Receivables

Deloof (2003)

Laziridis and Tryfonidis (2006)

Gill et al. (2010)

Garcia-Teruel and Martinez-Solano (2007)

Samiloglu and Demirgunes (2008)

Karaduman et al. (2011)

Falope and Ajilore (2009)

Raheman and Nasr (2007)

Mathuva (2010)

Sharma and Kumar

(2011)

Number of days

Accounts

Payables

Deloof (2003)




Sharma and Kumar (2011)



Mathuva (2010)

Number of days

Accounts

Inventories

Deloof (2003)



Samiloglu and Demirgunes (2008)


Sharma and Kumar (2011)



Mathuva (2010)

Research Methodology

This report analyses the impact of working capital management on firms performance

with the study of Dabur Nepal Private Limited. To study the relationship between

working capital management and profitability, multiple regression has been chosen as the

primary method. Other techniques include descriptive analysis and correlation analysis of

the variables.


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Sample & Data Collection

Since this report is a case study of Dabur Nepal Private Limited, we can say that to attain

the abovementioned research objectives, this paper uses a sample of only 1

manufacturing company. The study uses secondary data where data was collected from

the companys financial statements over the period 2002/03-2011/12 i.e. 10 years.

Research model

This study undertakes the issue of identifying key variables that influence working capital

management of Dabur Nepal Pvt. Ltd. The choice of the variables is influenced by the

previous studies on working capital management.

Dependent variable:

- Profitability represented by ROTA (Return on Total Assets)Independent variables:

- Inventory conversion period (ICP)- Payable Deferral Period (PDP)- A/c receivable period (ARP)- Cash Conversion Cycle (CCC)

Control variables:

Various studies have utilized the control variables along with the main variables of

working capital in order to have an opposite analysis of working capital management on

the firms profitability (Deloof, 2003). The control variables chosen for this study are:

- Size of the firm (LNS)- Firm growth (FG)- Current ratio (CR)- Debt ratio (DR)

Therefore our regression model is:

Y = a+ b1X1 + b2 X2 + b3X3 + b4 X4 + b5 X5

Model 1: ROTA= a + b1ICP + b2 LNS + b3 FG + b4CR + b5 DR

Model 2: ROTA= a + b1PDP + b2 LNS + b3 FG + b4CR + b5 DR

Model 3: ROTA= a + b1ARP + b2 LNS + b3 FG + b4CR + b5 DR

Model 4: ROTA= a + b1CCC + b2 LNS + b3 FG + b4CR + b5 DR


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The various methods and formulae used in the models are given below in Table 2.

Table 2: Methods and Formulae used

Dependent variables:

-

ROTA= Net Profit/ Total AssetsIndependent variables:

- Inventory conversion period (ICP) = (Inventory/Cogs) * 365- Payable Deferral Period (PDP) = (A/c payable/ Cogs) * 365- A/c receivable period (ARP) = (Receivables/ Sales) * 365- Cash Conversion Cycle (CCC) = ICP + ARP - PDP

Control variables:

- Size of the company = Natural logarithm of sales (LNS)- Firm growth (GROW) = (SalestSalest-1)/ Salest-1- Current ratio (CR) = Current assets / Current liabilities- Debt ratio (DR) = Total debt/ Total assets

Note:

- For Net profit, NPAT was used- Total assets = Long term assets (viz. Fixed assets, Capital WIP, Investments)

+ Total Current assets

- For a/c payable, Creditors for goods was used- For a/c receivable, sundry debtors was used- For current liabilities, the provisions are excluded since they are not true

current liabilities.

- Total debt = Bank loan + Short term liabilities i.e. Total Current Liabilitiesand Provisions

Using Excel, the descriptive analysis, correlation analysis and regression analysis were

completed.

Limitations

During the course of this study, I faced several limitations.

Since only one sample company of Dabur Nepal is taken, the results may not beable to generalize the conditions of the entire manufacturing industry of Nepal.The study would be more meaningful if a larger sample was taken.

The study undertook only the past records of last ten years. The efforts, resources and expertise are all limited since the study had to be

conducted within a very limited time, along with efforts to accomplish several

other responsibilities of the researcher.


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DATA ANALYSIS AND FINDINGS

Descriptive analysis

This section contains the minimum, maximum, mean, and standard deviation of all

dependent, independent and control variables of the study.

