3.3 Hypotheses Testing
Objective of this study is to look at the relationship between profitability and working capital management, the study uses the same hypotheses as used by Raheman & Nasr(2007)
Hypothesis 1
The first hypothesis of this study is as follows:
H01: There does not exist any relationship between efficient working capital management and profitability of firms.
H11: There is a relationship between efficient working capital management and profitability of firms.
Hypothesis 2
The second hypothesis of the study is as follow.
H02: There is no relationship between liquidity and size and profitability of firms.
H12: There may exist a negative relationship between liquidity and size of Pakistani firms and profitability.
3.4 Model Specifications:
The model used in the Study is similar to that used by Raheman & Nasr (2007) which can be specified as;
NOP it = β0 + β1 (ACP it) + β2 (ITID it) + β3 (APP it) + β4 (CCC it) + β5 (CR it) + β6 (DR it) +
Β7 (LOS it) + β8 (FATA it) + ε (Eq. 3.2)
Where:
NOP: Net Operating Profitability
ACP: Average Collection Period
ITID: Inventory Turnover in Days’
APP: Average Payment Period
CCC: Cash Conversion Cycle
CR: Current Ratio
DR: Debt Ratio
LOS: Natural logarithm of Sales
FATA: Financial Assets to Total Assets
E: The error term.
4. Results and Discussion
Two types of analysis are used, descriptive and quantitative. The results of these analysis are discussed in this section
4.1 Descriptive Analysis
Descriptive analysis is the first step in analysis; it will help to describe relevant aspects of occurrence of cash conversion cycle and provide detailed information about every relevant variable. Research has already been conducted in this area of study and a...
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...has a negative coefficient – 0.2237.But it is significant at ά. = 5%. It means that if the firm is able to decrease this time period known as cash conversion cycle, it can increase its profitability.
By analyzing the results it is concluded that if the firm is able to reduce these time periods, then the firm is efficient in managing working capital. This efficiency will lead to increasing its profitability.
Current ratio is a traditional measure of checking liquidity of the firm. In this analysis the current ratio has a significant negative relationship with profitability (measured by net operating profitability). The coefficient is – 0.1357. The result is significant at ά. = 1%. It indicates that the two objectives of liquidity and profitability have inverse relationships. So, the Pakistani firms need to maintain a balance or tradeoff between these two measures.
Net working capital represents organization’s operating liquidity. In order to compute the net working capital, total current assets are divided from total current liabilities. When there is sufficient excess of current assets over current liabilities, an organization might be considered sufficiently liquid. Another ratio that helps in assessing the operating liquidity of as company is a current ratio. The ratio is calculated by dividing the total current assets over total current liabilities. When the current ratio is high, the organization has enough of current assets to pay for the liabilities. Yet, another mean of calculating the organization’s debt-paying ability is the debt ratio. To calculate the ratio, total liabilities are divided by total assets. The computation gives information on what proportion of organization’s assets is financed by a debt, and what is the entity’s ability to pay for current and long term liabilities. Lower debt ratio is better, because the low liabilities require low debt payments. To be able to lend money, an organization’s current ratio has to fall above a certain level, also the debt ratio cannot rise above a certain threshold. Otherwise, the entity will not be able to lend money or will have to pay high penalties. The following steps can be undertaken by a company to keep the debt ratio within normal
In order to determine the value of operations, and using proforma income statement and balance sheet statement, Cash flow statement was formulated for the next 5 years. The Account Receivables plus the Inventory minus the Account Payable was determined as Net Operating Working Assets. An organization cost of 0,000 was amortized over the 5-year period.
The efficiency ratios are a mix of positive and negative aspects for the company. The asset turnover ratio has improved drastically over a period of 5 years. For an investment of $1, the company is able to produce $2 of sales revenue. Although the efficiency ratio may be positive, it is n...
1) Current Ratio: Calculated as ratio of Current Asset and Current liability, this liquidity ratio is considered to be true indicator of a firm’s liquidity.
