Qurat-Ul-Ain Khalil: Effects of Working Capital Management On The Profitability of Pharm Firms Listed in KSE

Effect of Working Capital management on the profitability of pharma firms
DISSERTATION
“EFFECTS OF WORKING CAPITAL MANAGEMENT

ON THE PROFITABILITY OF PHARM FIRMS listed in
KSE”
SUBMITTED BY
QURAT-UL-AIN KHALIL
(MBA/M/1173/11)
MBA- IV (Finance)
A Report is submitted to Department of Business Administration, Federal Urdu

University, Karachi In partial fulfillment of the requirements for the degree Of Master
in Business Administration
SUBMITTED TO
SIR ABDUL AZIZ MEMON

DEPARTMENT OF BUSINESS ADMINTRATION
FEDERAL URDU UNIVERSITY ART, SCIENCE & TECHNOLOGY
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Abstract
Working Capital management is the focus of study .Working Capital Management

has its effect on liquidity as well on profitability of the firm. In this research, I have
selected a sample of 5 Pakistani Pharma firms listed on Karachi Stock Exchange for
a period of 12 years from 2000 to 2011, I have studied the effect of different
variables of working capital management including the Debt ratio, size of the firm
(measured in terms of natural logarithm of sales), Average collection period,
Inventory turnover in days, Average payment period, Cash conversion cycle and
Current ratio on the Net operating profitability of Pakistani firms. Descriptive and
Regression are used for analysis. The results show that there is a strong negative
relationship between variables of the working capital management and profitability of
the firm except the sales (Size of the company). We also find that there is a positive
relationship between size of the firm and its profitability. There is also a relationship
between debt used by the firm and its profitability.
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Acknowledgement
In the name of Allah, the Most Gracious and the Most Merciful
All praise and glory goes to Almighty Allah (Subhanahu Wa Ta‘ala) who gave me the
courage and patience to carry out this work. Peace and blessings of Allah be upon
His last Prophet Muhammad (Sallulaho-Alaihe-Wassalam) and all his Sahaba (Razi-
Allaho-Anhum) who devoted their lives towards the prosperity and spread of Islam.
Firstly, I would like to thanks to my Parents, who brought me up , where I am

standing today, looking forward for the most promising and the most glowing future
ahead for which they sacrificed most of their past Then I am heartily thankful to my
teacher SIR ABDUL SAMAD, he has been the ideal thesis supervisor. His sage
advice, insightful criticisms, and patient encouragement aided the writing of this
thesis in innumerable ways.
Family support plays a vital role in the success of an individual. I would like to thanks
my siblings, cousin from the core of my heart. Their prayers and encouragement
always help me take the right steps in life.
I pray, May Allah help us in following Islam according to Quran and Sunna! (
Aameen)
QURATULAIN KHALIL
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DEDICATION
“THIS REPORT IS
DEDICATED TO MY
PARENTS”
This Research Paper is lovingly dedicated to “MY
RESPECTED PARENTS” who have been my constant
source of inspiration. They have given me the drive and
discipline to tackle any task with enthusiasm and
determination. Without their love and support this thesis
would not have been made possible .
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Acronyms
CCC Cash Conversion Cycle
DR Debt Ratio
DTID Inventory turnover in Days
DPO Days Payables Outstanding
DSO Days Sales Outstanding
ROA Return on Assets
ROE Return on Equity
WCM Working Capital Management
LOS Logaritham of sales
CR Current ratio
QR Quick ratio
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CHAPTER#1
INTRODUCTION
1.1)Overview of Pharma Sector:
Pakistan has a developing and a vibrant Pharma Industry. At the time of

independence, in 1947, there was hardly any pharmacy industry in Pakistan and the
country was suffering in this regard to a greater extent. Today Pakistan has about
400 pharmaceutical manufacturing units, which also include those operated by 25
multinationals that are present in the country. Around 70% of the country's demand
of Finished Medicine is met by The Pakistan Pharmaceutical Industry. In terms of
share market, the domestic pharmacy market is almost evenly divided between the
Nationals and the Multinationals. The National pharmacy industry has shown a
growing progress over the years, mostly in the last decade. The industry has
invested significantly to improve itself in the last few years and in the recent times
the majority of the industry is following Good Manufacturing Practices (GMP),
compliant with the domestic as well as international Guidance. At present the
industry has the capacity to produce a variety of product that range from simple pills
to sophisticated Biotech, Oncology and Value Added Generic compounds. Total
capital investment in this sector is approximately Rs 21.12billion. The whole global
Pharmaceutical market is valued at 650 billion US$ (2008-09), with an annual
growth rate of 8% and continuing with the rate it will crossthe value of 1.1 trillion
US$ by 2014.On the basis of value the global market is governed by USA, EU and
Japan with a share of 48%, 28% and 12%, respectively. The rest of the world has
only 20% of the total world Pharmaceutical market.
According to the researches, although Pakistan’s pharmaceutical and healthcare

sectors are expanding and evolving speedily, about half of the population has no
access to the modern medicines. Clearly this presents an opportunity, but the
government and industry's stakeholders are required to put more efforts. The value
of pharmaceuticals that was sold in 2007 exceeded US$1.4bn, which equates to per
capita consumption of less than US$ 10 per year and value of medicines sold is now
expected to exceed US$2.3 Billion by the year 2012.The Pharmaceutical market of
Pakistan is estimated at over $1.5 Billion in value and bulk imports of raw materials
are close to $450 million. The utility rates and other aspects of production have been
experiencing a stable enhancement over the last couple of years. Prices of drugs
have not increased over the last 7 years, most recently with China revoking its export
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subsidy by 8%; prices of raw materials are expected to shoot up further. Machinery
and equipment is imported from China, Taiwan, Korea, India, Germany, UK, USA
and Japan most of the time.
According to an expert, the regulation of price has given rise to the false belief that
pharmaceutical companies are overpricing with reference to their products. Besides
that, surging inflation and the deteriorating economic condition of the country has
considerably affected company margins.
There is the need of a properly defined policy in this regard, as price fixing remains is
in the control of the ministry. It is necessary for the pricing policy to work in automatic
ways, keeping in view the interests of both patients and pharmacists. In addition,
price control can help increase investment.
It was being informed that the production of drugs takes place under strict CGMP
(Current Good Manufacturing Practice) principles, while a variety of dosage forms
including liquids, tablets, capsules, dry syrups, creams and ointments, sterile
ampoules, vials, metered dose inhalers can be produced. However, some
companies’ products’ production for multinational companies is found to be worth Rs
1.0 billion.
The reputable companies are not involved in the smuggling of drugs while
multinational companies refrain from such a thing as well. The doctors are
responsible to support the interests of the patient, but unfortunately unethical and
immoral practices seem to prevail in the community. Companies should identify their
responsibility and, hence, should focus at maintaining excellence on reasonable
prices, while marketing should also be patient-intensive.
It was being found that a meager seven percent claim of manufacturing is being
satisfied on local basis as resources are not available in Pakistan. This is because of
a lack found in petrochemical industry, which makes preliminary steps essential for
our local industry. Certain companies have started such a thing, but it is
disappointing that no basic research for making new drugs (molecular) is processed
in the country. The quality standards of the ministry are not same for all, adding that
role of the doctor could be limited through this access if it satisfies the patient to buy
the same product on lower rates.
The ministry should keep an eye on Chinese drugs which are coming in Pakistan
and should allow only those Chinese firms that are genuine. The pharmaceutical
industry hires well qualified people; therefore, grey channel input is in the loss of the
patient.
As for the budgetary changes, sustained increase in exports has been seen;
therefore, duties should be revised on importing machines. In order to de-register the
products, the Ministry of Health should play its dynamic role.
Pakistan is a developing pharmaceutical market, holds a large population and
economic progress evident.However, and per capita drug spending was observed to
be rather low at around US$9.30 in the year 2007.
Classified spending accounts for 65% of total healthcare expenditure sourced

through out-of pocket payments, international aid and religious or charitable
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institutions. Pharmaceutical spending accounts for less than 1% of the country's

