A COMPARATIVE ANALSIS OF THE EFFECT OF WORKING CAPITAL MANAGEMENT ON THE PROFITABILITY OF SMALL AND LARGE COMPANIES LISTED AT KARACHI STOCK EXCHANGE

Transcription

1 i A COMPARATIVE ANALSIS OF THE EFFECT OF WORKING CAPITAL MANAGEMENT ON THE PROFITABILITY OF SMALL AND LARGE COMPANIES LISTED AT KARACHI STOCK EXCHANGE By Mustafa Afeef PhD (Management Sciences) February, 2011 QURTUBA UNIVERSITY OF SCIENCE AND INFORMATION TECHNOLOGY, PESHAWAR

2 ii A COMPARATIVE ANALSIS OF THE EFFECT OF WORKING CAPITAL MANAGEMENT ON THE PROFITABILITY OF SMALL AND LARGE COMPANIES LISTED AT KARACHI STOCK EXCHANGE A Doctoral Dissertation submitted to Qurtuba University of Science and Information Technology in partial fulfillment of the requirements for the degree of Doctor of Philosophy in Management Sciences February, 2011

3 iii APPROVAL SHEET QURTUBA UNIVERSITY OF SCIENCE AND INFORMATION TECHNOLOGY, PESHAWAR A COMPARATIVE ANALSIS OF THE EFFECT OF WORKING CAPITAL MANAGEMENT ON THE PROFITABILITY OF SMALL AND LARGE COMPANIES LISTED AT KARACHI STOCK EXCHANGE Internal Supervisor: Signature Name Designation Organization Date Foreign Evaluator 1: Signature Name Designation Organization Date Home Country Evaluator: Signature Name Designation Organization Date Foreign Evaluator 2: Signature Name Designation Organization Date

4 i PREFACE Short-term management of financial affairs seems to have been intermittently overlooked by researchers in the field of Financial Management. Scholarly work on the various aspects of short-term finance, particularly the working capital management, is even scarce in a country like ours where research endeavors in the educational institutions are not usually accentuated much. Although quite a great deal of work has been done on the impact of working capital management on a firm s profitability in India, the subject remains barely thrashed out in the other nations of the subcontinent. This thesis pertains to the effect of the efficient management of working capital on the profitability of firms listed in Karachi Stock Exchange. However, unlike previous studies, this effort has a distinct objective. The work is aimed to compare the effects of WCM on profitability of Small firms with that of its influence on the profit performance of large organizations. In other words, the work is intended to reveal whether the size of a firm has anything to do with the potential impact of its WCM on its output. Or, is the effective management of working capital more of a constructive exertion for large firms or is it the vice versa? To serve the purpose, firms of both large and small size listed in KSE were sampled independently and the effect of WCM on profitability was determined for each of the samples using the SPSS 16 software. Results drawn from both samples were then compared coherently to achieve the very objective of the study. Nonetheless, it is expected that this humble effort will work out to be a pathway for those who may come forward to further enrich the study. January, 2011 Mustafa Afeef

5 ii ACKNOWLEDGEMENTS The impetus to delve into short-term finance came from the veracity that so little had been explored so far in the subject particularly in this region. However, the urge and the initiative to do all this may be attributed to the blessings of the Almighty, no doubt. I am highly obliged and indebted to my Supervisor, Prof. Dr. Khair-uz-Zaman, whose unfailing guidance helped me and encouraged me a lot during the course of my research work. He was always there to provide me with his valuable suggestions. I found him very nice and cooperative indeed. While carrying out this research study, I have freely quoted many of the available text, reference books and research papers etc., thus having got ample assistance from the previously done work, to the authors of which I must express my sincere indebtedness. I also owe a deep debt of gratitude to Prof. Dr. Muhammad Saleem of Qurtuba University Peshawar not only for his constructive criticism but for the special moral uplift and support that he offered me at all stages of the preparation of this manuscript. I must place on record my deepest gratitude to Mr. Nazim Ali, a PhD Scholar at Qurtuba University Peshawar for his help in enabling me to get access to the required financial data vital for the conduction of this research. Finally, the encouragement and especially the immense financial support granted by the Higher Education Commission must also be gratefully acknowledged. A special acknowledgement, in this regards, is due to the then Chairman of the Commission, Dr. Atta-ur-Rehman, for his very strenuous and remarkable efforts to initiate and inaugurate a truly research-oriented culture in the educational institutions by launching fully funded Fellowship programs for students of higher studies throughout the country. January, 2011 Mustafa Afeef PhD (Management Sciences) Session

6 iii Dedication: To my very beloved father, who so much wished to see his son earn a PhD degree in Management Sciences, but passed away long before that could ever be realized!

7 iv LIST OF ACRONYMS CCC CR EBIT GDP ICP KSE Log Obs. OI OPS PDP RCP ROA SBP SME SPSS St. Dev. WCM Cash Conversion Cycle Current Ratio Earnings Before Interest and Taxes Gross Domestic Product Inventory Conversion Period Karachi Stock Exchange Logarithm Observations Operating Income Operating Profit to Sales Payable Deferral Period Receivable Collection Period Return On Assets State Bank of Pakistan Small and Medium Enterprises Statistical Package for Social Sciences Standard Deviation Working Capital Management

8 v CONTENTS IN BRIEF Preface.i Acknowledgements.ii Dedication..iii List of Acronyms...iv List of Tables. xi Abstract xxi CHAPTER 1: INTRODUCTION CHAPTER 2: REVIEW OF LITERATURE CHAPTER 3: THE RESEARCH METHODOLOGY CHAPTER 4: COLLECTION OF DATA CHAPTER 5: ANALYSES AND FINDINGS CHAPTER 6: CONCLUSION Bibliography...318

