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

Abstract

This study examines the impact of working capital management on firm profitability within Pakistan’s textile sector, a key contributor to the country's economy. Effective management of resources and obligations is essential for enhancing productivity and financial performance. To achieve this objective, panel data covering 115 textile companies listed on the Karachi Stock Exchange from 2006 to 2011 is analyzed. Firm profitability is measured using Return on Assets, while 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, firm size and the quick ratio are incorporated into the analysis to explore their influence on profitability. The study employs Generalized Least Squares regression with panel data, a technique chosen for its superior estimation accuracy over Ordinary Least Squares regression. The findings reveal that a conservative working capital investment policy positively impacts firm profitability, indicating that firms that maintain higher current assets relative to total assets tend to experience improved profitability. Additionally, an aggressive working capital financing policy also demonstrates a positive effect, suggesting that higher reliance on current liabilities for financing enhances firm performance. Moreover, both firm size and the quick ratio exhibit a significant positive relationship with profitability, reinforcing the importance of liquidity and scale in driving financial success. These insights hold significant implications for policymakers, administrators, investors, and lenders, offering valuable guidance on optimizing working capital management strategies to enhance profitability and mitigate financial risks in Pakistan’s textile sector.