GDP, equivalent to levels in some neighboring countries but above that in some of
the South Asian countries. The forecast period is probable to witness the marginal
strengthening of the generics sector, albeit more in terms of volumes than values.
The share of generics is also seems to increase further as major drugs come off-
patent in the near term, to the likely benefit of the generics-dominated local industry.
With an export turnover of over US$ 100 Million as of 2007, the Pakistan pharmacy
industry is relatively young in the international markets. Pakistan Pharma business
boasts of quality producers and many units are approved by regulatory authorities
around the world. Like domestic market where in the last five years, the sales in
international market have gone almost double. The pharmacy industry is making
efforts to an Export Vision of USD 500 Million by 2013. In the meantime, exports are
also expected to be boosted by new regional and global opportunities.
Above all, the Pakistan Pharmaceutical Industry holds a successful developing
business, providing high quality essential drugs at affordable prices to Millions.
Technologically, well-built and self reliant National Pharmaceutical Industry is not
only playing a specific role in promoting and sustaining growth in the vital field of
medicine within the country, but is also set in a good manner to take on the
international markets.. As of 2012, the total export value of Pakistani-manufactured
medicines around the world stood at $400 million. Many different companies sell a
diverse range of drugs and pharmaceutical products. Top 10 pharmaceutical brands
in Pakistan include:
Ferozsons Laboratories
Getz Pharma
Horizon Pharmaceuticals/Wilshire Labs.
Herbion
Remington Pharmaceuticals
Barrett Hodgson Pakistan
Nucleus Pharmaceuticals (Pvt) Limited
Sami Pharma
Macter International Limited
AGP Pharmaceuticals
Today, the pharmaceutical sector is one of the most developed hi-tech sectors within
the country's economy. New pharmacy schools have been set up nationwide in the
past few years which provide and cater to quality pharmacy education to students of
pharmacy. Within the province of Punjab, the Punjab Pharmacy Council (based in
Lahore) is a government department responsible for conducting examination and
tests.
The Pakistan Pharmacists Society is the national professional organisation of

pharmacists country-wide and also acts as a regulatory authority controlling
pharmacy practice in Pakistan.[6] Pharmaceutical authorities in Pakistan are part of
the International Pharmaceutical Federation.
In recent years, the Government of Pakistan has substantially simplified the

regulatory environment for the setting up of a business operation. The Patent
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Ordinance 2002 has been made TRIPS compliant to include granting of patents to
pharmaceutical products, which will encourage new investments in the sector.
There are about 906 hospitals, 4554 Dispensaries, 5290 Basic Health Units and 552
Rural Health Centers. The availability of hospital beds in all medical facilities has
been estimated at 98,684, which comes to a population bed ratio of 1,536 persons
per bed. The figures available about the medical facilities clearly indicate the need
for a further expansion in health facilities.
Today, the total volume of the Pakistan Pharmaceutical market is 1.64 billionUS$,
with an annual growth of 11%, which is more than the global growth of the
Pharmaceutical industry. The economy of Pakistan is growing faster than ever.
Exports are increasing at over 20% per annum and have surpassed the budgeted
12.2 billion mark. Remittances from expatriate Pakistanis have increased over 60%
reaching the present level of over US $ 4.2 billion annually. The foreign exchange
reserves of the Country are at an all-time high of over US $ 12 billion at present. The
industrial growth has been over 8% and the overall growth in GDP has been over
6.4%. The Karachi Stock Exchange has performed better than all the stock
exchanges of the world where it has gone from 1300 points to over 4200 points in
one year and crossed the 5600 points limit. The PSDP outlay for the forthcoming
year has been estimated at PKR 202 billion as compared to last year’s estimation of
PKR 160 billion. The Government has also allocated PKR 3,254 million for Health
Affairs & Services in the next year’s budget. These steps demonstrate the
seriousness of the present Government concerning health infrastructure
development in the Country and for this reason we have identified numerous
potential investment opportunities in the Country’s health sector that will be
promoted at health asia.
1.2)STATEMENT OF THE PROBLEM:

Effects of Working Capital Management on the Profitability of Pharma firms in
Pakistan.
1.3)OBJECTIVES OF THIS STUDY:

1. The goal of working capital management is to manage the firm’s current
assets and current liabilities in such a way that a satisfactory level of working
capital is maintained, to meet the short-term obligations as and when they
arise.
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2. A significant objective of working capital management is to ensure short-term

liquidity and to see that profitability is not affected by the way current assets
and current liabilities are managed.
3. The main theme of working capital management is the interaction between

the current assets and the current liabilities and arrives at the optimum level of
both. The optimum level thus arrived must have provision for contingencies.
4. Trade-off between Profitability and Risk: The level of a firm’s Net working
capital has a bearing on its profitability as well as risk. The term profitability
used in this context is measured by profits after expenses. The term risk is
defined as the probability that a firm will become technically insolvent so that it
will not be able to meet its obligations when they become due for payment.
The risk of becoming technically insolvent is measured using Net Working
Capital. The greater the net working capital, the more liquid the firm is and
therefore the less likelihood of it becoming technically insolvent. The
relationship between liquidity, net working capital and risk is such that if either
net working capital or liquidity increases, the firm's risk decreases.
5. Trade-off: If a firm wants to increase its profits, it must also increase its risk.
Inversely, if it decreases risk, its profitability too tends to decrease. The trade-
off between these variables is that regardless of how the firm increases its
profitability through the manipulation of working capital, the consequence is a
corresponding increase in risk as measured by the level of Net working
capital.
6. Apart from the profitability – risk – trade-off, another important ingredient of

the theory of working capital management is determining the financing mix.
Financing mix refers to the proportion of current assets that would be financed
by current liabilities and by long-term resources.
1.4)SIGNIFICANCE OF THE STUDY:

This study is significant because it will produce data on the workingcapital
management on firm’s profitability useful to :
1.managers and top executives in organized private sector
2.students carry a research work in this same issue.
3.Bankers that deals with such firms
4.Auditors
5.Accountants
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6.Financial analyst
t7.Stock exchange dealers
8.The staff of the organization
9.Prospective customers of the firm
10.Creditors of such organization
11.Legal practitioners
12.The stakeholders and management staff
1.5)LIMITATIONS OF THE STUDY:

The limitation of this research is to primary data,here it is difficult to get the primary
data .The secondary data necessarily required to perform the research was
gathered from the official sites of the PHARMA firms. Additionally, some of the
required data was abstracted from the library of State Bank and Karachi stock
exchange. Rest of the data is collected from annual reports, SBP analysis reports
and economical surveys.he researcher would have obtained more information than
what is obtainable here but due to lack of money because students have limited
amount of money to spend on this type of study.this study covers only period of
2000-2011 of 5 pharma firms listed in Karachi Stock Kxchange because there is a
time limitation to cover this research.
1.6)HYPOTHESES TESTING:
1.6.1 NULL HYPOTHESIS (HO);

1)There is no relationship between working capital management and profitability of
Pharma firms in Pakistan.
2) There is no relationship between debt ratio and profitability of Pharma firms in

Pakistan.
3)There is no relationship between LOS and profitability of Pharma firms in

Pakistan.
4) There is no relationship between DSO and profitability of Pharma firms in

Pakistan.
5)There is no relationship between DPO and profitability of Pharma firms in Pakistan.

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6)There is no relationship between ITID and profitability of Pharma firms in Pakistan.
1.6.2 ALTERNATIVE HYPOTHESIS( H1);

1)There is a relationship between working capital management and profitability of
2) There is a relationship between debt ratio and profitability of Pharma firms in

Pakistan.
3)There is a relationship between LOS and profitability of Pharma firms in Pakistan.
4) There is a relationship between DSO and profitability of Pharma firms in Pakistan.
5)There is a relationship between DPO and profitability of Pharma firms in Pakistan.
6)There is a relationship between ITID and profitability of Pharma firms in Pakistan.
1.7 )STRUCTURE OF WORK:

This research work is to be organized in five chapters as follows:
1. Introduction
2. Literature review
3. Methodology
4. Data analysis and Results
5. Conclusion
6.
1.8) WORKING CAPITAL:

There are two definitions of working capital
(1) Gross working capital
(2) Net working capital
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1) Gross working capital :

Gross working capital refers to working capital as the total of current assets .Gross
working capital is sum of current assets of a company and does not account for
current liabilities. Accordingly,
Gross working capital = Total current assets
1.1)Constitutes of Current Assets:
A current asset is an assets which can either be converted to cash or used to pay
current liabilities within 12 months. Typical current assets include cash, cash
equivalents, short-term investments, accounts receivable, inventory and the portion
of prepaid liabilities which will be paid within a year.
1.Cash in hand and cash at bank.
2.Bills Receivables /Sundry debtors.
3.Short term loans and advances.
4.Inventories in stock as :
Raw material
Work in process
Stores and spares
Finished goods
5.Prepaid Expenses
6.Accrued incomes
7.Marketable Securities
8.Temporary investment of surplus funds.
The concept of Gross Working Capital focuses attention on two aspects of Current
Assets' management. They are:
a) Way of optimizing investment in Current Assets
b) Way of financing current assets.
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a. Optimizing investment in Current Assets:
Investment in Current Assets should be just adequate i.e., neither in excess nor
deficit because excess investment increases liquidity but reduces profitability as idle
investment earns nothing and inadequate amount of working capital can threaten the
solvency of the firm because of its inability to meet its obligation. It is taken into
consideration that the Working Capital needs of the firm may be fluctuating with
changing business activities which may cause excess or shortage of Working Capital
frequently and prompt management can control the imbalances.
b. Way of financing Current Assets:
This aspect points to the need of arranging funds to finance Company Assets. It says
whenever a need for working Capital arises; financing arrangement should be made
quickly.The financial manager should have the knowledge of sources of theworking
Capital funds as wheel as investment avenues where idle funds can be temporarily
invested.
2) Net working capital:

