Working Capital Management and Firms Profitability: Evidence from Spinning Sector of Textile Industry of Pakistan

Abstract

The prime aim of this study was to find out the effect working capital management on profitability of the spinning sector of Textile industry of Pakistan. For this purpose, a sample of 16 Pakistani Spinning companies listed on Karachi Stock Exchange was taken for period of 13 years from 1998-2011. Return on assets (ROA) has been used as a proxy for measuring firm profitability. Working capital management has been measured by current ratio, average collection period, average payment period, cash conversion cycle and inventory turnover in days. Data has been analyzed using Descriptive statistics, Pearson correlation and Regression analyses. The analyses confirm significant negative impact of inventory turnover and payables turnover in days on profitability. The results also reveal significant positive impact of current ratio on return on assets of firms. Based on the results important policies should be adopted regarding working capital in order to enhance the profitability of the firms.

Keywords: Working Capital Management, Profitability, Spinning Industry.