Impact of Working Capital Policy on Firm’s Profitability: A Case of Pakistan Cement Industry

Abstract

The main aim of this study is to investigate the relationship between working capital policy and firm’s profitability in the cement sector of Pakistan. Working capital management is considered to be a crucial element in determining the performance of an organization. An optimal WCM practice is expected to contribute positively to the creation of firm’s value and enrichment of its profitability. Working capital policy, growth of firm, size of firm and debt, and size (capital) of the firm as control variables are also used to investigate their effect on profitability. Profitability of Pakistan cement sector measured in terms of market as well as in accounting terms. Tobin’s Q, return on equity (ROE) return on asset (ROA) and Net operating Profitability (NOP) used to measure profitability. For regard this research adopted ordinary least square regression method of research approach to test a research hypothesis. This research used 20 cement companies listed in Karachi stock exchange during the period of 2006 – 2011. The result of study showed that there is significant negative relationship between working capital policies on profitability of the firms.

Keywords: Working capital policy, Return on Asset, Return on Equity, Tobin’s Q, Net Operating Profit.