Net working capital is difference of Current assets and current liabilities .It is excess
of current assets over current liabilities. In other words net working capital refers to
current assets financed by long term funds. The net working capital position of the
firm is an important consideration, as this will determine the firm’s profitability and
risk. Here the profitability refers to profits after expenses and risk refers to the
probability that a firm will become technically insolvent where it will be unable to
meet obligations when they become due for payment.
Accordingly,
Net working capital = Current assets – Current liabilities.
2.1)Constitutes of current Liabilites:
A current liability is a company's debts or obligations that are due within one year.
Current liabilities appear on the company's balance sheet and include short term
debt, accounts payable, accrued liabilities and other debts.
1.Accrued or outstanding expenses.
2.Short terms loans,advances and deposites.
3.Dividends payable.
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4.Bank overdraft.
5.Provision for taxation, if it does not amount to appropriation of profit.
6.Bills payable.
7.Sundry creditors.
1.9)Characteristics of working capital :
1.Short term Needs:

Working capital is used to acquire current assets which get converted into cash in
a short period. In this respect it differs from fixed capital which represent the
funds locked in long term assets. The duration of the working capital depends on
the length of production process, the time that elapses in the sale and the waiting
period of the cash receipt.
2.Circular Movement:
Working capital is constantly converted into cash which again turns into working
capital. This process of conversion goes on continuously. The cash is used to
purchase current assets and when the goods are produced and sold out; those
current assets are transformed into cash. Thus it moves in a circular away. That
is why working capital is also described as circulating capital.
3.An Element of Permanency:

Though working capital is a short term capital, it is required always and forever.
As stated before, working capital is necessary to continue the productive activity
of the enterprise. Hence so long as production continues, the enterprise will
constantly remain in need of working capital. The working capital that is required
permanently is called permanent or regular working capital.
4. An Element of Fluctuation:
Though the requirement of working capital is felt permanently, its requirement
fluctuates more widely than that of fixed capital. The requirement of working
capital varies directly with the level of production. It varies with the variation of the
purchase and sale policy; price level and the level of demand also. The portion of
working capital that changes with production, sale, price etc. is called variable
working capital.
5.Liquidity:
Working capital is more liquid than fixed capital. If need arises, working capital
can be converted into cash within a short period and without much loss. A
company in need of cash can get it through the conversion of its working capital
by insisting on quick recovery of its bills receivable and by expediting sales of its
product. It is due to this trait of working capital that the companies with a larger
amount of working capital feel more secure.
6.Less Risky:
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Funds invested in fixed assets get locked up for a long period of time and can not
be recovered easily. There is also a danger of fixed assets like machinery getting
obsolete due to technological innovations. Hence investment in fixed capital is
comparatively more risky. As against this, investment in current assets is less
risky as it is a short term investment. Working capital involves more of physical
risk only, and that too is limited. Working capital involves financial or economic
risk to a much less extent because the variations of product prices are less
severe generally. Moreover, working capital gets converted into cash again and
again; therefore, it is free from the risk arising out of technological changes.
7.Special Accounting System not needed:

Since fixed capital is invested in long term assets, it becomes necessary to adopt
various systems of estimating depreciation. On the other hand working capital is
invested in short term assets which last for one year only. Hence it is not
necessary to adopt special accounting system for them.
1.10)Advantages of working capital:
• It helps the business concern in maintaining the goodwill.

• It can arrange loans from banks and others on easy and favorable terms.
• It enables a concern to face business crisis in emergencies such as depression.
• It creates an environment of security, confidence, and over all efficiency in a
business.
• It helps in maintaining solvency of the business.
1.11)Disadvantages of working capital:
• Rate of return on investments also fall with the shortage of working capital.
• Excess working capital may result into over all inefficiency in organization.
• Excess working capital means idle funds which earn no profits.
• Inadequate working capital can not pay its short term liabilities in time.
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Implications of Working Capital

Figure#1:
1.11) Factors Or Determinants of Working Capital:

Requirements Of working capital depend upon various factors such as nature of
business, size of business, the flow of business activities. However, small
organization relatively needs lesser working capital than the big business
organization. Following are the factors which affect the working capital of a firm:
1. Size Of Business
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Working capital requirement of a firm is directly influenced by the size of its business
operation. Big business organizations require more working capital than the small
business organization. Therefore, the size of organization is one of the major
determinants of working capital.
2. Nature Of Business
Working capital requirement depends upon the nature of business carried by the
firm. Normally, manufacturing industries and trading organizations need more
working capital than in the service business organizations. A service sector does not
require any amount of stock of goods. In service enterprises, there are less credit
transactions. But in the manufacturing or trading firm, credit sales and advance
related transactions are in large amount. So, they need more working capital.
3. Storage Time Or Processing Period

Time needed for keeping the stock in store is called storage period. The amount of
working capital is influenced by the storage period. If storage period is high, a firm
should keep more quantity of goods in store and hence requires more working
capital. Similarly, if the processing time is more, then more stock of goods must be
held in store as work-in-progress.
4. Credit Period
Credit period allowed to customers is also one of the major factors which influence
the requirement of working capital. Longer credit period requires more investment in
debtors and hence more working capital is needed.But, the firm which allows less
credit period to customers needs less working capital.
5. Seasonal Requirement
In certain business, raw material is not available throughout the year. Such business
organizations have to buy raw material in bulk during the season to ensure an
uninterrupted flow and process them during the entire year. Thus, a huge amount is
blocked in the form of raw material inventories which gives rise to more working
capital requirements.
6. Potential Growth Or Expansion Of Business

If the business is to be extended in future, more working capital is required. More
amount of working capital is required to meet the expansion need of business.
7. Changes In Price Level

Change in price level also affects the working capital requirements. Generally, the
rise in price will require the firm to maintain large amount of working capital as more
funds will be required to maintain the sale level of current assets.
8. Dividend Policy
The dividend policy of the firm is an important determinant of working capital. The
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need for working capital can be met with the retained earning. If a firm retains more
profit and distributes lower amount of dividend, it needs less working capital.
9. Access To Money Market

If a firm has good access to capital market, it can raise loan from bank and financial
institutions. It results in minimization of need of working capital.
10. Working Capital Cycle

When the working capital cycle of a firm is long, it will require larger amount of
working capital. But, if working capital cycle is short, it will need less working capital.
11. Operating Efficiency

The operating efficiency of a firm also affects the firm's need of working capital. The
operating efficiency of the firm results in optimum utilization of assets. The optimum
utilization of assets in turn results in more fund release for working capital.
WORKING CAPITAL CYCLE :

Figure#2:
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CHAPTER#2
LITERATURE REVIEW
Working capital is so important for business day-to-day operations. A decision made
on one of the Working Capital components has an impact on the other components.
In order to maximise the performance of a business, the Working Capital
Management should be integrated into the short-term financial decision making
process (Crum, Klingman, & Tavis, 1983)
Working capital is an important tool for growth and profitability for corporations. If the
levels of working capital are not enough, it could lead to shortages and problems
with the day-to-day operations (Horne and Wachowicz, 2000). Working capital is
also called net working capital and is defined as current assets less current liabilities
(Hillier et al., 2010).
Net working capital = Current assets – current liabilities
Both components of the working capital formula above can be found on the balance
sheet. Current assets can be found on the left side of the balance sheet and are
those assets that generate cash within one year. Current assets are normally divided
in cash and cash equivalents, short-term investments, trade and other receivables,
prepaid expenses, inventories and work-in-progress. Current liabilities can be found
on the right side of the balance sheet and are obligations which have to be met
within one year. Current liabilities are divided in trade payables, short-term debt and
accrued liabilities.
In the 1980’s and prior to that period, working capital management was
compartmentalized (Sartoris and Hill, 1983). WCM was divided in cash, account
payables and account receivables. In most firms, these compartments were
managed by different managers on various different organizational layers (Sartoris
and Hill, 1983). But Sartoris and Hill (1983) argued that there was a need for an
integrated approach, where all the three compartments are combined. This led to the
integration of the management of inventories, account payables and account
receivables, called Working Capital Management (WCM), these parts will now be
discussed individually.
The effects of working capital management upon corporate performance have been
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thefocus of a substantial amount of theoretical and empirical research for many

years and in different environments. Traditional approach to the interaction
between cash conversion cycle and profitability posits that relatively long cash
conversion periods tend to decrease profitability (Samiloglu and Demirgunes, 2008).
It means that reducing working capital investment would positively influence the
companies’ profitability by reducing the proportion of current assets in total assets.
Most studies in this area show that companies can improve their profitability by
shortening the cash conversion cycle because they found a strong negative
relationship between these two variables. Various results were obtained when it
comes to the relationship between different components of the Cash Conversion
Cycle and corporate profitability.
According to Gitman (2009) the objective of WorkingCapital Management (WCM) is