9 vi CONTENTS Preface Acknowledgements Dedication List of Acronyms Contents in Brief Contents List of Tables Abstract CAPTION PAGE(S) i ii iii iv v vi xi xxi CHAPTER 1: INTRODUCTION BACKGROUND OF THE RESEARCH STATEMENT OF THE RESEARCH QUESTION THE HYPOTHESES Hypothesis Hypothesis Hypothesis Hypothesis Hypothesis Hypothesis OBJECTIVES OF THE STUDY JUSTIFICATION AND LIKELY BENEFITS LIMITATIONS OF THE STUDY CONJECTURAL FRAMEWORK ORGANIZATION OF THE DISSERTATION KEY TERMS AND DEFINITIONS Working Capital Management Cash Conversion Cycle Inventory Conversion Period Receivable Collection Period Payable Deferral Period Liquidity Profitability 12 END NOTES 13 CHAPTER 2: REVIEW OF LITERATURE MARC DELOOF Findings of his Study SUSHMA VISHNANI AND BHUPESH KR. SHAH Findings of their Study PEDRO JUAN GARCÍA-TERUEL AND PEDRO MARTÍNEZ-SOLANO 19

10 vii Findings of their Study DR IOANNIS LAZARIDIS AND MSC DIMITRIOS TRYFONIDIS Findings of their Study AZHAGAIAH RAMACHANDRAN AND M. JANAKIRAMAN Findings of their Study M. A., ZARIYAWATI, M. N., ANNUAR AND A.S., ABDUL RAHIM Findings of their Study ABDUL REHMAN AND MOHAMED NASR Findings of their Study HAITHAM NOBANEE AND MARYAM ALHAJJAR Findings of their Study DR. S. BENJAMIN CHRISTOPHER AND MS. A. L. KAMALAVALLI Findings of their Study HAITHAM NOBANEE Findings of his Study HAITHAM NOBANEE AND MARYAM ALHAJJAR Findings of their Study OTHER RELATED PAPERS 32 END NOTES 35 CHAPTER 3: THE RESEARCH METHODOLOGY COLLECTION OF THE DATA THE SAMPLES Sample For SMEs Listed in KSE Sample For Large Companies Listed in KSE VARIABLES USED IN THE STUDY Comparison of Variables used for Measuring the Efficiency of WCM The Net Trade Cycle The Weighted Cash Conversion Cycle The Optimal Cash Conversion Cycle The Cash Conversion Cycle Measuring the Cash Conversion Cycle Measuring the Components of Cash Conversion Cycle Receivable Collection Period Inventory Conversion Period Payable Deferral Period Comparison of Variables used for Measuring Liquidity The Cash Ratio The Quick Ratio The Current Ratio Comparison of Variables used for Measuring Profitability The Return on Assets The Gross Operating Profit The Operating Profit to Sales 49

11 viii Control Variables used and their Measurement The Natural Logarithm of Sales The Sales Growth The Financial Leverage STATISTICAL TOOLS USED IN THE STUDY THE REGRESSION MODEL THE STRUCTURE OF DATA ANALYSES The Descriptive Analysis The Quantitative Analysis 52 END NOTES 53 CHAPTER 4: COLLECTION OF DATA REPRESENTATION OF THE COLLECTED DATA OF SMALL COMPANIES LISTED IN KSE (SAMPLE 1) 4.2 REPRESENTATION OF THE COLLECTED DATA OF LARGE COMPANIES LISTED IN KSE (SAMPLE 2) CHAPTER 5: ANALYSES AND FINDINGS THE DESCRIPTIVE AND QUANTITATIVE ANALYSES FOR FIRMS IN 128 SAMPLE THE DESCRIPTIVE AND QUANTITATIVE ANALYSES FOR FIRMS IN 168 SAMPLE RESULTS OF THE CORRELATION ANALYSES OF INDIVIDUAL 271 FIRMS IN SAMPLE Correlation of ROA with the Indicators of WCM and Liquidity ROA and the Inventory Conversion Period ROA and the Receivable Collection Period ROA and the Payable Deferral Period ROA and the Cash Conversion Cycle ROA and the Current Ratio Correlation of OPS with the Indicators of WCM and Liquidity OPS and the Inventory Conversion Period OPS and the Receivable Collection Period OPS and the Payable Deferral Period OPS and the Cash Conversion Cycle OPS and the Current Ratio 275 Results of Overall Individual SME Correlation Analysis RESULTS OF THE CORRELATION ANALYSES OF INDIVIDUAL FIRMS 276 IN SAMPLE Correlation of ROA with the Indicators of WCM and Liquidity ROA and the Inventory Conversion Period ROA and the Receivable Collection Period ROA and the Payable Deferral Period ROA and the Cash Conversion Cycle ROA and the Current Ratio

