Impact of working capital management on the profitability of

Pharmaceutical industry of Bangladesh

COURSE: BUS 485

SECTION: 06

Submitted to:
G M Wali Ullah
Lecturer
Independent University, Bangladesh

Submitted by:

Name ID

Tasin Kibria 1321882

Muminul Hoque 1320826

Rubayet Bushra 1321794

Mohammad Morshedul Hoque Patwary 1321299
Taslima Rahman Mishu 1321909

27th March, 2016

Dhaka, Bangladesh
 Table of Contents

Pages
Content
3
1. Introduction.
2. Statement of the Problem... 4

3. Purpose of the Study... 5

4. Literature Review... 6-15

5. Research Questions & Hypothesis 16

6. Methodology

6.1. Sampling Method.

(17-19)
6.2. Data Collection
6.3. Data Research Design.
6.4. Data Analysis Method

19-26
7. Findings
7.1. Descriptive Analysis .... 19

7.2. Testing for Multicollinearity. 20

7.3. Regression Analysis.. 20-22

7.4. Goodness of Fit. 22

7.5. Model Specification.. 23

7.6. Hypotheses Testing... 24-25

7.7. Summary of the hypotheses.. 26

27
8. Conclusion...
28-30
9. References

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1. Introduction
Working capital management may have impact on survival and growth of business organization.
In the present day context of rising capital cost and scarce funds, the importance of working
capital needs special emphasis. The inefficient management of working capital not only reduces
profitability but ultimately may also lead a concern to financial crisis. The amounts invested in
working capital are often high in proportion to the total assets employed. The developing
economies generally face the problem of inefficient utilization of resources available to them.
Fixed capital and working capital are the dominant contributors to the capital of a developing
country. (Rehn 2012)

Proper management of working capital leads to a material savings and ensures financial returns
at the optimum level even on the minimum level of capital employed. We also know that both
excessive and inadequate working capital is harmful for a firm. (Filback and Krueger 2005)
On the other hand inadequate working capital usually interrupts the normal operations of a
business and impairs profitability. Working capital has to play a vital role to keep pace with the
scientific and technological developments that are taking place in the concerned area of
pharmaceutical industry. In this context, working capital management has a special relevance
and a thorough investigation regarding working capital practice in the pharmaceutical industry is
of utmost importance. (Deloof 2003)

Therefore attempts have been made to undertake an in-depth study on working capital practices
by Bangladeshi firms in pharmaceutical industry enlisted in DSE. Bangladesh as a developing
country, Pharmaceutical is the core of Bangladeshs Healthcare sector, and serves as one of the
most important manufacturing industry. Being part of healthcare sector, its performance is
related to demographic variables like population growth as well as economic growth and
healthcare policy. Chowdhury & Amin (2007) stated that there has been a lack of studies
conducted upon it to analyze its profitability and the accompanying determinants. It is necessary
to carry out studies to understand the state of affairs of the industry, its degree of profitability in
relation to other industries and scope for improvements. If new ideas, methods and techniques
are not injected, the concern will certainly not be able to face competition and survive. With
improving demographic characteristics, recent economic growth and favorable policy, the
industry has seen good growth. The industry has been experiencing robust growth over the last
few years. A local industry supporting drug policy and effective regulatory framework, along
with TRIPS (Trade Related Intellectual Property Rights) relaxations are the key reasons for
success of the industry. While the industry is achieving self sufficiency, it yet procures 70% of
raw materials from abroad. Comparing to the size of the Bangladeshi population, the
pharmaceutical market of the country is quite small. But developments are already taking place,
with a number of firms now manufacturing raw materials locally and thinking about enlarging
the market for future prosperity and profitability. (Saad 2012)

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2. Statement of the problem
Working capital is an indicator for measuring the liquidity which is defined as adequacy of cash
for doing firms obligations and its objective is to ensure that corporate entities have sufficient,
regular and consistent cash flow to fund their activities. Efficient working capital management
could enable firms in sustaining growth which, in turn leads to strong liquidity and profitability
for ensuring effective and efficient customer services. Firm with proper situation of liquidity has
enough cash for the payment of bills, that is why working capital management is very important
and should be done on the basis of supply chain management for the financial health of
businesses of all sizes. (Huynh, Jyh-tay 2010)

