Impact of Working Capital Management on Firm Profitability: Evidence from Pakistan's Textile Sector

Abstract

The objective of this study is to assess the impact of working capital management on firm profitability within the textile sector of Pakistan, a crucial and highly productive area in the country. Effective management of resources and obligations is imperative for enhancing productivity in this sector. To achieve this objective, panel data spanning six years from 2006 to 2011 for 115 textile companies listed on the Karachi Stock Exchange is utilized. Profitability of the firm is measured using Return on Assets, while the working capital investment policy is assessed through the Current Assets to Total Assets ratio, and the working capital financing policy is examined using the Current Liabilities to Total Assets ratio. Additionally, the impact of firm size and the quick ratio on firm performance is also analyzed. The analysis employs Generalized Least Squares regression with panel data, chosen for its ability to provide more accurate estimates compared to Ordinary Least Squares regression. Through this rigorous methodology, the study aims to offer insights into the relationship between working capital management practices and firm profitability in the textile sector of Pakistan. The results of the study indicate that a conservative working capital investment policy has a positive impact on firm profitability within the textile sector of Pakistan. Additionally, an aggressive working capital financing policy is found to influence profitability positively. Furthermore, both the quick ratio and firm size demonstrate a positive relationship with profitability. These findings hold significant implications for administrators and policymakers, providing valuable insights into effective working capital management strategies. By understanding the impact of conservative investment policies and aggressive financing policies on profitability, decision-makers can make informed choices to optimize firm performance. Moreover, investors and lenders stand to benefit from this study as well, as it offers accurate information about the financial health and performance of companies within the textile sector. Armed with this knowledge, stakeholders can make more informed investment and lending decisions, thereby mitigating risk and maximizing returns. Overall, the study contributes to enhancing decision-making processes and improving outcomes within the textile industry of Pakistan.