12 ix Correlation of OPS with the Indicators of WCM and Liquidity OPS and the Inventory Conversion Period OPS and the Receivable Collection Period OPS and the Payable Deferral Period OPS and the Cash Conversion Cycle OPS and the Current Ratio 279 Results of Overall Individual Large Company Correlation Analysis COMPARISON OF RESULTS OF THE CORRELATION ANALYSES FOR 280 SAMPLE 1 AND SAMPLE Comparison of ROA-ICP Correlations for Small and Large Companies Comparison of OPS-ICP Correlations for Small and Large Companies Comparison of ROA-RCP Correlations for Small and Large Companies Comparison of OPS-RCP Correlations for Small and Large Companies Comparison of ROA-PDP Correlations for Small and Large Companies Comparison of OPS-PDP Correlations for Small and Large Companies Comparison of ROA-CCC Correlations for Small and Large Companies Comparison of OPS-CCC Correlations for Small and Large Companies Comparison of ROA-CR Correlations for Small and Large Companies Comparison of OPS-CR Correlations for Small and Large Companies 285 Summary of Results of the Comparative Analysis THE DESCRIPTIVE ANALYSES FOR SAMPLES Descriptive Analysis for Sample Descriptive Analysis for Sample THE QUANTITATIVE ANALYSES FOR SAMPLES The Correlation Analysis for Sample Results of the Correlation Analysis between the Profitability Indicators 291 and the Inventory Conversion Period Results of the Correlation Analysis between the Profitability Indicators 291 and the Receivable Collection Period Results of the Correlation Analysis between the Profitability Indicators 292 and the Payable Deferral Period Results of the Correlation Analysis between the Profitability Indicators 292 and the Cash Conversion Cycle Results of the Correlation Analysis between the Profitability Indicators 292 and the Current Ratio Results of the Correlation Analysis between the Profitability Indicators 293 and the Financial Leverage Results of the Correlation Analysis between the Profitability Indicators 293 and the Firm Size Results of the Correlation Analysis between the Profitability Indicators 293 and the Sales Growth The Correlation Analysis for Sample Results of the Correlation Analysis between the Profitability Indicators 295 and the Inventory Conversion Period Results of the Correlation Analysis between the Profitability Indicators 295 and the Receivable Collection Period Results of the Correlation Analysis between the Profitability Indicators 295

13 x and the Payable Deferral Period Results of the Correlation Analysis between the Profitability Indicators 296 and the Cash Conversion Cycle Results of the Correlation Analysis between the Profitability Indicators 296 and the Current Ratio Results of the Correlation Analysis between the Profitability Indicators 296 and the Financial Leverage Results of the Correlation Analysis between the Profitability Indicators 296 and the Firm Size Results of the Correlation Analysis between the Profitability Indicators 297 and the Sales Growth Comparison of the Correlation Analysis for Sample 1 and that for 299 Sample The Regression Analysis A for Sample Results of Regression Results of Regression Results of Regression Results of Regression Results of Regression The Regression Analysis A for Sample Results of Regression Results of Regression Results of Regression Results of Regression Results of Regression Comparison of the Regression Analysis A for Sample 1 and that for 306 Sample The Regression Analysis B for Sample Results of Regression Results of Regression Results of Regression Results of Regression Results of Regression The Regression Analysis B for Sample Results of Regression Results of Regression Results of Regression Results of Regression Results of Regression Comparison of the Regression Analysis B for Sample 1 and that for Sample 2 CHAPTER 6: CONCLUSION Bibliography

14 xi LIST OF TABLES Serial Table Title of the Table Page Population and Samples Aruj Garment Accessories Ltd International Knitwear Ltd Mubarak Textile Mills Ltd Mukhtar Textile Mills Ltd Regent Textile Industries Ltd Safa Textiles Ltd Amin Spinning Mills Ltd Mehr Dastagir Textile Mills Ltd Bannu Woolen Mills Ltd Kashmir Polytex Ltd Moonlite (Pak) Ltd Bawany Air Products Ltd Data Agro Ltd Leiner Pak Gelatine Ltd Sardar Chemical Industries Ltd Bela Automotives Ltd Johnson & Philips (Pakistan) Ltd The Climax Engineering Company Ltd Transmission Engineering Industries Ltd Dadabhoy Sack Ltd Pakistan Paper Products Ltd Ideal Energy Ltd S.G. Power Ltd Khyber Tobacco Company Ltd Sarhad Cigarette Industries Ltd Amin Fabrics Ltd Suhail Jute Mills Ltd Kakakhel Pakistan Ltd Al-Khair Gadoon Ltd Diamond Industries Ltd Goodluck Industries Ltd Grays Of Cambridge (Pakistan) Ltd Haji Dossa Ltd Hashimi Can Company Ltd Indus Fruit Products Ltd Leather Up Ltd Mandviwala Mauser Plastic Industries Ltd Pakistan House International Ltd Quice Food Industries Ltd. 74

15 xii Syed Match Company Ltd Azgard Nine Ltd Colony Textile Mills Ltd Dewan Textile Mills Ltd Faisal Spinning Mills Ltd Fateh Textile Mills Ltd Fatima Enterprises Ltd Fazal Cloth Mills Ltd Gadoon Textile Mills Ltd Gul Ahmed Textile Mills Ltd Gulistan Textile Mills Ltd Indus Dyeing & Manufacturing Co. Ltd Kohinoor Textile Mills Ltd Mahmood Textile Mills Ltd Masood Textile Mills Ltd Nishat (Chunian) Ltd Nishat Mills Ltd Quetta Textile Mills Ltd Reliance Weaving Mills Ltd Saif Textile Mills Ltd Sapphire Fibres Ltd Sapphire Textile Mills Ltd Suraj Cotton Mills Ltd The Crescent Textile Mills Ltd Al-Abid Silk Mills Ltd Dewan Salman Fibre Ltd Gatron (Industries) Ltd Ibrahim Fibres Ltd Liberty Mills Ltd Rupali Polyester Ltd Abbott Laboratories (Pakistan) Ltd Berger Paints Pakistan Ltd Clariant Pakistan Ltd Colgate-Palmolive (Pakistan) Ltd Dawood Hercules Chemicals Ltd Engro Chemical Pakistan Ltd Fauji Fertilizer Bin Qasim Ltd Fauji Fertilizer Company Ltd Glaxosmithkline (Pakistan) Ltd ICI Pakistan Ltd Pakistan PTA Ltd Sanofi Aventis (Aventis Pharma) Searle Pakistan Ltd Sitara Chemical Industries Ltd Al-Ghazi Tractors Ltd. 96

