Working capital management and profitability in Pakistan’s automobile industry: An analysis

Main Article Content

Nabeela Arshad
Saqib Rehman
Shabbir Hussain
Adeel Nasir

Abstract

The study investigates the relationship between working capital management and profitability of explicit firms that are allied with the automobile sector of Pakistan. Profitability is measured by two of its proxy variables i.e. Return On Assets (ROA) and Return On Equity (ROE) while the independence of the study is examined through the mediums of Inventory Turnover Ratio (ITOR), Account Payable Turnover Ratio (APTOR), Account Receivable Turnover Ratio (ARTOR) and Operating Profit (O.P). The study occupies three liquidity ratios as well; consolidated as control variables, include Current Ratio (CR), Quick Ratio (QR) and Solvency Ratio (SR) played as a catalyst and do not impact the genuine findings. The study targets the firms in the automobile sector which are listed on the Pakistan Stock Exchange (PSX) and also being actively traded there. Thus, the study aims to highlight the impact of efficient working capital on profitability. The study also elaborates on the actual potential, demand and operational mechanism of automotive firms while assembling. Second, the study visualizes the opportunistic and enlisted current demand bidden by the resident customers to the automotive sector of Pakistan. The annual financial reports of automotive firms have been gathered for five years from (2016 - 2020). The comprised model has been tested through the multiple regression analysis via Statistical Package for the Social Sciences (SPSS). The findings of the study ascribed that Account Receivable Turnover Ratio (ARTOR), Inventory Turnover Ratio (ITOR) and Operating Profit (O.P) are statistically significant and positively related to Return on Assets (ROA) and Return on Equity (ROE) while Account Payable Turnover Ratio (APTOR) is statistically insignificant and inversely linked to Return On Assets (ROA) and Return On Equity (ROE). The outcomes of the study have set a roadmap to uplift this sector to meet its true potential demanded by the local consumers.

Article Details

How to Cite
Arshad, N. ., Rehman, S., Hussain, S. ., & Nasir, A. (2022). Working capital management and profitability in Pakistan’s automobile industry: An analysis. Journal of Public Value and Administrative Insight, 5(2), 292–305. https://doi.org/10.31580/jpvai.v5i2.2532
Section
Articles

References

Amponsah-Kwatiah, K., & Asiamah, M. (2020). Working capital management and profitability of listed manufacturing firms in Ghana. International Journal of Productivity and Performance Management, 70(7), 1751-1771. doi: 10.1108/ijppm-02-2020-0043

Bibi, N., & Amjad, S. (2017). The Relationship between Liquidity and Firms' Profitability: A Case Study of Karachi Stock Exchange. Asian Journal of Finance & Accounting, 9(1), 54. doi: 10.5296/ajfa.v9i1.10600

Choiriyah, C., Fatimah, F., Agustina, S., & Ulfa, U. (2021). The Effect Of Return On Assets, Return On Equity, Net Profit Margin, Earning Per Share, And Operating Profit Margin On Stock Prices Of Banking Companies In Indonesia Stock Exchange. International Journal of Finance Research, 1(2), 103-123. doi: 10.47747/ijfr.v1i2.280

Deesomsak, R., Paudyal, K., & Pescetto, G. (2004). The determinants of capital structure: evidence from the Asia Pacific region. Journal of Multinational Financial Management, 14(4-5), 387-405. doi: 10.1016/j.mulfin.2004.03.001

Engman, A. (2011). Is there life after P<0.05? Statistical significance and quantitative sociology. Quality & Quantity, 47(1), 257-270. doi: 10.1007/s11135-011-9516-z

Farooq, U. (2019). Impact of Inventory Turnover on the Profitability of Non-Financial Sector Firms in Pakistan. Journal of Finance and Accounting Research, 01(01), 34-51. doi: 10.32350/jfar.0101.03

Guajardo, J. A., Cohen, M. A., & Netessine, S. (2016). Service Competition and Product Quality in the US Automobile Industry. Management Science, 62(7), 1860-1877. doi: 10.1287/mnsc.2015.2195

Iqbal, A., & Zhuquan, W. (2015). Working Capital Management and Profitability Evidence from Firms Listed on Karachi Stock Exchange. International Journal of Business and Management, 10(2). doi: 10.5539/ijbm.v10n2p231

Iqbal, U., & Usman, M. (2018). Impact of Financial Leverage on Firm Performance. SEISENSE Journal of Management, 1(2), 70-78. doi: 10.33215/sjom.v1i2.13

Jaff, M. R., McMurtry, M. S., Archer, S. L., Cushman, M., Goldenberg, N., Goldhaber, S. Z., . . . Zierler, B. K. (2011). Management of massive and submassive pulmonary embolism, iliofemoral deep vein thrombosis, and chronic thromboembolic pulmonary hypertension: a scientific statement from the American Heart Association. [Practice Guideline]. Circulation, 123(16), 1788-1830. doi: 10.1161/CIR.0b013e318214914f

Jyoti, J., Kour, S., & Sharma, J. (2017). Impact of total quality services on financial performance: role of service profit chain. Total Quality Management & Business Excellence, 28(7-8), 897-929. doi: 10.1080/14783363.2016.1274649

Kabuye, F., Kato, J., Akugizibwe, I., Bugambiro, N., & Ntim, C. G. (2019). Internal control systems, working capital management and financial performance of supermarkets. Cogent Business & Management, 6(1), 1573524. doi: 10.1080/23311975.2019.1573524

Kadim, A., Sunardi, N., & Husain, T. (2020). The modeling firm's value based on financial ratios, intellectual capital and dividend policy. Accounting, 859-870. doi: 10.5267/j.ac.2020.5.008

Kamar, K. (2017). Analysis of the Effect of Return on Equity (Roe) and Debt to Equity Ratio (Der) On Stock Price on Cement Industry Listed In Indonesia Stock Exchange (Idx) In the Year of 2011-2015. IOSR Journal of Business and Management, 19(05), 66-76. doi: 10.9790/487x-1905036676

Kelly, D. E. C. J. S. (1994). Social Choice and Economic Theory , Trade Off Theory. The American Economic Review, 84(2), 422-426.

