Impact of Working Capital Management on Profitability: A Case of the Pakistan Textile Industry

Abstract

This paper investigates that how different factors such as Current ratio, Quick ratio, Inventory turnover and Trade debt are effecting Working Capital Management in Textile Industry of Pakistan. The study used the annual data of 15 firms listed at Pakisatn Stock Exchange. The statistical software Eviews 9 was used for analyzing the variables. This study has used panel regression models for panel data. To choose most appropriate model among these models, the current study has used Chow, Brush-pagan and Hausman tests. These test suggested that the Random Effect Model is appropriate while Fixed Effect Model and Pooled OLS cannot be used. Residual Autocorrelation test was tested using the Breusch-Pagan LM, Pesaran scaled LM and Pesaran CD and it showed that there is no issue of Autocorrelation in the Model. Correlation test shows that all the variables are unique and have no relationship with each other. Wald test shows that error terms are homoscedastic. In the results of Random Effect Model, it is found that R-Square has a value of 62.52 % which shows that 62.52 % changes in the Dependent variables are caused by the independent variables. Probability value of F-Statistic is 0.0000 which is less than 0.05 and shows that the overall model is highly significant. The regression results show that Current ratio and Inventory turnover are significant and have a positive relationship with firm Profitability while Quick ratio and Trade debt ratio have no significant relationship with profitability.

Keywords: Working Capital, Random Effect, Textile industry, Pakistan