16 xiii Atlas Honda Ltd Crescent Steel & Allied Products Ltd Dewan Farooque Motors Ltd General Tyre & Rubber Co. Ltd Ghandhara Nissan Ltd Hinopak Motors Ltd Honda Atlas Cars (Pakistan) Ltd Indus Motor Company Ltd International Industries Ltd Millat Tractors Ltd Pak Elektron Ltd Pak Suzuki Motor Company Ltd Pakistan Cables Ltd Siemens (Pakistan) Engineering Co. Ltd Dewan Sugar Mills Ltd Habib Sugar Mills Ltd JDW Sugar Mills Ltd Shakarganj Mills Ltd Century Paper & Board Mills Ltd Packages Ltd Bestway Cement Ltd Cherat Cement Company Ltd D.G. Khan Cement Company Ltd Dewan Cement Ltd. (Pakland Cement Ltd.) Fauji Cement Company Ltd Fecto Cement Ltd Lucky Cement Ltd Maple Leaf Cement Factory Ltd Pioneer Cement Ltd Attock Refinery Ltd Japan Power Generation Ltd Karachi Electric Supply Corporation Ltd Kohinoor Energy Ltd Mari Gas Company Ltd National Refinery Ltd Pakistan Oilfields Ltd Pakistan Refinery Ltd Pakistan State Oil Company Ltd Shell Pakistan Ltd Southern Electric Power Co. Ltd Sui Northern Gas Pipelines Ltd Sui Southern Gas Company Ltd The Hub Power Company Ltd Pakistan International Airlines Corporation Ltd Pakistan National Shipping Corporation. 119

17 xiv Pakistan Telecommunication Company Ltd Lakson Tobacco Company Ltd Pakistan Tobacco Company Ltd Thal Jute Mills Ltd Bata Pakistan Ltd Ghani Glass Ltd National Foods Ltd Nestlé Pakistan Ltd Pakistan Services Ltd Rafhan Maize Products Co. Ltd Service Industries Ltd Tri-Pack Films Ltd Unilever Pakistan Foods Ltd Unilever Pakistan Ltd Descriptive Analysis for Aruj Garment Accessories Ltd Quantitative Analysis for Aruj Garment Accessories Ltd Descriptive Analysis for International Knitwear Ltd Quantitative Analysis for International Knitwear Ltd Descriptive Analysis for Mubarak Textile Mills Ltd Quantitative Analysis for Mubarak Textile Mills Ltd Descriptive Analysis for Mukhtar Textile Mills Ltd Quantitative Analysis for Mukhtar Textile Mills Ltd Descriptive Analysis for Regent Textile Industries Ltd Quantitative Analysis for Regent Textile Industries Ltd Descriptive Analysis for Safa Textiles Ltd Quantitative Analysis for Safa Textiles Ltd Descriptive Analysis for Amin Spinning Mills Ltd Quantitative Analysis for Amin Spinning Mills Ltd Descriptive Analysis for Mehr Dastagir Textile Mills Ltd Quantitative Analysis for Mehr Dastagir Textile Mills Ltd Descriptive Analysis for Bannu Woolen Mills Ltd Quantitative Analysis for Bannu Woolen Mills Ltd Descriptive Analysis for Kashmir Polytex Ltd Quantitative Analysis for Kashmir Polytex Ltd Descriptive Analysis for Moonlite (Pak) Ltd Quantitative Analysis for Moonlite (Pak) Ltd Descriptive Analysis for Bawany Air Products Ltd Quantitative Analysis for Bawany Air Products Ltd Descriptive Analysis for Data Agro Ltd Quantitative Analysis for Data Agro Ltd Descriptive Analysis for Leiner Pak Gelatine Ltd Quantitative Analysis for Leiner Pak Gelatine Ltd Descriptive Analysis for Sardar Chemical Industries Ltd Quantitative Analysis for Sardar Chemical Industries Ltd Descriptive Analysis for Bela Automotives Ltd. 143

18 xv Quantitative Analysis for Bela Automotives Ltd Descriptive Analysis for Johnson & Philips (Pakistan) Ltd Quantitative Analysis for Johnson & Philips (Pakistan) Ltd Descriptive Analysis for The Climax Engineering Company Ltd Quantitative Analysis for The Climax Engineering Company Ltd Descriptive Analysis for Transmission Engineering Industries Ltd Quantitative Analysis for Transmission Engineering Industries Ltd Descriptive Analysis for Dadabhoy Sack Ltd Quantitative Analysis for Dadabhoy Sack Ltd Descriptive Analysis for Pakistan Paper Products Ltd Quantitative Analysis for Pakistan Paper Products Ltd Descriptive Analysis for Ideal Energy Ltd Quantitative Analysis for Ideal Energy Ltd Descriptive Analysis for S.G. Power Ltd Quantitative Analysis for S.G. Power Ltd Descriptive Analysis for Khyber Tobacco Company Ltd Quantitative Analysis for Khyber Tobacco Company Ltd Descriptive Analysis for Sarhad Cigarette Industries Ltd Quantitative Analysis for Sarhad Cigarette Industries Ltd Descriptive Analysis for Amin Fabrics Ltd Quantitative Analysis for Amin Fabrics Ltd Descriptive Analysis for Suhail Jute Mills Ltd Quantitative Analysis for Suhail Jute Mills Ltd Descriptive Analysis for Kakakhel Pakistan Ltd Quantitative Analysis for Kakakhel Pakistan Ltd Descriptive Analysis for Al-Khair Gadoon Ltd Quantitative Analysis for Al-Khair Gadoon Ltd Descriptive Analysis for Diamond Industries Ltd Quantitative Analysis for Diamond Industries Ltd Descriptive Analysis for Goodluck Industries Ltd Quantitative Analysis for Goodluck Industries Ltd Descriptive Analysis for Grays Of Cambridge (Pakistan) Ltd Quantitative Analysis for Grays Of Cambridge (Pakistan) Ltd Descriptive Analysis for Haji Dossa Ltd Quantitative Analysis for Haji Dossa Ltd Descriptive Analysis for Hashimi Can Company Ltd Quantitative Analysis for Hashimi Can Company Ltd Descriptive Analysis for Indus Fruit Products Ltd Quantitative Analysis for Indus Fruit Products Ltd Descriptive Analysis for Leather Up Ltd Quantitative Analysis for Leather Up Ltd Descriptive Analysis for Mandviwala Mauser Plastic Industries Ltd Quantitative Analysis for Mandviwala Mauser Plastic Industries Ltd Descriptive Analysis for Pakistan House International Ltd Quantitative Analysis for Pakistan House International Ltd. 165