Table 3: Descriptive statistics

ROTA I CP PDP ARP CCC LNS Growth CR DR

Mean 3.74% 116.62 39.68 34.21 111.14 10.56 0.10 2.35 0.63

Standard Deviation 2.28% 18.60 30.88 13.33 32.03 0.29 0.10 0.92 0.04

Minimum 0.08% 95.23 11.23 20.50 69.08 10.24 0.00 1.40 0.56

Maximum 6.88% 157.14 107.56 55.23 171.19 11.14 0.31 4.45 0.71

From the above table, we see that the average return on assets of Dabur Nepal for the last

10 years was only 3.74% with a standard deviation of 2.28%. The minimum value of

ROTA as a measure of profitability is 0.08% and the maximum value is 6.88%. It takes a

lot of days for Dabur Nepal to turn its inventory to sales on average around 116 days, the

minimum being 95 and maximum 157 days. In comparison to inventory conversion

period, it takes a lot less days for Dabur Nepal to turn its sales to cash i.e. ARP with an

average of 34 days. About the payment deferral period (PDP) i.e. time between receipt of

inventory and payment for it is an average of 40 days. Dabur Nepal has had a minimumtime of 11days and maximum of 108 days to pay its purchases on account. Overall, the

average cash cycle is 111.14 days. The firm has had 171 days as maximum time between

cash disbursement and cash collection and a minimum of 69 days.

The size of the firm as measured by LNS on average is 10.56 with only a slight deviation

of 0.29. The mean growth of the firm in terms of sales is 10% meaning the sales amount

of Dabur is in a steady increasing trend, with a SD of 10%. The average current ratio for

Dabur Nepal is 2.35. Usually, the average current ratio for manufacturing firms is around

2:1. Dabur is following this trend as well by keeping around twice as much current assets

as its current liabilities. Also, the mean debt ratio of Dabur Nepal is 0.63 i.e. 63%. Dabur

Nepal is an aggressive manufacturing company financing more assets with debt than with

equity. The maximum DR was 71% and even the minimum was high with 56%.


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Correlation analysis

Presented below are the correlation matrix and analysis of the relationships between the

variables of the study.

Table 4: Correlation matrix of the variables

ROTA ICP PDP ARP CCC LNS Growth CR DR

ROTA 1

ICP 0.1439 1

PDP -0.3929 -0.0491 1

ARP -0.7902 -0.2792 0.4493 1

CCC 0.1336 0.5121 -0.8059 -0.1793 1

LNS -0.5816 0.3935 0.2768 0.3537 0.1089 1

Growth -0.6598 0.1662 0.4542 0.4845 -0.1398 0.8577 1

CR 0.6990 -0.1185 -0.3499 -0.3913 0.1058 -0.5311 -0.6397 1

DR 0.1267 -0.1129 0.3517 0.0581 -0.3806 -0.0615 0.2271 0.2579 1

The table shows that there is a low positive correlation between inventory conversion

period (ICP) and profitability. This correlation indicates that in contrast to most theories,

any increase in inventory period leads to the increase in the profitability of Dabur Nepal.

Also contrasting theories, it is also shown that there is a negative correlation between

payable deferral period (PDP) and profitability.

Correlation analysis also indicates that there is a negative correlation between account

receivable collection period (ARP) and profitability. This means that if Dabur Nepal

reduces the time between sales and actual cash collection, it will lead to increased

profitability. This finding is in line with the theory of working capital management.

It is found that the relationship between cash conversion cycle and profitability is

positive, which also contradicts to most literature.

There is a negative correlation between LNS and profitability. This may occur if

managerial utility maximization replaces profit maximization as the firms objective

function (Alchian, 1965). Managerial utility maximization is a by-product of the

separation of ownership from management in modern corporations. This separation may


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increase with firm size, making large firms more vulnerable to managerial utility

maximization than smaller firms. Managerial utility maximization thus provides a

conceptual framework for a negative relationship between firm size and profitability. The

table also shows that there is a negative correlation between growth of sales and

profitability.

There is a positive correlation between liquidity (current ratio) and profitability and a low

positive correlation between debt ratio and profitability as well.