to minimisethe Cash Conversion Cycle (CCC) the amount of capital tied up in the
firm’s current assets. It focuses on controlling account receivables and their
collection process, and managing the investment in inventory. WCM is vital for all
business survival, sustainability and its direct impact on performance. WCM is an
important area of financial management inevery business function. WCM deals with
the administration of the liquidity components of firms’ short-term current assets and
current liabilities (Baker & Powell, 2005; Brigham & Ehrhardt, 2005; Gitman, 2009).
The most important current assets are cash, debtors or account receivables, stock or
inventory and current liabilities consisting of creditors or account payables, accrued
expenses, taxation liabilities, short-term debt such as commercial bills, and
provisions for current liabilities such as dividends declared but not yet paid (Birt et
al., 2011; Gitman, 2009; D. Sharma, 2009).
According to Oliver & English (2007) business performance analysis is dealing with
the ‘return on investment (ROI)’ and ‘return on equity (ROE)’. ‘Business Performance
Analysis (BPA)’ gives the owners-managers of SMEs the means to look at every
possible strategy for improving the return on assets. The SMEs owners would firstly
consider the increasing of ‘Net Profit Margin’ in various ways such as increasing the
selling price on the same unit sales volume and decreasing cost of sales. The
decreasing of cost of sales can be processed by earning more efficient purchasing,
efficient management of quality, eliminating waste and reworks, identifying short
delivery by suppliers, maximising security of inventory and cash, eliminating
undercharging errors and omissions.The alternative ways of improving return on
assets is by increasing the assets turnover. Under increasing the assets turnover,
the SMEs owners would do this by increasing the unit selling price on the same unit
sales volume with the same operating expenses, and reducing the assets. When the
business assets are reduced, the liabilities and equity would have reduced by the
same extent. In maintaining the ‘Net Profit Margin’ while the assets are reducing
then it helps to produce a higher return on assets.
Birt et al., (2011) argues that business financial performance must be measured to
verify achievement of business goals as expressed in a mission statement of the
21 | P a g e
entities. In general all entities have to set their business goals, and evaluate their
success by using performance measurement processes. The measure is normally
compared with a benchmark such as previous achievement, expectation or
competitor achievement,in order to decide whether the performance is good or bad.
Performance measurement systems ina typical entity could include measures to
evaluate the performance of the entity as a whole, divisions or segments, individual
managers and employees, customers, products/services, suppliers or processes
(Birt et al., 2011; Kimmel, 2010).
All the components of the working capital formula above can be found from the
balance sheet, although the way entries are labelled can vary. By definition, current
assets are those assets that are expected to generate cash within one year and
when looking at the balance sheet they are usually grouped under cash and cash
equivalents, short-term investments, receivables, prepaid expenses and inventories,
while current liabilities are obligations due to mature within one year. Different
components of current liabilities on the balance sheet include trade payables, short-
term debt and accrued liabilities. Stephen H. Penman(2007)
Working capital management is an important part of financial management and its

primary task is concerned with the matching of asset and liability movements over
time, which takes us to the two main purposes of WCM; liquidity and profitability
(Pass & Pike, 1984). The situation of those dual targets of WCM is widely discussed
in the literature and it is claimed that they are conflicting. Profitability refers to the
shareholders’ wealth maximization and liquidity is concerned with fulfilling financial
obligations. Conflicts between these two goals can arise when for instance a
profitable long-run investment opportunity erodes company’s liquidity in the short-run
(Pass & Pike, 1984). WCM is very often about trade-offs between these two main
goals, since focusing entirely either on profitability or liquidity most probably shakes
the balance between these two important components of company’s financial status
(Shin & Soenen, 1998). Pass & Pike (1984) emphasize also the importance of
clearly defined goals, since the responsibility of the WCM is often spread over many
departments ina company and several managers may pursue for different goals.
Sharma and Kumar (2011) argued that the positive relation .they found between
accounts receivables and profitability is caused by the fact that Indian firms have to
grant more trade credit to sustain their competitiveness with their foreign
competitors, which have superior product and services.
Raheman and Nasr (2007) in that research, the authors are selected a sample of
94Pakistani firms listed on Karachi Stock Exchange for a period of 6 years from 1999
± 2004. They used such variables Average collection period, Inventory turnover in
days, Average payment period, Cash conversion cycle and Current ratio to find the
relationship of the Net operating profitability of Pakistani firms. Debt ratio, size of the
firm (measured in terms of natural logarithm of sales) and financial assets to total
assets ratio have been used as control variables . Pearson"s correlation and
22 | P a g e
regression analysis are used for data analysis. The results show that there is a
strong negative relationship between variables of the working capital management
and profitability. It means that as the cash conversion cycle increases it will lead to
decreasing profitability of the firm. They find that there is a significant negative
relationship between liquidity and profitability. They also find that there is a positive
relationship between size of the firm and its profitability. There is also a significant
negative relationship between debt used by the firm and its profitability .They have
concluded that, Most of the Pakistani firms have large amounts of cash invested in
working capital. It can therefore be expected that the way in which working capital is
managed will have a significant impact on profitability of those firms. They 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. These results suggest that managers can create value for their
shareholders by reducing the number of days accounts receivable and inventories to
a reasonable minimum. The negative relationship between accounts payable and
profitability is consistent with the view that less profitable firms wait longer to pay
their bills.
Joshua Abor’s (2005) research paper revealed significant relationship between

financial leverage and profitability. His study demonstrated that the use of short-term
debt improved the companies’ profitability. Results of the study showed a
significantly positive relation between the ratio of short-term debt to total assets and
return on equity (ROE), as well as a significantly positive association between the
ratio of total debt to total assets and ROE.
Shin and Soenen (1998) are an example of such studies. By using a

COMPUSTAT sample of 58,985 US company years covering the period 1975-
1994, they found a strong negative relationship between the length of the company’s
net-trade cycle, used to measure efficiency of working capital management, and its
profitability. In addition, shorter net trade cycles were associated with higher risk
adjusted stock returns. Based on their findings, they suggest that one possible way
to create shareholder value is to reduce company’s Net-Trade Cycle.
Lazaridis and Tryfonidis (2009) this research is about the relationship of corporate
profitability and working capital management. A sample of 131 companies listed in
the Athens Stock Exchange (ASE) is used for the period of 2001-2004. The purpose
of this research is to establish a relationship that is statistical significant between
profitability, the cash conversion cycle and its components for listed firms in the ASE.
The results of research showed that there is statistical significance between
profitability, measured through gross operating profit, and the cash conversion cycle.
According to this research managers can create profits for their companies by
handling correctly the cash conversion cycle and keeping each different component
(accounts receivables, accounts payables, inventory) to an optimum level. This
research concludes that there is a negative relationship between
profitability(measured through gross operating profit) and the cash conversion cycle
23 | P a g e
which was used as a measure of working capital management efficacy. According to

research lower gross operating profit is associated with an increase in the number
days of accounts payables. The negative relationship between accounts receivables
and firms profitability suggests that less profitable firms will pursue a decrease of
their accounts receivables in an attempt to reduce their cash gap in the cash
conversion cycle. Therefore managers can create profits for their companies by
handling correctly the cash conversion cycle and keeping each different component
(accounts receivables, accounts payables, inventory) to an optimum level.
Deloof (2003) discussed that most companies had a large amount of cash invested
in working capital. It can therefore be expected that the way in which working capital
is managed will have a significant impact upon those company’s profitability. Using
a sample of 1,009 large Belgian non-financial companies during the period 1992-
1996, with correlation and regression tests, he found a significant negative
relationship between gross operating income and the number of days of accounts
receivable, inventories and accounts payable of Belgian companies. On the basis of
these results, he suggested that managers could create value for their shareholders
by reducing the number of days of receivables and inventories accounts to a
reasonable minimum. The negative relationship between accounts payable and
profitability is consistent with the view that less profitable companies wait longer to
pay their bills.
Nobanee (2010) this research shows the relationship between the Cash conversion
cycle and the profitability of the firm. As the time period of the cash conversion cycle
decrease the profitability of the company will be increase. On the other hand
shortening the cash conversion cycle could harm the firms operations and
reduces profitability. This could happen when taking actions to reduce the inventory
conversion period, a firm could face inventory shortages. . When reducing the
receivable collection period a firm could lose its good credit customers. The
management should keep the optimal levels of inventory, receivables, and payables.
In this regard, we suggest an optimal cash conversion cycle as more accurate and
comprehensive measure of working capital management. However, achieving the
optimal levels of inventory, receivable, and payable will minimizes the carrying cost
and opportunity cost of holding.
Nazir and Afza (2009) examines the relationship between working capital
management policies and a firms profitability. For this research data is using for the
period of 1998-2005. The study also finds that investors give weight to the stocks of
those firms that adoptan aggressive approach to managing their short-term liabilities.
Aggressive Investment Policy (AIP), ARamachandran and Janakiraman (2009) found
negative relationship between EBIT and the cash conversion cycle (ccc). The study
revealed that operational EBIT dictates how to manage the working capital of the
firm. Further, it was found that lower gross EBIT was associated with an increase in
the accounts payable days. Thus the study concluded that less profitable firms wait
longer to pay their bills, taking advantage of credit period granted by their suppliers.
24 | P a g e
While the positive relationship between average receivable days and firms EBIT
suggested that less profitable firms will pursue a decrease of their accounts
receivable days in an attempt to reduce their cash gap in the CCC.
In the study of Ganesan (2007) he depicted that the working capital management
efficiency was negatively associated to the profitability and liquidity. The study
revealed that when the working capital management efficiency was improved by
decreasing days of working capital, there was improvement in profitability of the firms
in telecommunication firms in terms of profit margin. Padachi (2006) examined the
trend in working capital needs and profitability of firms to identify the causes for any
significant differences between the industries. The results showed that high
investment in inventories and receivables was associated with lower profitability. The
findings also revealed that an increasing trend in the short-term component of trend
in the short-term component of working capital financing.
Mathuva (2010) found contradicting evidence with the management of inventories in