19 xvi Descriptive Analysis for Quice Food Industries Ltd Quantitative Analysis for Quice Food Industries Ltd Descriptive Analysis for Syed Match Company Ltd Quantitative Analysis for Syed Match Company Ltd Descriptive Analysis for Azgard Nine Ltd Quantitative Analysis for Azgard Nine Ltd Descriptive Analysis for Colony Textile Mills Ltd Quantitative Analysis for Colony Textile Mills Ltd Descriptive Analysis for Dewan Textile Mills Ltd Quantitative Analysis for Dewan Textile Mills Ltd Descriptive Analysis for Faisal Spinning Mills Ltd Quantitative Analysis for Faisal Spinning Mills Ltd Descriptive Analysis for Fateh Textile Mills Ltd Quantitative Analysis for Fateh Textile Mills Ltd Descriptive Analysis for Fatima Enterprises Ltd Quantitative Analysis for Fatima Enterprises Ltd Descriptive Analysis for Fazal Cloth Mills Ltd Quantitative Analysis for Fazal Cloth Mills Ltd Descriptive Analysis for Gadoon Textile Mills Ltd Quantitative Analysis for Gadoon Textile Mills Ltd Descriptive Analysis for Gul Ahmed Textile Mills Ltd Quantitative Analysis for Gul Ahmed Textile Mills Ltd Descriptive Analysis for Gulistan Textile Mills Ltd Quantitative Analysis for Gulistan Textile Mills Ltd Descriptive Analysis for Indus Dyeing & Manufacturing Co. Ltd Quantitative Analysis for Indus Dyeing & Manufacturing Co. Ltd Descriptive Analysis for Kohinoor Textile Mills Ltd Quantitative Analysis for Kohinoor Textile Mills Ltd Descriptive Analysis for Mahmood Textile Mills Ltd Quantitative Analysis for Mahmood Textile Mills Ltd Descriptive Analysis for Masood Textile Mills Ltd Quantitative Analysis for Masood Textile Mills Ltd Descriptive Analysis for Nishat (Chunian) Ltd Quantitative Analysis for Nishat (Chunian) Ltd Descriptive Analysis for Nishat Mills Ltd Quantitative Analysis for Nishat Mills Ltd Descriptive Analysis for Quetta Textile Mills Ltd Quantitative Analysis for Quetta Textile Mills Ltd Descriptive Analysis for Reliance Weaving Mills Ltd Quantitative Analysis for Reliance Weaving Mills Ltd Descriptive Analysis for Saif Textile Mills Ltd Quantitative Analysis for Saif Textile Mills Ltd Descriptive Analysis for Sapphire Fibres Ltd Quantitative Analysis for Sapphire Fibres Ltd Descriptive Analysis for Sapphire Textile Mills Ltd. 188

20 xvii Quantitative Analysis for Sapphire Textile Mills Ltd Descriptive Analysis for Suraj Cotton Mills Ltd Quantitative Analysis for Suraj Cotton Mills Ltd Descriptive Analysis for The Crescent Textile Mills Ltd Quantitative Analysis for The Crescent Textile Mills Ltd Descriptive Analysis for Al-Abid Silk Mills Ltd Quantitative Analysis for Al-Abid Silk Mills Ltd Descriptive Analysis for Dewan Salman Fibre Ltd Quantitative Analysis for Dewan Salman Fibre Ltd Descriptive Analysis for Gatron (Industries) Ltd Quantitative Analysis for Gatron (Industries) Ltd Descriptive Analysis for Ibrahim Fibres Ltd Quantitative Analysis for Ibrahim Fibres Ltd Descriptive Analysis for Liberty Mills Ltd Quantitative Analysis for Liberty Mills Ltd Descriptive Analysis for Rupali Polyester Ltd Quantitative Analysis for Rupali Polyester Ltd Descriptive Analysis for Abbott Laboratories (Pakistan) Ltd Quantitative Analysis for Abbott Laboratories (Pakistan) Ltd Descriptive Analysis for Berger Paints Pakistan Ltd Quantitative Analysis for Berger Paints Pakistan Ltd Descriptive Analysis for Clariant Pakistan Ltd Quantitative Analysis for Clariant Pakistan Ltd Descriptive Analysis for Colgate-Palmolive (Pakistan) Ltd Quantitative Analysis for Colgate-Palmolive (Pakistan) Ltd Descriptive Analysis for Dawood Hercules Chemicals Ltd Quantitative Analysis for Dawood Hercules Chemicals Ltd Descriptive Analysis for Engro Chemical Pakistan Ltd Quantitative Analysis for Engro Chemical Pakistan Ltd Descriptive Analysis for Fauji Fertilizer Bin Qasim Ltd Quantitative Analysis for Fauji Fertilizer Bin Qasim Ltd Descriptive Analysis for Fauji Fertilizer Company Ltd Quantitative Analysis for Fauji Fertilizer Company Ltd Descriptive Analysis for Glaxosmithkline (Pakistan) Ltd Quantitative Analysis for Glaxosmithkline (Pakistan) Ltd Descriptive Analysis for ICI Pakistan Ltd Quantitative Analysis for ICI Pakistan Ltd Descriptive Analysis for Pakistan PTA Ltd Quantitative Analysis for Pakistan PTA Ltd Descriptive Analysis for Sanofi Aventis (Aventis Pharma) Quantitative Analysis for Sanofi Aventis (Aventis Pharma) Descriptive Analysis for Searle Pakistan Ltd Quantitative Analysis for Searle Pakistan Ltd Descriptive Analysis for Sitara Chemical Industries Ltd Quantitative Analysis for Sitara Chemical Industries Ltd. 210