In spite of considering profitability as the governing factor of a business, the management of

working capital can effectively bring to a halt, or to its ultimate downfall, what might otherwise
be a successful and profitable company. If its not translated into cash from operations within the
same operating cycle, the firm would need to borrow to support its continued working capital
needs. The amounts invested in working capital are often high in proportion to the total assets
employed and so it is vital that these amounts are used in an efficient and effective way.
Increasing profits at the cost of liquidity can bring serious problems to the firm.
Too much capital signifies inefficiency where as too little cash in hand signifies that the survival
of the business is shaky. Shah (2007) stated that most business organizations do not hold the
right amount of stocks, debtors and cash; as a result of which the firms are unable to meet there
maturing short term obligations and its upcoming operational needs. Similarly, insufficient
working capital means that a firm is unable to undertake expansion projects and increase its
sales, therefore limiting the growth and profitability of the business. (Ojeani, Roseline
2014).Lacking working capital can account for inefficiencies in a companys operation when it is
not able to pay off its due obligations. On the other hand, without sufficient working capital, the
company will not either be able to provide goods or services required to customers due to lack of
money to buy materials for producing goods. The companys profitability can be jeopardized as
a result. In addition, Beaumont & Begemann (1997) showed that working capital management
is of importance in managing financial aspect of a company. Many financial managers are
finding it difficult to

To investigate the working capital management and profitability and its effect on pharmaceutical
industry it is important to research properly and find out what mainly the problem is which is
hindering the growth of the profitability of this industry. After measuring the cash conversion
cycle (CCC), the current ratio (CR), Receivable Collection Period (RCP), Working Capital
turnover ratio (WCTR) and Inventory Conversion Period (ICP) on return on assets (ROA) and
linking all the variables together we can find out the relationship and total impact on the working
capital management of the pharmaceutical industry on profitability.

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3. Purpose of the study
The purpose of the study is to find the impact of various ratios on the working capital and
profitability of firms and to analysis. The financial feasibility of a firm is given below:

The basic purpose is to examine the relationship between working capital management
and profitability.
To find out which working capital metrics and drivers affect profitability the most
To analyze the relationship between average collection period and profitability of
pharmaceutical firms.
To maintain a striking balance between the liquidity and the profitability
To assess the relationship between cash conversion cycle and profitability of listed
pharmaceutical firms.
To establish the relationship between inventory conversion and profitability of listed
pharmaceutical firms.
To evaluate how current asset and current liability impact on profitability of
pharmaceutical firms.
To analyze how working capital management affect liquidity and profitability.
To identify the relationship between dependent and independent variable.

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4. Literature Review
Thachappilly (2009) stated in his articles that financial ratio analysis for performance
evaluation. The analysis is typically done to make sense of the massive amount of numbers
presented in company financial statements. It helps evaluate the performance of a company, so
that investors can decide whether to invest in that company by looking at different ratio
categories in separate articles on different aspects of performance such as profitability ratios,
liquidity ratios, debt ratios, performance ratios, investment evaluation ratios. First part of the
description lights upon conceptual studies on capital structure and second part provides a brief
overview about empirical studies on relationship between working capital management and
profitability.
The reason for choosing return on asset (ROA) as a dependent variable is, it is a primary and
main source to measure a companys performance. Companys profit directly depends on ROA.
According to Rasiah (1995), ROA can express the companys ability to generate profit as a
consequence of the productive use of resources and of the efficient management, and its used as
a dependent variable in the assessment of companys performance. It depends on the other
independent variables which express various aspects of efficient management of resources and
they were used in change the performance for the analyzed company. Independent variables
those have been chosen can manipulate companys ROA. Though the results are mixed, a
majority of these studies conclude a strong relationship between working capital management
and the firms profitability and indicate that effective management of working capital is an
important indicator of financial health of an organization.