Kenya. He argued that companies increase their inventory levels to reduce the cost
of possible production stoppages and the possibility of no access to raw materials
and other products. He further stated the findings of Blinder and Maccini (1991),
which indicate that higher inventory levels reduces the cost of supplying products
and also protects against price fluctuations caused by changing macroeconomic
factors. Also contradicting evidence is found by Mathuva (2010) with the
management of account payables. He found a positive effect of the number days
accounts payables on a firm’s profitability in Kenya. He explained this positive
relation with two reasons, first he argued that more profitable firms wait longer to pay
their bills. These firms use these accounts payables as a short-term source of funds.
The second argument why firms increase their accounts payables is that these firms
are able to increase their working capital levels and thus increasing their profitability.
This is in line with theory of a negative effect of the Cash Conversion Cycle (CCC)
on the profitability of a firm. This is caused by the fact that the number of days
accounts payables needs to be add in the measurement of the CCC. Thus a higher
amount of a number of days accounts payables leads to a higher profitability with a
negative relation between the CCC and a firm’s profitability.
Chiou and Cheng (2006) analyzed the determinants of working capital management
and explored that how the working capital management of a firm was influenced by
the different variables like business indicators, industry effect, operating cash flows,
growth opportunity for a firm, firm performance and size of firm. The study has
depicted consistent results of leverage and the operating cash flow for both net
liquid balance and working capital requirements while variables like business
indicator, industry effect, growth opportunities, performance of firm, and size of firm
were unable to produce consistent conclusions for the net liquid balance and the
working capital requirements of firms.
Binti Mohamad and Binti Mohd Saad (2010) found that current ratio is negatively
significant to financial performance of 172 listed Malaysian firms. Their study
emphasized the importance of proper management of working capital as it affects
firm’s market value and profitability. They also suggested that working capital
management should be part of the company’s strategic and operational processes in
order to be effective. Eljely, A. (2004) empirically examined the relationship of
25 | P a g e
liquidity and profitability as measured by current ratio and cash gap on a sample of
29 joint stock companies in Saudi Arabia and found significant negative relation
between the firm’s profitability and its liquidity level, as measured by current ratio
using correlation and regression analysis. He presented evidence of negative
relation between current ratio and profitability. His study pointed to reduction in
profitability due to lost profits and unnecessary costs resulting from excessive
liquidity. Based on these past studies, current ratio seemed to be a good proxy
variable for working capital management. However, no data transformation
technique can correct the current ratio’s normality distribution in this study.
Farooq Khilji et al. (2011) studied the effects of working capital management on the
profitability of Pakistani companies. The return on investment (ROI) has been
defined as the index of profitability; cash conversion cycle, receivables conversion
period, inventory conversion period, and payables conversion period have been
defined as the indices of working capital management. According to this research,
the directors are suggested firstly to generate value for the share holders by
increasing the inventory of products and receivables, secondly
CASH CONVERSION CYCLE:

Figure#3:
DAYS PAYABLES
OUTSTANDING
DAYS SALES INVENTORY

OUT - TURNOVER
STANDING IN DAYS
increase productivity by developing effective and efficient of working capital, and

thirdly pave the way for the company to have access to competitive advantages by
effective and efficient use of resources.
In his studies Uyar (2009) concluded the following points that are (1) to set industry
benchmarks for cash conversion cycle (CCC) of merchandising and manufacturing
companies, and to examine the relationship between (2) the length of the CCC and
the size of the firms, and (3) the length of the CCC and profitability. The data were
collected from the financial statements of the corporations listed on the Istanbul
Stock Exchange (ISE) for the year 2007. ANOVA and Pearson correlation analyses
26 | P a g e
are used for empirical investigation. The major findings of the study are as follows.
The lowest mean value of the CCC is found in the retail/wholesale industry, with an
average of 34.58 days, and the highest mean is found in the textile industry, with an
average of 164.89 days. There is a significant negative correlation between the CCC
and the variables; the firm size and the profitability .
The paper showed that retail/wholesale industry has shorter CCC than
manufacturing industries. The main reason for this is that retail/wholesale industry
do not manufacture goods, rather it keeps ready-for-sale goods in its warehouse.
Hence, it has shorter days in inventory. Secondly, the retail/wholesale industry
makes cash sales or credit sales with short maturity. Moreover, the retail/wholesale
industry is slower in paying its accounts payable to its suppliers. Another important
finding of the study is that the textile industry has the longest CCC; therefore, the
industry may have liquidity problems. Moreover, the finding indicated a significant
negative correlation between the length of CCC and the firm size. Lastly, the
significant negative correlation between the length of CCC and the profitability is
another important finding of the study. The message to the firms is that the longer
CCC, the less profitable you are. The probable reason are keeping inventory for a
long time, being slow in collecting receivables, and paying debts quickly. Working
capital management has been a concern for all firms but small firms should give
more importance to this issue because they cannot afford to survive without cash
(Peel, Wilson and Howorth, 2000). Many researchers have worked on the same
issue but pioneer study of Shin and Soenen (1998) and Deloof (2003) have found
that working capital management strongly affects the corporate profitability.
Therefore sugar mills should address this issue seriously. Maccini and Blinder (1991)
suggested that conventional approach that is to invest highly in working capital can
also increase profitability. Maccini and Blinder (1991) suggested that if more
investment is done on inventory than it will save supply time and money due to
availability and fluctuations in prices and production process is also not disturbed.
Hicks and Czyzewski(1992) analyzed that the firms which have greater cash
balances have high return on assets. Jose, Lancaster and Stevens (1996) performed
the research to find out the relationship between working capital management and
firm’s profitability by taking net trading cycle as a measure of working capital
management on specific industry, the result was not that significant. After observing
the Industry nature and size of the industry Jose et al. (1996) suggested that
aggressive liquidity management increases the profitability.
Wang (2002) took a sample of Taiwanese and Japanese firms and Deloof(2003)
took a sample of Belgium Firms. The results suggested that profitability depends on
how the working capital management is handle by the management. Tryfonidis and
Lazaridis(2006) carried out a research for the companies listed in Athens Stock
Exchange. Tryfonidis and Lazaridis (2006) analyzed the relationship between
working capital management and profitability of the firms. The variable for the
measurement of profitably was gross operating profit in their research. Significant
relationship between the cash conversion cycle and profitability was reported.
Tryfonidis and Lazaridis (2006) stated that the profit can be maximize by taking care
of every component of working capital at individual level.Padachi(2006) studied
different behaviors in the working capital management for a sample of 58 small
Mauritian firms for the year 1998 – 2003. Padachi (2006) stated that if the working
capital is managed efficiently than it will add up to the firms value and increase
27 | P a g e
profitability. The research showed that no of days inventories and no of days

receivable are indirectly related to profitability.
Alipour (2011) took a sample of 1063 top firms listed in Tehran stock exchange and
found a negative significant relationship between no of days accounts receivable,
Inventory Turnover and cash conversion cycle where as positive significant relation
with no of days accounts payables with profitability and hence concluded that
working capital management significantly affects the profitability of the firms. Enqvist,
Graham, Nikkinen (2012) worked on the sample of Finland firms and studied the
relationship of working capital management and profitability on different business
cycles and concluded that there is a significant negative relationship between cash
conversion cycle and profitability of firms. The results suggested that efficient
management of inventory and accounts receivable days significantly affects the
corporate profitability of the firms.
In Pakistan there have been few researches on working capital management. Sana
and Shah (2006) worked on oil and gas sector. They took a very small sample of
consisting only 7 firms and they concluded that profitability and value of shareholders
can be increased by managing the working capital efficiently. Nazir and Afza
(2007)in their research analyze the relationship between aggressive and
conventional way ofinvesting in working capital for 205 firms for 17 different sub
sectors. Results showed that there is a negative relationship between aggressive
approach in working capital investment and the profitability of the firms. Nasr and
Rehman(2007) analyzed the relationship between the profitability and components of
working capital management which includes no of days inventory, no of days
accounts receivable, no of days accounts payable and cash conversion cycle. The
result showed that there is negative relationship between them. In the year Nazir and
Afza(2008) analyzed the working capital management for 204 firms.
Though researchers have studied the relationship between the components of

working capital management and the corporate profitability with reference to
Pakistan but it’s not enough. There is still lack of evidence of relationship between
the two variables. This reason has been a motivational force to do a research on the
pharma sector of Pakistan. For this purpose sample of 5 pharma firms listed on
Karachi stock exchange has been taken during 2000-2011.
28 | P a g e
CHAPTER#3
METHODOLOGY
3.1) Method of Data Collection:

The secondary data necessarily required to perform the research was gathered from
the official sites of the Pharma firms. Additionally, some of the required data was
abstracted from the library of State Bank and Karachi stock exchange. Rest of the
data is collected from annual reports, SBP analysis reports and economical surveys.
3.2) Sample Size:

There are 9 pharma firms listed at Karachi Stock Exchange out of which 5 are
selected. Those firms are not included whose data was not available or observations
were missing for few years. The data used for the purpose of research consisted of
12 years annual data of the variables used in research. Data of all the variables
belonged to period starting from fiscal year 2000 to fiscal year 2011 because this is
the period where many of new pharma firms were installed and many of them were
shutdown. There are total 60 observations.
3.3) Research Model Developed:

Person Correlation is used to calculate the relationship between the different
variables use in this research. Working capital components are inventory,
receivables and payables. To find the effect of working capital management on
profitability on pharma firms regression model is developed .
3.4) Variables:
3.4.1)Dependent Variables:
In this research the dependent variable is profitability and the ratios to measure
profitability of the firm calculated by the following variables.
1)Return on Assets (ROA)
2)Return on Equity (ROE)
29 | P a g e
1)Return on Assets (ROA):

An indicator of how profitable a company is relative to its total assets. ROA gives an
idea as to how efficient management is at using its assets to generate earnings.
Calculated by dividing a company's annual earnings by its total assets, ROA is
displayed as a percentage. Sometimes this is referred to as "return on investment".
The formula for return on assets is:
=Net income/Total assets
2)Return on Equity (ROE):

The amount of net income returned as a percentage of shareholders equity. Return
on equity measures a corporation's profitability by revealing how much profit a
company generates with the money shareholders have invested.
ROE is expressed as a percentage and calculated as:
The formula for return on Equity is:
=Net income/share holders equity
3.4.2)Independent Variables:
In this research three comprehensive components of working capital management
Trade credit policy, Inventory policy and Payment policy are use. so, following are
the independent variable.
1) Days Sales Outstandings (DSO)
2) Inventory Turnover in Days (ITID)
3) Days Payable (DPO)
4) Cash Conversion Cycle (CCC)
5) Logarithm of sales(LOS)
6) Debt Ratio(DR)
1) Days Sales Outstanding ( DSO):

A measure of the average number of days that a company takes to collect revenue
after a sale has been made. A low DSO number means that it takes a company
fewer days to collect its accounts receivable. A high DSO number shows that a
company is selling its product to customers on credit and taking longer to collect
30 | P a g e
money.
Days sales outstanding is calculated as:
2)Inventory Turnover in Days (ITID):

A ratio showing how many times a company's inventory is sold and replaced over a
period. The days in the period can then be divided by the inventory turnover formula
to calculate the days it takes to sell the inventory on hand or "inventory turnover
days."
3)Days Payable Outstanding (DPO):

DPO is an indicator of how long a company is taking to pay its trade creditors. DPO
is typically looked at either quarterly or yearly (90 or 365 days).A company's average
payable period. Calculated as:
4)Cash Conversion Cycle (CCC):

A metric that expresses the length of time, in days, that it takes for a company to
convert resource inputs into cash flows. The cash conversion cycle attempts to
measure the amount of time each net input dollar is tied up in the production and
31 | P a g e
sales process before it is converted into cash through sales to customers. This
metric looks at the amount of time needed to sell inventory, the amount of time
needed to collect receivables and the length of time the company is afforded to pay
its bills without incurring penalties.
Calculated as:
Where:
DIO represents days inventory outstanding
DSO represents days sales outstanding
DPO represents days payable outstanding
5)Debt Ratio(DR):
A ratio that indicates what proportion of debt a company has relative to its assets.
The measure gives an idea to the leverage of the company along with the potential
risks the company faces in terms of its debt-load.
Calculated as:
3.5) Hypothesis Testing:
NULL HYPOTHESIS (HO):

1)There is no relationship between working capital management and profitability of
2) There is no relationship between debt ratio and profitability of Pharma firms in

Pakistan.
3)There is no relationship between LOS and profitability of Pharma firms in

Pakistan.
4) There is no relationship between DSO and profitability of Pharma firms in

Pakistan.
5)There is no relationship between DPO and profitability of Pharma firms in Pakistan.
6)There is no relationship between ITID and profitability of Pharma firms in Pakistan.
32 | P a g e
ALTERNATIVE HYPOTHESIS :
H1)There is a relationship between working capital management and profitability of
H2) There is a relationship between debt ratio and profitability of Pharma firms in
Pakistan.
H3)There is a relationship between LOS and profitability of Pharma firms in

Pakistan.
H4) There is a relationship between DSO and profitability of Pharma firms in

Pakistan.
H5)There is a relationship between DPO and profitability of Pharma firms in

Pakistan.
H6)There is a relationship between ITID and profitability of Pharma firms in Pakistan.
3.6 Statistical Technique:

Pearson Correlation and Multiple Linear Regression are used in this research to
study the relationship between variables.Pearson Correlation is use to understand
the relationship of variables with each other whereas the general purpose of using
multiple linear regression is to know more about the relationship between many
independent variable or predictor variables and a dependent or criterion variable.
33 | P a g e
CHAPTER#4
DATA ANALYSIS AND RESULTS
DESCRIPTIVE STATISTICS:
ROE% ROA% DSO ITID DPO CCC LOS DR%

Mean 18.3916 27.4866 29.1666 51.4833 92.05 -12.28 11.3863 38.4633
Standard Error 1.41621 1.37045 5.21434 4.49880 5.05452 6.50502 0.51749 2.38698
Median 16.59 25.975 9 64 74 0 11.45 31.35
Mode #N/A 20.1 7 0 72 20 7.56 #N/A
Standard 10.9699 10.6154 40.3901 34.847 39.1522 50.3876 4.00846 18.4894
Deviation
Sample Variance 120.339 112.688 1631.36 1214.3 1532.89 2538.91 16.067 341.860
Kurtosis -0.84937 -0.65922 0.55825 -1.26 -0.6024 0.8903 1.8291 -0.5010
Skewness 0.444746 0.460953 1.51195 -0.4383 0.78149 -0.9448 -0.0108 0.6997
Range 43.1 41.3 123 103 145 230 11.11 65.93
Minimum 3.7 10.9 2 0 39 -165 5.78 15.45
Maximum 46.8 52.2 125 103 184 65 16.89 81.38
Sum 1103.5 1649.2 1750 3089 5523 -737 683.18 2307.8
No of 60 60 60 60 60 60 60 60
observations
EXPLAINATION:
Firms in the pharma sector of Pakistan on average have 18.3916 % ROE, 27.4866
% ROA 113863 Sales Growth, 29.166 days sales outstanding, 92.05 days
ofpayables outstanding , 51.4833 inventory turnover in days and-12.28 cash
conversion cycle,38.46 debt ratio of the pharma sector according to this study.
34 | P a g e
PEARSON CORRELATION:
ROA% ROE% DSO ITID DPO CCC LOS DR(%)
ROA% 1
ROE% 0.910117 1
DSO -0.45204 -0.23411 1
ITID 0.202062 0.091972 -0.2636 1
DPO -0.75936 -0.60376 0.599842 -0.28092 1
CCC 0.348417 0.325459 0.164113 0.696409 -0.47282 1
LOS 0.025108 0.011675 0.071163 0.603556 -0.27525 0.707882 1
DR(%) -0.7919 -0.57356 0.621063 -0.28837 0.889168 -0.37744 -0.1905 1
H1)There is no relationship between working capital management

(CCC)and profitability of Pharma firms in Pakistan;
150
100
50
0 CCC
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58
-50 ROA%
-100
-150
-200
SUMMARY OUTPUT:
Regression Statistics
Multiple R 0.348417
R Square 0.121394
Adjusted R
Square 0.106246
Standard
Error 47.6358
Observations 60
35 | P a g e
ANOVA
Significance
df SS MS F F
Regression 1 18184.38 18184.38 8.013675 0.00637
Residual 58 131611.8 2269.169
Total 59 149796.2
Standard Upper Lower Upper

Coefficients Error t Stat P-value Lower 95% 95% 95.0% 95.0%
Intercept -41.7168 12.07996 -3.45338 0.001041 -65.8974 -17.5361 -65.8974 -17.5361
ROA% 1.600368 0.565332 2.830843 0.00637 0.468732 2.732003 0.468732 2.732003
H2) There is no relationship between debt ratio and profitability of

Pharma firms in Pakistan;
100
90
80
70
60
50 DR(%)
40 ROA%
30
20
10
0
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58
SUMMARY OUTPUT
Multiple R 0.791897
R Square 0.627101
Adjusted R
Square 0.620672
Standard
Error 11.3876
Observations 60
36 | P a g e
ANOVA
Significance
df SS MS F F
Regression 1 12648.5 12648.5 97.53823 4.92E-14
Residual 58 7521.285 129.6773
Total 59 20169.78

Intercept 63.01104 2.887781 21.81988 1.2E-29 57.23052 68.79157 57.23052 68.79157
ROA% -1.33472 0.135146 -9.87614 4.92E-14 -1.60524 -1.0642 -1.60524 -1.0642
H3)There is no relationship between LOS and profitability of

60
50
40
30 LOS
ROA%
20
10
0
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58
SUMMARY OUTPUT
Multiple R 0.025108
R Square 0.00063
Adjusted R
Square -0.0166
Standard
Error 4.0416
Observations 60
37 | P a g e
ANOVA
Significance
df SS MS F F
Regression 1 0.597609 0.597609 0.036586 0.848979
Residual 58 947.403 16.33453
Total 59 948.0006

Intercept 11.2176 1.02491 10.94496 9.83E-16 9.166021 13.26918 9.166021 13.26918
ROA% 0.009174 0.047965 0.191274 0.848979 -0.08684 0.105187 -0.08684 0.105187
H4) There is no relationship between DPO and profitability of