21 xviii Descriptive Analysis for Al-Ghazi Tractors Ltd Quantitative Analysis for Al-Ghazi Tractors Ltd Descriptive Analysis for Atlas Honda Ltd Quantitative Analysis for Atlas Honda Ltd Descriptive Analysis for Crescent Steel & Allied Products Ltd Quantitative Analysis for Crescent Steel & Allied Products Ltd Descriptive Analysis for Dewan Farooque Motors Ltd Quantitative Analysis for Dewan Farooque Motors Ltd Descriptive Analysis for General Tyre & Rubber Co. Ltd Quantitative Analysis for General Tyre & Rubber Co. Ltd Descriptive Analysis for Ghandhara Nissan Ltd Quantitative Analysis for Ghandhara Nissan Ltd Descriptive Analysis for Hinopak Motors Ltd Quantitative Analysis for Hinopak Motors Ltd Descriptive Analysis for Honda Atlas Cars (Pakistan) Ltd Quantitative Analysis for Honda Atlas Cars (Pakistan) Ltd Descriptive Analysis for Indus Motor Company Ltd Quantitative Analysis for Indus Motor Company Ltd Descriptive Analysis for International Industries Ltd Quantitative Analysis for International Industries Ltd Descriptive Analysis for Millat Tractors Ltd Quantitative Analysis for Millat Tractors Ltd Descriptive Analysis for Pak Elektron Ltd Quantitative Analysis for Pak Elektron Ltd Descriptive Analysis for Pak Suzuki Motor Company Ltd Quantitative Analysis for Pak Suzuki Motor Company Ltd Descriptive Analysis for Pakistan Cables Ltd Quantitative Analysis for Pakistan Cables Ltd Descriptive Analysis for Siemens (Pakistan) Engineering Co. Ltd Quantitative Analysis for Siemens (Pakistan) Engineering Co. Ltd Descriptive Analysis for Dewan Sugar Mills Ltd Quantitative Analysis for Dewan Sugar Mills Ltd Descriptive Analysis for Habib Sugar Mills Ltd Quantitative Analysis for Habib Sugar Mills Ltd Descriptive Analysis for JDW Sugar Mills Ltd Quantitative Analysis for JDW Sugar Mills Ltd Descriptive Analysis for Shakarganj Mills Ltd Quantitative Analysis for Shakarganj Mills Ltd Descriptive Analysis for Century Paper & Board Mills Ltd Quantitative Analysis for Century Paper & Board Mills Ltd Descriptive Analysis for Packages Ltd Quantitative Analysis for Packages Ltd Descriptive Analysis for Bestway Cement Ltd Quantitative Analysis for Bestway Cement Ltd Descriptive Analysis for Cherat Cement Company Ltd. 233

22 xix Quantitative Analysis for Cherat Cement Company Ltd Descriptive Analysis for D.G. Khan Cement Company Ltd Quantitative Analysis for D.G. Khan Cement Company Ltd Descriptive Analysis for Dewan (Pakland) Cement Ltd Quantitative Analysis for Dewan (Pakland) Cement Ltd Descriptive Analysis for Fauji Cement Company Ltd Quantitative Analysis for Fauji Cement Company Ltd Descriptive Analysis for Fecto Cement Ltd Quantitative Analysis for Fecto Cement Ltd Descriptive Analysis for Lucky Cement Ltd Quantitative Analysis for Lucky Cement Ltd Descriptive Analysis for Maple Leaf Cement Factory Ltd Quantitative Analysis for Maple Leaf Cement Factory Ltd Descriptive Analysis for Pioneer Cement Ltd Quantitative Analysis for Pioneer Cement Ltd Descriptive Analysis for Attock Refinery Ltd Quantitative Analysis for Attock Refinery Ltd Descriptive Analysis for Japan Power Generation Ltd Quantitative Analysis for Japan Power Generation Ltd Descriptive Analysis for Karachi Electric Supply Corporation Ltd Quantitative Analysis for Karachi Electric Supply Corporation Ltd Descriptive Analysis for Kohinoor Energy Ltd Quantitative Analysis for Kohinoor Energy Ltd Descriptive Analysis for Mari Gas Company Ltd Quantitative Analysis for Mari Gas Company Ltd Descriptive Analysis for National Refinery Ltd Quantitative Analysis for National Refinery Ltd Descriptive Analysis for Pakistan Oilfields Ltd Quantitative Analysis for Pakistan Oilfields Ltd Descriptive Analysis for Pakistan Refinery Ltd Quantitative Analysis for Pakistan Refinery Ltd Descriptive Analysis for Pakistan State Oil Company Ltd Quantitative Analysis for Pakistan State Oil Company Ltd Descriptive Analysis for Shell Pakistan Ltd Quantitative Analysis for Shell Pakistan Ltd Descriptive Analysis for Southern Electric Power Co. Ltd Quantitative Analysis for Southern Electric Power Co. Ltd Descriptive Analysis for Sui Northern Gas Pipelines Ltd Quantitative Analysis for Sui Northern Gas Pipelines Ltd Descriptive Analysis for Sui Southern Gas Company Ltd Quantitative Analysis for Sui Southern Gas Company Ltd Descriptive Analysis for The Hub Power Company Ltd Quantitative Analysis for The Hub Power Company Ltd Descriptive Analysis for Pakistan International Airlines Co. Ltd Quantitative Analysis for Pakistan International Airlines Co. Ltd. 255