Kim, H. Y. (2013). Statistical notes for clinical researchers: assessing normal distribution (2) using skewness and kurtosis. Restor Dent Endod, 38(1), 52-54. doi: 10.5395/rde.2013.38.1.52

Kusuma, H., & Dhiyaullatief Bachtiar, A. (2018). Working Capital Management and Corporate Performance: Evidence from Indonesia. Journal of Management and Business Administration. Central Europe, 26(2), 76-88. doi: 10.7206/jmba.ce.2450-7814.229

Lefebvre, V. (2020). Performance, working capital management, and the liability of smallness: A question of opportunity costs? Journal of Small Business Management, 1-30. doi: 10.1080/00472778.2020.1735252

Lina, W., & Rania Al, O. (2015). The Impact of Turnover Ratios on Jordanian Services Sectors' Performance. Journal of Modern Accounting and Auditing, 11(2). doi: 10.17265/1548-6583/2015.02.001

Lyngstadaas, H., & Berg, T. (2016). Working capital management: evidence from Norway. International Journal of Managerial Finance, 12(3), 295-313. doi: 10.1108/ijmf-01-2016-0012

Malik, M. S., Awais, M., & Khursheed, A. (2016). Impact of Liquidity on Profitability: A Comprehensive Case of Pakistan's Private Banking Sector. International Journal of Economics and Finance, 8(3), 69. doi: 10.5539/ijef.v8n3p69

Masri, H., & Abdulla, Y. (2018). A multiple objective stochastic programming model for working capital management. Technological Forecasting and Social Change, 131, 141-146. doi: 10.1016/j.techfore.2017.05.006

Mishra, P., Pandey, C. M., Singh, U., Gupta, A., Sahu, C., & Keshri, A. (2019). Descriptive statistics and normality tests for statistical data. Ann Card Anaesth, 22(1), 67-72. doi: 10.4103/aca.ACA_157_18

Morshed, A. (2020). Role of working capital management in profitability considering the connection between accounting and finance. Asian Journal of Accounting Research, 5(2), 257-267. doi: 10.1108/ajar-04-2020-0023

Nguyen, A. H., Pham, H. T., & Nguyen, H. T. (2020). Impact of Working Capital Management on Firm's Profitability: Empirical Evidence from Vietnam. The Journal of Asian Finance, Economics and Business, 7(3), 115-125. doi: 10.13106/jafeb.2020.vol7.no3.115

Nyaupane, G. P., & Graefe, A. R. (2008). Travel Distance: a Tool for Nature‐Based Tourism Market Segmentation. Journal of Travel & Tourism Marketing, 25(3-4), 355-366. doi: 10.1080/10548400802508457

Onwuegbuzie, A. J., & Leech, N. L. (2005). On Becoming a Pragmatic Researcher: The Importance of Combining Quantitative and Qualitative Research Methodologies. International Journal of Social Research Methodology, 8(5), 375-387. doi: 10.1080/13645570500402447

Rauch, J., & Wende, S. (2014). Solvency Prediction for Property-Liability Insurance Companies: Evidence from the Financial Crisis. The Geneva Papers on Risk and Insurance - Issues and Practice, 40(1), 47-65. doi: 10.1057/gpp.2014.16

Rehman, A. u., & Wang, M. (2015). Corporate Cash Holdings and Adjustment Behaviour in Chinese Firms: An empirical Analysis Using Generalized Method of Moments. Australasian Accounting, Business and Finance Journal, 9(4), 20-37. doi: 10.14453/aabfj.v9i4.3

S, J., M, T., Tk, S., A, J., Kt, M., & Ms, S. (2017). Working Capital Management and Profitability: Evidence from Manufacturing Sector in Malaysia. Journal of Business & Financial Affairs, 06(02). doi: 10.4172/2167-0234.1000255

Şamiloğlu, F., & Akgün, A. İ. (2016). The Relationship between Working Capital Management and Profitability: Evidence from Turkey. Business and Economics Research Journal, 7(2), 1-1. doi: 10.20409/berj.2016217492

Sulieman Alshatti, A. (2014). The Effect of the Liquidity Management on Profitability in the Jordanian Commercial Banks. International Journal of Business and Management, 10(1). doi: 10.5539/ijbm.v10n1p62

Tahir, M., & Anuar, M. B. A. (2015). The determinants of working capital management and firms performance of textile sector in pakistan. Quality & Quantity, 50(2), 605-618. doi: 10.1007/s11135-015-0166-4

Ursavaş, Ö. F. (2013). Reconsidering the role of attitude in the TAM: An answer to Teo (2009) and Nistor and Heymann (2010), and Lopez-Bonilla and Lopez-Bonilla (2011). British Journal of Educational Technology, 44(1), E22-E25. doi: 10.1111/j.1467-8535.2012.01327.x

Yaprak, A., Yosun, T., & Cetindamar, D. (2018). The influence of firm-specific and country-specific advantages in the internationalization of emerging market firms: Evidence from Turkey. International Business Review, 27(1), 198-207. doi: 10.1016/j.ibusrev.2017.07.001

Zimon, D., & Madzík, P. (2019). Standardized management systems and risk management in the supply chain. International Journal of Quality & Reliability Management, 37(2), 305-327. doi: 10.1108/ijqrm-04-2019-0121