200
180
160
140
120
100 DPO
80 ROA%
60
40
20
0
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58
SUMMARY OUTPUT
Multiple R 0.75936
R Square 0.576627
Adjusted R
Square 0.569328
Standard
Error 25.69389
Observations 60
38 | P a g e
ANOVA
Significance
df SS MS F F
Regression 1 52150.64 52150.64 78.99506 2.03E-12
Residual 58 38290.21 660.176
Total 59 90440.85

Intercept 141.895 6.515715 21.77735 1.33E-29 128.8524 154.9376 128.8524 154.9376
ROA% -2.71019 0.30493 -8.88792 2.03E-12 -3.32058 -2.09981 -3.32058 -2.09981
H5)There is no relationship between DSO and profitability of

pharma firms in Pakistan;
160
140
120
100
80 DSO
ROA%
60
40
20
0
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58
SUMMARY OUTPUT
Multiple R 0.452043
R Square 0.204343
Adjusted R
Square 0.190624
Standard
Error 36.33709
Observations 60
39 | P a g e
ANOVA
Significance
df SS MS F F
Regression 1 19668.04 19668.04 14.89569 0.000288
Residual 58 76582.29 1320.384
Total 59 96250.33

Intercept 59.77728 9.214725 6.487148 2.12E-08 41.33201 78.22256 41.33201 78.22256
ROA% -1.66437 0.431242 -3.85949 0.000288 -2.5276 -0.80115 -2.5276 -0.80115
H6)There is no relationship between ITID and profitability of

140
120
100
80
ITID
60 ROA%
40
20
0
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58
SUMMARY OUTPUT
Multiple R 0.202062
R Square 0.040829
Adjusted R Square 0.024292
Standard Error 34.42175
Observations 60
ANOVA
40 | P a g e
Significance
df SS MS F F
Regression 1 2925.283 2925.283 2.468892 0.12156
Residual 58 68721.7 1184.857
Total 59 71646.98
Standard Upper Lower

Coefficients Error t Stat P-value Lower 95% 95% 95.0%
Intercept 39.67807 8.729013 4.545539 2.83E-05 22.20506 57.15109 22.20506 5
ROA% 0.641881 0.408511 1.571271 0.12156 -0.17584 1.459604 -0.17584 1
EXPLAINATON:
The result of this study shows a negative relation between Cash Conversion Cycle
(CCC) and Return on Assets (ROA) and between CCC-ROE, but both are sensitive
to industry factors. The findings also imply that aggressive liquidity management,
e.g. shortening the CCC, improves operating performance of the firm ROA is
considered as a measure for profitability. The level of WCM is measured with the
cash conversion cycle. The study the three parts of the CCC, which are account
payables, account receivables and inventories. These findings imply that managers
can create shareholder value by shortening the CCC. Results shows the negative
relation between profitability and account payables with the view that less profitable
firms wait longer to pay their bills.This research observed negative relation between
profitability and working capital management, measured with the cash conversion
cycle,also found that account payables are negatively related to profitability.The
negative relation between profitability and the CCC, which is the measure for
working capital management efficiency in this study. relation between liquidity and
profitability and a positive relation between the size of the firm and profitability. There
is also evidence for a significant negative relationship between debt used by the firm
and its profitability .The results demonstrate that managers can create shareholders
value by shortening their firm’s number of days accounts receivables and
inventories. Also shortening the firm’s cash conversion cycle enhances profitability.,
because they can create value if they keep their CCC to a reasonable minimum.The
empirical evidence shows that the number of days accounts receivables and
inventory and leverage have a negative effect on firm profitability. They measure firm
profitability through gross operating profit and found that there is a negative relation
between the CCC and firm profitability. Compared to the other studies mentioned
here, his study has a significant weakness, which is the shortness of the sample
period.There found a positive relation between WCM and firm profitability, although
the CCC-ROA relation is not statistically significant. They found that account
receivables are also positively related with ROA and that account payables are
negatively related to ROA. This means that when increase their cash conversion
cycle, profitability will be higher.
41 | P a g e
CHAPTER#5
Conclusion
5.1FINDINGS:
In this research no of days accounts receivable, no of days account payable and no
of days inventory are taken as a comprehensive components of working capital
management, by using these variables the efficiency of working capital management
can easily be check. The results shows that longer these components lesser will be
the net operating profit as these have a negative relationship with net operating
income.
Firms can easily increase value for the shareholders by keeping the days to optimal
level. In this research no of days payable and no of days inventory is significant and
are affecting the operating profitability. Deloof (2003) concluded the same result for
the study of Belgian firms. Current Ratio (CR) has proved statistically significant and
has impact on NOI whereas gearing ratio is statistically insignificant in this research
but it has a negative relationship with net operating income which shows that higher
will be the leverage low will be the operating profitability of the firm. Same result was
concluded by Deloof (2003), Shin and Soenen (1998), Rajan and Zingales (1995)
and Myers and Majlof (1984) but in this case gearing ratio is insignificant.Sales
growth and natural log of sales have positive relationship with profitability but sales
growth in significant whereas natural log of sales has proven to be insignificant.
5.2 DISCUSSIONS:
Pharma sector which is the second biggest sector in manufacturing sector of
Pakistan contributes to the economy significantly. Keeping in mind the importance of
pharma sector in the economy of Pakistan objective of this research is to analyze
the affect of working capital management on firm’s profitability in the pharma sector
of Pakistan. To carry out the research data from 5 pharma firms which are currently
listed at Karachi Stock Exchange is analyzed. The results shows that profitability of
pharma firms are significantly affected by the efficient management of working
capital and working capital management play a vital role in creating a value for the
shareholders.
42 | P a g e
5.3 IMPLICATIONS:
Many recommendations can be drawn from the above research results. Every
pharma firms should give due importance to working capital management. Pharma
firms should make such collection and payment policies which are in favor of the firm
and existing policies should be thoroughly reviewed. Pharma firms should decrease
there payment and increase receivable cycle. This can only be done when there will
be professional management. The results suggest that pharma firms should keep
optimum level of inventory and cash conversion cycle. This could only be possible
when pharma firms will give due importance to every component of cash conversion
cycle. Pharma firms should hire professional human resource to take decisions
related to finance. There are many sugar mills where only one person is looking after
the whole department. In order to maximize the profit pharma firmsshould manage
there working capital efficiently.
5.4 Future Research:

Every sector in manufacturing sector should be analyzed at micro level for efficient
working capital management so it can be understand that which factors affects the
working capital management more and how can working capital management can
increase profitability in different sectors of our country.
43 | P a g e
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50 | P a g e
APPENDICES#1
THE PHARMA FIRMS IN THIS RESEARCH
1. ABBOTT LABORATORIES(PAKISTAN) LTD
2. GLAXO SMITH KLINE(PAKISTAN)LTD
3. FEROZSONS LABORATORIES LTD
4. HIGHNOON LABORATORIES LTD
5. SEARLE PAKISTAN LTD
51 | P a g e
APPENDICES#2
DATA OF RESEARCH
ROA% ROE% DSO ITID DPO CCC
13.8 20.1 9 0 74 -65
26.8 39.2 6 0 70 -64
25.4 36.6 5 0 74 -69
46.8 39.1 5 70 75 0
33.7 48.9 4 57 90 -29
38.2 49.6 3 44 53 -6
29.33 36.4 5 57 62 0
23.93 30.08 11 48 72 -13
21.68 29.01 9 63 86 -14
15.4 21.35 18 86 83 21
14 19.1 18 93 86 25
22.33 28.88 26 98 68 56
24.2 30.6 10 0 62 -52
19 24.2 7 0 72 -65
17.4 23.1 5 0 62 -57
26.3 35.5 3 71 68 6
30.9 36.9 2 66 45 23
32.6 38.8 3 75 50 28
29.73 36.35 3 78 67 14
27.12 33.97 4 77 69 12
28.87 36.44 27 93 60 60
13.62 18.01 29 99 72 65
13.18 18.06 6 83 68 21
14.75 20.42 6 94 65 35
4.9 10.9 4 0 135 -131
4.7 11.4 3 0 168 -165
6.3 14.9 8 0 159 -151
8.8 20.3 9 90 139 -40
5.6 13.4 7 93 162 -62
6.2 13.4 2 74 138 -62
8.94 19.1 28 80 131 -23
7.78 16.41 33 74 104 3
8.54 17.71 22 70 105 -13
9.45 22.04 4 103 112 -5
6.19 15.45 6 89 89 6
8.72 19.46 7 64 55 16
52 | P a g e
5.8 25.3 94 0 129 -35