Return on Assets (ROA):

Return on assets (ROA) is a financial ratio that shows the percentage of profit a company earns
in relation to its overall resources. Its an indicator of how profitable a company is relative to its
total assets. It gives an idea as to how efficient management is at using its assets to generate
earnings (G. and Buchholtz 1982)
It is a better metric of financial performance than income statement profitability measures like
return on sales. It explicitly takes into account the assets used to support business activities. It
determines whether the company is able to generate an adequate return on these assets rather
than return on sales (Leif 1997).
A.H (1985) indicated the use of ROA. He expressed that ROA is used internally by companies to
track asset-use over time, to monitor the company's performance with industry performance and
to look at different operations or divisions by comparing them one to the other. G. and
Buchholtz (1982) indicate another common internal use for ROA involves evaluating the
benefits of investing in a new system versus expanding a current operation. The best choice will
ideally increase productivity and income as well as reduce asset costs, resulting in an improved
ROA ratio

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According to the article of Rasiah (2010), ROA measure is best applied in comparing companies
with the same level of capitalization. He found that if everything else being equal, a higher ROA
is better, as it means that a company is more efficient about using its assets .It also gives an
indication of the capital intensity of the company. He also described that "Capital intensity" is
the term for the amount of fixed or real capital present in relation to other factors of production,
especially labor. The more capital-intensive a business is, the more difficult it will be to achieve
a high ROA.
Aaker and Jacobson (2004) in their study of ROA found that unlike other profitability ratios,
such as return on equity (ROE), ROA measurements include all of a business's assets those
which arise out of liabilities to creditors as well capital paid in by investors. Total assets are used
rather than net assets. K.V (2013) also noted that it measures how productively the resources
(assets) of the firm are used. How the assets are financed does not affect the analysis. He also
added that ROA figure gives investors an idea of how effectively the company is converting the
money it has to invest into net income.

Relationship of ROA with Working capital:

PJ, PM (2007), expressed that working capital management is one of the most important areas in
financial management of a firm. He also found that managers spend much time on day-to-day
problems that involve working capital decisions. Management of working capital generally
means managing current assets and current liabilities.

Wang (2002) focused on the relationship between working capital management and firm
profitability and found that lesser the investment in working capital which leads to increase the
profitability of the firm. Singhania, Sharma, Rohit (2014) also expressed a negative and
significant relationship between variables of working capital with market value and profitability
of company.

Similar findings were found by al. (2010) that the relationship between working capital
management and profitability. They reported that there was a negative relationship between
variables of working capital management and profitability. In addition, the results indicated that
increase in number of days accounts receivable, number of days accounts payable, number of
days inventories and cash conversion cycle could lead to decrease in profitability of companies.

K.V (1980) also stated that ROA an enterprise requires fixed as well as working capital. He
suggested that, firms can minimize their investments in fixed assets by renting or leasing plant
and equipment, but they cannot avoid investment in current assets. He also found that a firm can
exist and survive without making profit but cannot survive without working capital. Thus,
working capital management is important because of its effect on the firms profitability and risk
and consequently its value.
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Cash Conversion Cycle:
There's reason money is regularly called the "backbone" of a business. Without solid income to
pay for stock, crude materials, working costs and overhead, even organizations with solid deals
and benefits can keep running into inconvenience. Short time period of unbeneficial quality can
as a rule is overseen, however without cash, organizations won't have the capacity to pay their
costs. (Brealy, Myers 2003)
One of the most ideal approaches to support income is to enhance administration of your cash
conversion cycle. The cash conversion cycle (CCC) is the length of the time funds are tied up in
working capital, or the length of time between paying for working capital (Brigham and
Houston 2007). This is the development of cash through your business as items are made and
sold, installment is gathered, and cash is changed over once more into raw materials and
inventory by and by. It's imperative to figure your organization's cash conversion cycle to figure
out whether you will have enough fluid funding to keep operations running. Doing as such is a
scientific activity that can without much of a stretch be registered (Baker & Powell 2013)
Conversion cycle is simply the amount of a firms resources are tied up; calculated by
subtracting the average period from the operating cycle. A firms operating is the time from the
beginning of the production process to collection of cash from the sale of the finished product.
The operating cycle encompasses two major short term categories: inventory and account
receivable. It is measured in elapsed time by summing the inventory period (IP) and the account
receivable period (ARP).