Regression analysis

In the regression models given below, the column "Coefficient" gives the least squares

estimates of bj while the p-value to each variable is used to derive the significance of the

relationship between the dependent and explanatory variables. AdjustedR2 is a

modification ofR2

that adjusts for the number of explanatory terms in a model. Standard

Error is the sample estimate of the standard deviation of the error u. The standard error

here refers to the estimated standard deviation of the error term u. It is not to be confused

with the standard error of y itself (from descriptive statistics) or with the standard errors

of the regression coefficients.

Table 5: Results of Model 1: ROTA= a + b1ICP + b2 LNS + b3 FG + b4CR + b5 DR

From the table, we see that the intercept (b0 or a) has a fixed positive effect of 0.2650 on

the dependent variable ROTA.

The coefficient of Inventory Conversion Period (ICP) is positive but statistically

insignificant (P-value > 0.05). It means that 1unit change in the ICP will result in 0.0004

Variables Coefficients Standard Error t Stat P-value

Intercept

ICP

LNS

Growth

CR

FL

0.265019937

0.000460948

-0.030676378

-0.024742621

0.011205177

0.02938995

0.736300655

0.000415303

0.064265727

0.23882128

0.012283152

0.261761654

0.359934

1.109907

-0.47734

-0.1036

0.91224

0.112278

0.737096

0.329266

0.658034

0.922471

0.41325

0.916012

R Square

Adjusted R SquareStandard Error

0.676847468

0.2729068030.019404766 F-statisticSignificance F 1.675611114248220.318608139756546


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unit change in the same direction in the profitability represented by ROTA. A positive

relationship between ROTA and ICP can be explained by the fact that firms which

maintain high inventory levels reduce the cost of possible interruptions in the production

process. This helps in preventing loss of business due to the scarcity of products and

reducing the cost of supplying the goods. (Mathuva, 2010). In doing so, firms are

protected against price fluctuation (Blinder and Maccini, 1991). This is especially

important in Nepal that is very prone to political risks such as strikes and bandhs.

Among the control variables, the size of the firm i.e. LNS and growth have negative

coefficient of -0.0307 and -0.0247 respectively. It indicates that as the firms size and

growth rate increases, its profitability tends to decrease. However, both of these

relationships are not statistically significant. Alternatively, among the control variables,

the current ratio and debt ratio have positive coefficients of 0.0112 and 0.0294

respectively. It indicates that as the current ratio and debt ratio increase, Dabur Nepals

profitability tends to increase as well. However, both of these relationships are not

significant as the P-values are greater than 0.05.

A simple summary of the above output is that the fitted line is

ROTA= 0.2650 + 0.0005 ICP0.0307 LNS0.0247 Growth + 0.0112 CR + 0.0294 DR

Adjusted R2 = 0.2729 means that 27.29% of the variation of yi.e. profitability (ROTA) is

explained by the regressors. The remaining variation is due to other factors not accounted

for in the model. Here, we can see that the model is not significant.

Table 6: Results of Model 2: ROTA= a + b1PDP + b2 LNS + b3 FG + b4CR + b5 DR

Coefficients Standard Error t Stat P-value

Intercept

PDP

LNS

Growth

CR

DR

-0.10527

-0.00011

0.005738

-0.12264

0.007328

0.129106

0.747923

0.000288

0.062181

0.247913

0.01412

0.303444

-0.14075

-0.3977

0.092282

-0.49468

0.518976

0.42547

0.894875

0.71116

0.930911

0.646762

0.631168

0.692386

R Square

Adjusted R Square

Standard Error

0.593403

0.085156

0.021766

F-statistic 1.167549

Significance F 0.453021


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From the table, we see that the intercept (b0 or a) has a fixed negative effect of 0.2650 on

the dependent variable ROTA. The coefficient of Payable Deferral Period (PDP) is

negative but statistically insignificant (P-value > 0.05). It means that 1unit change in the

PDP will result in -0.0001 unit change in the same direction in Y i.e. the profitability

represented by ROTA. Any decrease in the period of payable conversion has positive

effects on the profitability of Dabur Nepal. According to Deloof 2003, those companies

with low profitability tend to delay the payment of their liabilities. In other words, the

acceleration of debts payment is related to the increase in profitability which is consistent

with the findings of Farzinfar and Arani, 2012.