3.7 20.1 101 0 184 -83
3.8 20.5 106 0 170 -64
5.2 27.2 112 24 161 -25
8.6 20.2 117 37 169 -15
6.8 14.4 97 32 136 -7
8.97 20.07 102 27 106 23
5.75 13.99 125 45 137 33
10.43 23.33 111 25 108 28
13.36 26.21 122 45 118 49
19.45 36.53 121 48 117 52
15.78 30.46 79 64 140 3
18.1 27.1 9 0 72 -63
18.2 26.4 8 0 76 -68
26.5 35.4 7 0 56 -49
27.7 36.1 8 62 56 -48
32.1 37.9 7 70 39 38
33.1 39.3 10 83 44 49
31.43 37.31 12 75 47 40
36.41 44.61 7 73 53 27
11.24 15.01 7 84 71 20
17.55 25.74 10 72 69 13
32.38 48.7 9 69 58 20
35.99 52.2 12 65 57 20
LOS DR(%) CR QR QR
5.78 31.58 1.64 1.64 1.64
5.95 31.77 1.65 1.65 1.65
6.08 30.56 1.71 1.71 1.71
6.27 31.56 1.74 0.82 0.82
6.3 31.14 1.59 0.96 0.96
6.69 22.98 2.55 1.73 1.73
13.74 17.29 2.89 1.59 1.59
13.84 22.88 3.35 2.03 2.03
13.86 27.22 3.54 1.86 1.86
13.99 28.39 1.76 0.39 0.39
14.24 25.2 1.89 0.42 0.42
14.61 20.74 2.66 0.82 0.82
8.22 20.81 3.37 1.79 1.79
8.18 21.57 3.19 1.53 1.53
8.89 24.64 2.94 1.45 1.45
9.01 26.04 2.89 1.33 1.33
9.1 16.37 4.83 1.09 1.09
9.16 15.94 5.13 1.1 1.1
53 | P a g e
16.14 20.19 4.02 1.25 1.25

16.19 20.14 3.87 0.99 0.99
16.43 21.37 3.62 1.31 1.31
16.63 26.59 2.81 1.26 1.26
16.75 27.31 2.71 1.13 1.13
16.89 28.04 2.48 0.66 0.66
6.56 54.8 1.07 1.07 1.07
6.61 58.9 1.07 1.07 1.07
6.75 57.8 1.11 1.11 1.11
6.86 56.3 1.07 0.42 0.42
7.01 57.9 0.91 0.34 0.34
7.23 53.69 1 0.46 0.46
14.31 54.67 1.02 0.27 0.27
14.54 50.8 1.14 0.37 0.37
14.67 52.6 1.07 0.23 0.23
14.72 60.9 1.26 0.08 0.08
14.78 59 1.41 0.17 0.17
14.89 50.9 1.64 0.15 0.15
7.41 77.12 1.79 3.37 3.37
7.37 81.38 1.53 3.19 3.19
7.56 81.19 1.45 2.94 2.94
7.56 80.7 1.47 1.84 1.84
7.61 57.3 1.31 3.38 3.38
7.81 52.47 1.33 3.63 3.63
14.99 58.77 1.69 2.59 2.59
14.95 59.04 1.51 2.35 2.35
14.99 51.09 1.69 1.79 1.79
14.95 47.15 1.85 1.2 1.2
15.24 46.41 1.74 1.13 1.13
15.4 49.57 1.63 0.69 0.69
7.87 33.33 1.97 1.98 1.98
8.2 31.09 2.26 2.26 2.26
8.36 25.24 2.69 2.69 2.69
8.39 23.39 2.91 1.82 1.82
8.41 15.45 4.6 2.84 2.84
8.58 15.79 4.51 2.64 2.64
15.6 15.76 4.53 2.29 2.29
15.73 21.19 3.19 0.63 0.63
15.81 28.85 2.39 0.82 0.82
15.94 34.55 2.03 0.63 0.63
16.21 32.43 2.19 0.61 0.61
16.37 29.96 2.42 0.91 0.91
54 | P a g e
APPENDIX#2
GRAPHS OF DATA
DAYS PAYABLES OUTSTANDING
DPO(days)
200
150
100
50 DPO
0
1 4 7 10
13 16 19 22
25 28 31 34 DPO
37 40 43 46
49 52 55 58
CASH CONVERSION CYCLE
CCC(days)
100
0
1 4 7 10 13 16
19 22 25 28 31 34 37 40 CCC
-100 43 46 49 52 55 CCC
58
-200
55 | P a g e
RETURN ON EQUITY
ROE%
60
40
20
ROE%
0
1 4 7 10
13 16 19 22 25 28
31 34 37 40 ROE%
43 46 49 52
55 58
QUICK RATIO
QR
4
3
2
1
QR
0
1 4 7 10
13 16 19 22 25 28 31
34 37 40 43 QR
46 49 52
55 58
56 | P a g e
CURRENT RATIO
CR
2
CR
0
1 4 7 10
13 16 19 22 25 28 31
34 37 40 43 CR
46 49 52
55 58
LOGARITHAM OF SALES
LOS
20
15
10
5
LOS
0
1 4 7 10
13 16 19 22 25 28 31
34 37 40 43 LOS
46 49 52 55
58
57 | P a g e
DAYS SALES OUTSTANDING
DSO(days)
150
100
50
DSO(day)
0
1 5 9 13
17 21 25 29 DSO(day)
33 37 41 45
49 53 57
INVENTORY TURNOVER IN DAYS
ITID(days)
150
100
50
ITID
0
1 4 7 10
13 16 19 22 25 28 31
34 37 40 43 ITID
46 49 52 55
58
58 | P a g e
DEBT RATIO
Debt Ratio(%)
100
50
DR(%)
0
1 4 7 10 13
16 19 22 25 28
31 34 37 40 DR(%)
43 46 49 52
55 58
RELATIONSHIP BETWEEN ROE,ROA,DPO
250
200
150
DPO(day)
ROE%
100
ROA%
50
0
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58
59 | P a g e
RELATIONSHIP BETWEEN ROE,ROA,CCC
150
100
50
0 CCC
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 ROE%
-50 ROA%
-100
-150
-200
RELATIONSHIP BETWEEN ROE,ROA,ITID
180
160
140
120
100 ITID
80 ROE%
60 ROA%
40
20
0
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58
60 | P a g e
RELATIONSHIP BETWWEN DR,ROE,ROA
140
120
100
80 DR(%)
ROE%
60
ROA%
40
20
0
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58
RELATION BETWEEN ROE,ROA,LOS
120
100
80
LOS
60
ROE%
40 ROA%
20
0
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58
61 | P a g e
RELATIONSHIP BETWEEN ROE,ROA,CR
60
50
40
ROA%
30
ROE%
20 CR
10
0
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58
62 | P a g e

Qurat-Ul-Ain Khalil: Effects of Working Capital Management On The Profitability of Pharm Firms Listed in KSE

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Effect of Working Capital management on the profitability of pharma firms

“EFFECTS OF WORKING CAPITAL MANAGEMENT

A Report is submitted to Department of Business Administration, Federal Urdu

SIR ABDUL AZIZ MEMON

FEDERAL URDU UNIVERSITY ART, SCIENCE & TECHNOLOGY

Working Capital management is the focus of study .Working Capital Management

Firstly, I would like to thanks to my Parents, who brought me up , where I am

CCC Cash Conversion Cycle

DTID Inventory turnover in Days

DPO Days Payables Outstanding

DSO Days Sales Outstanding

ROA Return on Assets

ROE Return on Equity

WCM Working Capital Management

LOS Logaritham of sales

1.1)Overview of Pharma Sector:

Pakistan has a developing and a vibrant Pharma Industry. At the time of

According to the researches, although Pakistan’s pharmaceutical and healthcare

Classified spending accounts for 65% of total healthcare expenditure sourced

institutions. Pharmaceutical spending accounts for less than 1% of the country's

The Pakistan Pharmacists Society is the national professional organisation of

In recent years, the Government of Pakistan has substantially simplified the

1.2)STATEMENT OF THE PROBLEM:

1.3)OBJECTIVES OF THIS STUDY:

2. A significant objective of working capital management is to ensure short-term

3. The main theme of working capital management is the interaction between

6. Apart from the profitability – risk – trade-off, another important ingredient of

1.4)SIGNIFICANCE OF THE STUDY:

1.managers and top executives in organized private sector

2.students carry a research work in this same issue.

3.Bankers that deals with such firms

t7.Stock exchange dealers

8.The staff of the organization

9.Prospective customers of the firm

10.Creditors of such organization

12.The stakeholders and management staff

1.5)LIMITATIONS OF THE STUDY:

1.6.1 NULL HYPOTHESIS (HO);

2) There is no relationship between debt ratio and profitability of Pharma firms in

3)There is no relationship between LOS and profitability of Pharma firms in

4) There is no relationship between DSO and profitability of Pharma firms in

5)There is no relationship between DPO and profitability of Pharma firms in Pakistan.

6)There is no relationship between ITID and profitability of Pharma firms in Pakistan.

1.6.2 ALTERNATIVE HYPOTHESIS( H1);

2) There is a relationship between debt ratio and profitability of Pharma firms in

3)There is a relationship between LOS and profitability of Pharma firms in Pakistan.

4) There is a relationship between DSO and profitability of Pharma firms in Pakistan.

5)There is a relationship between DPO and profitability of Pharma firms in Pakistan.

6)There is a relationship between ITID and profitability of Pharma firms in Pakistan.

1.7 )STRUCTURE OF WORK:

4. Data analysis and Results

1.8) WORKING CAPITAL:

(1) Gross working capital

(2) Net working capital

1) Gross working capital :

Gross working capital = Total current assets

1.1)Constitutes of Current Assets:

1.Cash in hand and cash at bank.