23 xx Descriptive Analysis for Pakistan National Shipping Co Quantitative Analysis for Pakistan National Shipping Co Descriptive Analysis for Pakistan Telecommunication Co. Ltd Quantitative Analysis for Pakistan Telecommunication Co. Ltd Descriptive Analysis for Lakson Tobacco Company Ltd Quantitative Analysis for Lakson Tobacco Company Ltd Descriptive Analysis for Pakistan Tobacco Company Ltd Quantitative Analysis for Pakistan Tobacco Company Ltd Descriptive Analysis for Thal Jute Mills Ltd Quantitative Analysis for Thal Jute Mills Ltd Descriptive Analysis for Bata Pakistan Ltd Quantitative Analysis for Bata Pakistan Ltd Descriptive Analysis for Ghani Glass Ltd Quantitative Analysis for Ghani Glass Ltd Descriptive Analysis for National Foods Ltd Quantitative Analysis for National Foods Ltd Descriptive Analysis for Nestlé Pakistan Ltd Quantitative Analysis for Nestlé Pakistan Ltd Descriptive Analysis for Pakistan Services Ltd Quantitative Analysis for Pakistan Services Ltd Descriptive Analysis for Rafhan Maize Products Co. Ltd Quantitative Analysis for Rafhan Maize Products Co. Ltd Descriptive Analysis for Service Industries Ltd Quantitative Analysis for Service Industries Ltd Descriptive Analysis for Tri-Pack Films Ltd Quantitative Analysis for Tri-Pack Films Ltd Descriptive Analysis for Unilever Pakistan Foods Ltd Quantitative Analysis for Unilever Pakistan Foods Ltd Descriptive Analysis for Unilever Pakistan Ltd Quantitative Analysis for Unilever Pakistan Ltd Correlation Statistics of ROA & Other Variables Correlation Statistics of OPS & Other Variables Descriptive Analysis for Sample Descriptive Analysis for Sample Quantitative Analysis: The Correlation Matrix for Sample Quantitative Analysis: The Correlation Matrix for Sample Linear Regressions for Sample 1 with ROA as Dependent Variable Linear Regressions for Sample 2 with ROA as Dependent Variable Linear Regressions for Sample 1 with OPS as Dependent Variable Linear Regressions for Sample 2 with OPS as Dependent Variable 310

24 xxi ABSTRACT Working Capital Management has an overriding impact on a firm s profit performance. However, the profitability of large firms, unlike small ones, might show a different degree of sensitivity to the efficient management of working capital. Presumably small firms and large firms are different from each other in that working capital management may affect more (or less) the profitability of one or the other. One wonders as to which type of firms (small or large) exhibit more escalation in their profitability as a result of a decent management of their working capital. Exploring the answer to this query is the basic aim of this research dissertation. To do that, effect of working capital management was determined on the profitability of the two forms of organizations separately and then the results so derived were compared in order to determine the difference in the possible effect of WCM on profitability of the two organization types, if any. To serve the purpose, two distinct samples were made, one having all the SME s listed in the Karachi Stock Exchange and the other including the largest non-financial firms of the country listed in KSE, the data of which was available. Related data was gathered for firms in both samples for a period of six years from 2003 to All the relevant and the required financial information was acquired from an official document titled, Balance Sheet Analysis of Joint Stock Companies Listed on the Karachi Stock Exchange --- ( ), formally published by the Statistics and DWH Department of the State Bank of Pakistan (SBP). This document contained the Balance Sheet analysis of all the non-financial firms listed on the Karachi Stock Exchange as at June 30, Hence the research was entirely based on the Secondary data. It should be stated that the financial corporations like Banking Companies, Insurance Companies, Leasing Companies and Modarabas etc. were not included in this study. A total of 40 (out of 93) small firms were included in the first sample (known as Sample 1) for six years which led to 240 firm-year observations. Similarly, 103 (out of 343) large companies were incorporated in the second sample (known as Sample 2) for six consecutive years leading to 618 firm-year observations. Working Capital Management