Among the control variables, the growth of the firm has negative coefficient of -0.12264.

It indicates that as the firms growth rate increases, its profitability tends to decrease.

However, this relationships is not statistically significant as the P-value is greater than

0.05. Alternatively, among the control variables, the current ratio and debt ratio have

positive coefficients of 0.0073 and 0.1291 respectively. It indicates that as the current

ratio and debt ratio increase, Dabur Nepals profitability tends to increase as well.

However, both of these relationships are not significant as the P-values are greater than

0.05.

Another relationship worth noting is the coefficient of LNS which is 0.0057. It was found

earlier in the correlation analysis that LNS and ROTA were negatively correlated. But in

this Model 2 regression, the relationship is positive. Since the independent variables are

correlated with each other as well, then such effects take place. In other words, if there

are several regressors and they are not independent then you can see the effect called

confounding.


ROTA= -0.10530.0001 PDP + 0.0057 LNS0.1226 Growth + 0.0073CR + 0.1291DR

Adjusted R2

= 0.0852 means that 8.52% of the variation of yi.e. profitability (ROTA) is

explained by the regressors of the model but we see that the model is statistically

insignificant.


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Table 7: Results of Model 3: ROTA= a + b1ARP + b2 LNS + b3 FG + b4CR + b5 DR


Intercept

ARP

LNSGrowth

CR

DR

0.145164

-0.001

-0.01129-0.01181

0.008442

0.042711

0.49417

0.000413

0.0409890.167745

0.008823

0.187612

0.293753

-2.41819

-0.27542-0.07038

0.956869

0.227654

0.783558

0.072905

0.7966330.947266

0.39282

0.831078

R Square 0.828315

Adjusted R Square 0.613708

Standard Error 0.014144

F-statistic

Significance F

3.859686

0.107547

From the table, we see that the intercept (b0 or a) has a fixed positive effect of 0.1452 on

the dependent variable ROTA. The coefficient of Account Receivable Period (ARP) is

negative and statistically insignificant (P-value > 0.05). It means that 1unit change in the

PDP will result in -0.001 unit change in the same direction in Y i.e. the profitability

represented by ROTA. Any decrease in the period of receivable conversion has positive

effects on the profitability of Dabur Nepal. In other words, the ROTA of the Dabur

increases if the accounts receivable conversion period is reduced. This shows the

importance of the management of working capital in Dabur. Although granting more

credit and longer deadline to customers may increase sales volume, but limiting the

period of receivables conversion improves the results of the performance of Dabur. This

finding is in line with most literature.

Among the control variables, the size of the firm i.e. LNS and growth have negative

coefficient of -0.0113 and -0.0118 respectively. It indicates that as the firms size and

growth rate increases, its profitability tends to decrease. However, both of these

relationships are not statistically significant. Alternatively, among the control variables,

the current ratio and debt ratio have positive coefficients of 0.0084 and 0.0427

respectively. It indicates that as the current ratio and debt ratio increase, Dabur Nepals

profitability tends to increase as well. However, both of these relationships are not

significant as the P-values are greater than 0.05.


ROTA= 0.14520.001 ARP0.0113 LNS0.0118 Growth + 0.0084 CR + 0.0427 DR


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Adjusted R2

= 0.6137 means that 61.37% of the variation of yi.e. profitability (ROTA) is


insignificant.

Table 8: Results of Model 4: ROTA= a + b1CCC + b2 LNS + b3 FG + b4CR + b5 DR


Intercept

CCC

LNS

Growth

CR

DR

-0.059890482

7.14408E-05

0.001218016

-0.116203624

0.008302993

0.108368563

0.759918468

0.000265831

0.064744074

0.252750276

0.013880654

0.298026563

-0.07881

0.268746

0.018813

-0.45976

0.59817

0.36362

0.940968

0.801417

0.985891

0.66957

0.581948

0.734545

R Square

Adjusted R SquareStandard Error

0.584821561

0.0658485120.021994902

F-statistic

Significance F

1.126882

0.46697064

There is an insignificant and very low positive correlation between the return on assets

and cash conversion cycle. Based on this relation, an increase in CCC days would result

in increase in profitability of Dabur. It gives a strong indication to the firm manager/

owners that longer the CCC turnover in days, lesser capital will be deployed in current

assets and eventually there will be more capital investment leading towards a higher

profitability of the firm. (Attari and Raza, 2012). The rationale is also supported by the

concept of optimum liquidity position promulgated by Schilling (1996).