The rising trend in the gross profit margin shows that the firm is selling its inventory at a higher percentage of profit. Likewise, higher profit margin in 2014 as compared to 2013 means that the firm is earning more profits from its sales. Similarly, the rising trend in ROCE value means that it is earning higher profits for the invested capital. Moreover, the declining trend in debtor days means that it is collecting cash quickly from debtors. The similar declining trend n creditor days shows that the firm is taking utmost advantage of the available trade credit. Next, the declining trend in gearing ratio shows a low amount of debt to equity, which means lower financial risk to its business. Finally, lower stock turnover ratio reflects good inventory management within the firm(Finch,
Analyse the relationship between the product life cycle and cash flow. The product life cycle is split into 5 stages. * Research and development * Introduction * Growth * Maturity / Saturation * Decline The product life cycle is the model that represents a sales pattern.
The decision regarding the level of overall investment in working capital is a cost/benefit trade-off - liquidity versus profitability. Unprofitable companies can survive if they have liquidity. Profitable companies can fail if they run out of cash to pay their liabilities. Liquidity in the context of working capital management means having enough cash or ready access to cash to meet all payment obligations when these fall due. The main sources of liquidity are
A higher operating expenses ratio is unfavorable since it will leave a little measure of working salary to meet intrigue, profits. Working costs proportion is a measuring stick of working productivity, yet it ought to be utilized mindfully. It is influenced by various factors, for example, outer wild factors, interior elements. This proportion is registered by partitioning working costs by deals. Operating expenses equal cost of goods sold plus selling expenses and general administrative expenses by sales.
The vertical analysis shows that the percentage of total current assets to total assets increased from 50% to 52%. This means that IQ has not made major investments in the business during 2005.
Legitimate administration of working capital parts empowers the organizations to hold abundance free trade streams which can out turn be interest in productive speculations to create benefits for the firm. Cutting of expenses significantly affects the free income held by the firm; this allows the firm to have extra funds to exploit beneficial speculation extends that can yield higher returns. Free income does not just effect on incomes and gainfulness of the firm additionally the administration of the monetary record. In the event that the firm neglects to deal with its net working capital appropriately then free money streams may be lower than the net income of the firm. Late research by Hubbard (1998) demonstrates that there is a noteworthy positive relationship between free money streams and benefit, an expansion in the level of money stream of a firm prompts a comparing increment in benefits of the firm. This is accomplished through contributing. The firm ought to consider settling on key venture choices to make utilization of extra money streams. For instance firms that hold abundance trade may utilize it out purchasing overrated firms as opposed to paying out profits to the shareholders. This is conceivable notwithstanding when the organizations have a low budgetary limit in the wake of making acquisitions since they put resources into non productive speculation ventures (Carolyn, Carroll and Griffith, 2001). Firms can choose to hold free money streams for theoretical reason as they sit tight for a productive venture that can guarantee better returns in future. The firm can likewise choose to put resources into danger ventures that have higher returns; these speculations may later yield better returns which could be beneficial to the firm. Then again if6 inadequately contributed free
As we know working capital is the life blood and centre of a business. Adequate amount of working capital is very much essential for the smooth running of the business. And the most important part is the efficient management if working capital in right time. The liquidity position of the firm is totally effected by the management of working capital. So, a study of changes in the uses and sources of working capital is necessary to evaluate the efficiency with which the working capital is employed in a business. This involves the need of working capital analysis.
We have found a significant negative relationship between net operating profitability and the average collection period, inventory turnover in days, average payment period and cash conversion cycle for a sample of Pakistani firms listed on Karachi stock exchange ( Makori & Jagongo, 2013).
For 1300SMILES, shareholders can see how much the company make money through the profit margin and the return on equity(ROE). The profit margin and ROE declined over the past four years (1300SMILES, n.d.), and this effect is negative for company. Decreasing of the profit margin and ROE also is related to asset efficiency. Asset efficiency tests on efficiency of management in the used of assets to increase sales revenue, and it includes asset turnover. The asset turnover ratio decreased over the past four years as well (1300SMILES, n.d.). Since the company’s profit margin, ROE, and asset turnover fell down, the sales revenue per one dollar assets would go down. It would also hard for 1300SMILES to maintain a high degree of liquidity, because the company earns less
Maintaining a company’s financial assets is a daunting task. Cash management techniques and short-term financing provide accounting executives with the tools needed to survive the constant changes within the economy. The combination of these tools and the knowledge of the world economy will assist companies in maintaining current assets and facilitates growth.
If there is sufficient working capital than we can assume that it has sound financial position and if the business is under trading than there will be increment in liquid assets which shows that the funds are not been utilized and kept ideal.