25 xxii was measured by the Cash Conversion Cycle. As for the measurement of profitability, two variables were used; the Return on Assets and the Operating Profit to Sales. The Pearson Product Moment Coefficient of Correlation and the Linear Regression Analysis were used to examine the relationship between the Cash Conversion Cycle and that of the profitability variables. The correlation analyses were separately made for all the firms included in the two samples individually and then for the pooled data of each sample collectively so as to make a clear comparison. As for the Regression, two separate analyses were made, one detecting the influence of working capital management on the Return on Assets, and the other finding out the impact of WCM on the Operating Profit to Sales for both the samples. Results of the individual Correlation analysis for the two samples did not present a clear picture of whether the indicators of WCM had more, or less, influence on the profitability of small, or large, firms or vice versa. However, a comparison of the results of the Pooled Correlation analysis of the two samples suggested that the indicators of working capital management had a more visible impact on the profitability of firms of relatively larger size. In the first Regression analysis (called the Regression Analysis A ), no significant associations were detected between the indicators of WCM and the Return on Assets for Sample 1. As for Sample 2, one of the WCM indicators, however, was found to be negatively and significantly related with the Return on Assets. The Regression analysis B, nonetheless, brought very clear demarcation between the effects of WCM on the profitability (Operating Profit to Sales) of the two samples. On the one hand, a very few significant relationships were found between the indicators of WCM and the profitability for Sample 1. And in contrast, the pooled data of Sample 2 displayed highly significant relationships of Operating Profit to Sales with all the indicators of working capital management including the Inventory Conversion Period, Receivable Collection Period, Payable Deferral Period and the Cash Conversion Cycle. This is a clear indication of the fact that the efficiency of managing working capital has more constructive effect on the profitability of larger firms. Hence, it is suggested for the managers of large-sized corporations to redouble their thought on the effective and vigilant management of their working capital so as to invigorate profitability.

26 Chapter 1 1 Introduction CHAPTER 1 INTRODUCTION 1.1 BACKGROUND OF THE RESEARCH Most of the research work being executed in Finance has typically emphasized on Longterm financial decisions of profit-oriented entities. The long-term financial matters, no doubt, play a pivotal role in contributing to any company s future prosperity, but the short-term financial issues, also, are vital to a company s steady and consistent growth and to the smooth functioning of its day-to-day affairs. Put it the other way, it can be held that while long-term financial decisions decide how a company is going to be in the coming years or decades, the short-term financial decisions determine the current financial health and soundness of the company. Working Capital Management is one of the most imperative and crucial aspects of shortterm financial matters of an organization. According to a host of managers, any shortterm financial decision (taken by an organization) directly affects its working capital management. Therefore, some authors label short-term financial management as working capital management. 1 Ross et al defines short term finance as, Short-term finance is primarily concerned with the analysis of decisions that affect current assets and current liabilities. 2 The nature and importance of short-term decisions is also described by Brealey and Myers (1996) as, Short-term decisions are easier than long-term decisions---but they are not less important. 3 This argument is supported by Brigham and Houston in their book, Fundamentals of Financial Management as they claim, About 60 percent of a typical financial manager s time is devoted to working capital management Siddiquee and Khan (2009) in their article, Analyzing Working Capital Performance: Evidence from Dhaka Stock Exchange (DSE) Ltd. describe the objective of efficient working capital management as, The goal of working capital management is to ensure

27 Chapter 1 2 Introduction that a firm is able to continue its operations and that it has sufficient ability to satisfy both maturing short-term debt and upcoming operational expenses. In the present day context of rising capital cost and scarce funds, the importance of working capital needs special emphasis. It has been widely accepted that the profitability of a business concern depends upon the manner in which its working capital is managed. The inefficient management of working capital not only reduces profitability but ultimately may also lead a concern to financial crisis. Every organization, irrespective of its profit orientation, size and nature of business, needs requisite amount of working capital. The efficient working capital management is the most crucial factor in maintaining survival, liquidity, solvency and profitability of the concerned business organization. 5 The importance of an efficient management of working capital is also stressed by Van Horne and Wachowicz (2000) in their text-book of Financial Management. They argue, The management of working capital is important for several reasons. For one thing, the current assets of a typical manufacturing firm account for over half of its total assets. For a distribution company, they account for even more. Excessive levels of current assets can easily result in a firm realizing a substandard return on investment. However, firms with too few current assets may incur shortages and difficulties in maintaining smooth operations. 6 So, what is the best level of investment in current assets then? Only a good management of working capital can decide about it. Hence, Working Capital Management introduces an optimal level of investment in current assets so as to foster an organization s profitability. 1.2 STATEMENT OF THE RESEARCH QUESTION This research thesis is aimed at determining the upshot of Working Capital Management on the Profitability of two kinds of organizations separately --- the Small and Medium Enterprises, and the Large Corporations --- listed at Karachi Stock Exchange. The report then compares the effects of Working Capital Management on Profitability of the two forms of organizations mentioned above in order to reveal the difference, if any, in the respective effects. Besides, an attempt is also made to discretely elucidate the influence of Liquidity on Profitability of SMEs and that of Large companies both listed at Karachi

28 Chapter 1 3 Introduction Stock Exchange and then to compare their respective effects. It is expected that Working Capital Management might have a more profound impact on the Profitability of small and medium enterprises than on the performance of larger companies since a substantial proportion of the total assets of small and medium firms is constituted of the Current Assets and a sizeable fraction of their total liabilities is consisted of the Current Liabilities. And, of course, the management of working capital is all about the management of a firm s current assets and current liabilities. With this in mind, the hypotheses for the study are, thus, formulated as follows: 1.3 THE HYPOTHESES Hypothesis 1 The first hypothesis developed for the study is: H0-1: Working Capital Management has no relevance to Profitability of Small and Medium-sized corporations listed at Karachi Stock Exchange. H1-1: An efficient management of Working Capital may have a significant relationship with the Profitability of Small and Medium-sized corporations listed at Karachi Stock Exchange Hypothesis 2 The second hypothesis developed for the study is: H0-2: Working Capital Management has no relevance to Profitability of Large Joint Stock Companies listed in Karachi Stock Exchange. H1-2: An efficient management of Working Capital may have a significant relationship with the Profitability of Large Corporations listed at Karachi Stock Exchange Hypothesis 3 The third hypothesis developed for the study is: H0-3: There is no substantial distinction between the effect of Working Capital Management on the Profitability of Small and Large Corporations listed at Karachi Stock Exchange.