ROTA= -0.05990.00007CCC + 0.0012 LNS0.1162Growth + 0.0083CR + 0.1084DR

Adjusted R2

= 0.0658 means that 6.58% of the variation of profitability (ROTA) is


insignificant.


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DISCUSSIONS

The findings of this study can be summarized as follows:

- The Inventory Conversion Period (ICP) of Dabur is positively related to theprofitability of Dabur Nepal.

- The Payable Deferral Period (PDP) of Dabur is negatively related to theprofitability of Dabur Nepal.

- The Accounts Receivable Period (ARP) of Dabur is negatively related to theprofitability of Dabur Nepal.

- The Cash Conversion Cycle (CCC) of Dabur is positively related to theprofitability of Dabur Nepal.

The positive relationship of ICP with ROTA indicates that higher inventory stocks will

increase profitability. This relationship can be explained by the fact that firms which

maintain high inventory levels reduce the cost of possible interruptions in the production

process, especially important in Nepal which is very prone to political risks such as

strikes and bandhs. Any decrease in the period of payable conversion has positive

effects on the profitability of Dabur Nepal. In other words, the acceleration of debts

payment is related to the increase in profitability which is consistent with the findings of

Farzinfar and Arani, 2012. Any decrease in the period of receivable conversion has

positive effects on the profitability of Dabur Nepal. . This means that if this company

makes its credit terms tighter, it will result in quick collection from debtors. As a result,

the firms profitability increases. Also, an increase in CCC days would result in increase

in profitability of Dabur. It gives a strong indication to the firm manager/ owners that

longer the CCC turnover in days, lesser capital will be deployed in current assets and

eventually there will be more capital investment leading towards a higher profitability of

the firm. (Attari and Raza, 2012).

We see that except for the relationships between ARP and profitability, all other

relationships contradict the theories of working capital management and profitability. It

suggests that Dabur Nepal could further increase its profits by taking a longer time to

convert its inputs to sales, shorter time to pay its creditors, and shorter time to collect


21/26

from its debtors. Overall, if the cash conversion cycle is elongated, it will lead to

increased profits for Dabur Nepal.

On the other hand, these relationships have not proven to be statistically significant.

Neither the individual variables of the models are significant, nor are the models

themselves significant.The results of this study seems to indicate that there is no

convincing evidence that any of the independent variables i.e. the components of working

capital management have an effect on the dependent variable i.e. profitability. Said more

carefully, it means that the data are compatible with the dependent variable values not

being affected by any of the independent variables. All the regression models are

insignificant because either the independent variables are affecting each other and/or

because reality is more complex than perceived by the models.

Let us look at the trends of net profit after tax, sales, and assets of Dabur to get a more

clear perspective.

Chart 1: NPAT trends of Dabur Nepal Pvt. Ltd.

We can see that the net profit after tax for Dabur has been highly volatile over the period

of last ten years with no fixed trend. The NPAT have significantly decreased in the years

2008-09 and 2011-12. According to the companys annual report, in FY 2008-09, the

recession has crippled the world economy. As a result of this, the commodity prices

touched sky high with the price of crude oil crossing USD 140 per barrel. Similarly, the

cost of other inputs has also increased. Further, during the year, there was huge

appreciation in the value of USD, resulting in huge exchange loss to the Company. As a

0.00

500.00

1000.00

1500.00

2000.00

Rs.

(inl

acs)

NPAT

NPAT


22/26

result of these factors, the Profit after Tax of Dabur has decreased significantly. Similarly

in 2011-12, due to Euro-zone crisis, there was huge appreciation in USD compared to

rupee, and hence Dabur Nepal incurred forex losses.

Let us now look at the total assets and sales trends of Dabur Nepal.

Chart 2: Sales and Total assets trend of Dabur Nepal Pvt. Ltd.

We can see above that the total assets and sales of Dabur have been in an increasing

trend.

The effects of these two components have the following effect on ROTA of Dabur:

Chart 3: Trends to ROTA of Dabur Nepal.

Because of the volatility of Daburs NPAT, the ROTA has been volatile as well despite

increasing asset trends.

As per the annual reports of Dabur, the world wide recessions and crisis are to be blamed

for such volatility. Further as mention in the annual reports of Dabur Nepal, the political

0.00

10000.00

20000.00

30000.00

40000.00

50000.00

60000.00

70000.00

80000.00

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

2009

-10

2010

-11

2011

-12

Rs.

(inl

acs)

Total assets

Sales

0

0.02

0.04

0.06

0.08

1 2 3 4 5 6 7 8 9 10

ROTA


23/26

trends of Nepal are also to be accounted for such volatility. The ROTA is lowest the 7th

year i.e. 2008-2009 where the company had to undergo shut down of its operation for 1

month due to political crisis.

What can be suggested to Dabur Nepal is that it should implement ways to protect itself

from forex risks. Since it is a subsidiary of a multinational company, it is more prone

risks of the international markets along with the domestic risks.

Since the sample period taken for research is unordinary and not the usual case, the

results of the research has been unordinary as well. It can only be concluded that the

independent variables taken into account could not show their true effects on the

dependent variables due to the extraordinary external factors faced by the dependent

variable but not accounted for in the model.

Taking everything into consideration, a suggestion for further studies could be to look at

working capital management and profitability at normal times when the economy is

stable and growing, and at abnormal times like in crisis situations or recessions as

conducted by Baveld, 2012 in Impact of Working Capital Management on the

Profitability of Public Listed Firms in The Netherlands During the Financial Crisis.

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24/26

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Annex

Calculation of necessary individual components:

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

NPAT 1521.86 1445.60 1116.68 775.50 852.70 705.30 23.65 1509.77 1858.98 414.8

Cogs 19654.45 20383.69 21849.55 22180.51 25771.58 28476.16 32275.02 31415.65 37219.51 49413.88

Sales 27961.79 28347.35 29634.41 31040.46 35181.33 39159.92 43519.23 44268.26 52335.45 68542.07

Inv. 5936.81 5318.12 7097.31 7062.56 6977.87 9878.98 8827.17 11381.11 16024.02 15062.3

TA 23350.03 21019.10 23182.47 25080.72 28447.79 32407.06 29730.43 28861.34 39345.30 44483.09

CA 14440.19 13246.84 14203.90 14919.06 18840.10 20518.94 17644.02 17553.83 26004.79 31020.12

CL 3241.81 5410.23 6549.33 7367.94 6952.06 12661.68 10903.84 5488.59 13902.31 22113.5

AP 1404.90 1720.22 1403.67 1915.97 3506.85 8391.20 992.85 1909.65 1539.73 10726.6

AR 2121.03 1722.47 1664.65 2145.73 4847.33 5365.60 6585.28 2714.87 4178.73 7406.83

TD 16551.03 13162.74 14582.61 15170.61 17750.69 20978.50 17795.09 16243.80 24899.76 29827.77

Where, Inv.= Inventories, TA= Total Assets, CA= Current Assets, CL= Current

Liabilities, AP= A/c payable, AR= A/c Receivable, TD= Total Debt

Calculation of necessary ratios:

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

ROA 0.0652 0.0688 0.0482 0.0309 0.0300 0.0218 0.0008 0.0523 0.0472 0.0093

ICP 110.2517 95.2288 118.5616 116.2207 98.8268 126.6261 99.8269 132.2304 157.1425 111.2592

PDP 26.0902 30.8031 23.4485 31.5290 49.6671 107.5562 11.2282 22.1871 15.0996 79.2336

ARP 27.6869 22.1785 20.5031 25.2313 50.2902 50.0114 55.2314 22.3846 29.1435 39.4428

CCC 111.8484 86.6042 115.6162 109.9230 99.4499 69.0814 143.8301 132.4279 171.1863 71.4684

LNS 10.2386 10.2523 10.2967 10.3430 10.4683 10.5754 10.6810 10.6980 10.8654 11.1352

FG - 0.0138 0.0454 0.0474 0.1334 0.1131 0.1113 0.0172 0.1822 0.3097

CR 4.4544 2.4485 2.1688 2.0249 2.7100 1.6206 1.6181 3.1982 1.8705 1.4028

FL 0.7088 0.6262 0.6290 0.6049 0.6240 0.6473 0.5985 0.5628 0.6329 0.6705

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