However the process of producing and selling a product is also includes the purchase of
production inputs on account, which results in accounts payable. Accounts payable reduces the
number of days a firms resources are tied up in the operating cycle. The time it takes to pay the
accounts payable, measured in days, is the accounts payable period (APP). The operating cycle
less the average payment period is referred as cash conversion cycle (CCC). It represents the
amount of the time firms resources are tied up. IP is time between purchase of raw materials,
production of goods or service and the sale of the product. The calculation of IP is inventory
divided by amount of goods sold /365.ARP is time between sales of the final product on credit
and cash receipts for the accounts receivable. The calculation of ARP is receivable divided by
sales/365.APP is time between purchase of raw materials on credit and cash payments for the
resulting accounts payable. The calculation of APP is accounts payable divided by cost of goods
sold/365. (Bygrave, William, Andrew 1996)

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Relationship of CCC with ROA:

Working capital management is vital in determining the profitability of a firm as well as its value
(Smith 1980).There is a strong relation between the cash conversion cycle of a firm and its
profitability. Hutchisonet (2007) found a direct relationship between smaller cash conversion
cycle and high profitability.
Kamath (1989) studied retailing firms and concluded that there was an inverse association
between cash conversion cycle and profitability. Wang (2002) also observed that lesser the
investment in working capital, higher is the profitability of the firm.
A study investigated the impact of working capital management on profitability
potential companies. The dependent variable, return on total assets considered as a
criterion of measure for profitability potential. The results showed that there is a
significant negative relationship between the cash conversion cycle with return on
assets. Also, they expressed that high investment in inventory and accounts receivable
will lead to lower profitability of companies (Izadinia and Taki 2010).
A statistically significant relationship existed between profitability and the cash conversion
cycle. They concluded that businesses can create profits for their companies by handling
correctly the cash conversion cycle and keeping each component of the cash conversion cycle
(that is accounts receivable, accounts payable and inventory) to an optimum level (Pouraghajan
2012)

Inventory conversion period:

Inventory conversion period indicates the velocity with which stock of finished goods is sold.
Generally it is expressed as number of times the average stock has been turned over or rotates
of during the year. (David, Piasecki 1996)

Insufficient level of inventory is dangerous because it may be responsible for the loss of business
opportunity. Thus for each item of stock minimum average and maximum levels should be fixed
carefully. The inventory conversion period formula is Cost of goods sold / Average inventory at
cost. High turnover suggests efficient inventory control, sound sales policies, trading in quality
goods, reputation in the market, better competitive capacity and so on. Low turnover suggests the
possibility of stock comprising of obsolete items, slow moving products, poor selling policy,
over investment in stock etc. For better understanding it is of interest to know that on an average
how many days were taken to dispose of average inventory. (Muller 2001)

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The number of days inventory or inventory holding period is the time lag between purchasing
materials, manufacturing and selling the finished goods (Hillier, D, Rose, Westerfield, R.,
Jaffe, and Jordan 2010). The inventory holding period is given by raw material conversion
period plus work-in-progress conversion period plus finished goods conversion period.
Therefore, the inventory conversion period is greatly influenced by the efficiency and
effectiveness of the manufacturing process and the selling process. The time taken to produce a
given quantity of goods depends on the nature of the product and the type of technology used in
the production process .The activity of making a sale depends on the completeness and readiness
of the product to satisfy customers needs and wants. A firm may minimize costs associated with
holding large amounts of inventory by adopting efficient stock control systems such as Just-Time
System. Reducing inventory to just the optimal level reduces the cost of obsolescence,
opportunity cost of excess working capital tied up on excess inventory and stock holding cost.
On the other hand, excessive inventory may reduce stock-out cost and lost goodwill of the firm.
The number of days inventory or inventory conversion period is calculated by diving average
inventories by the cost of goods sold per day (Huynh 2011).

Relationship of ICP with ROA:

Thuvarakan (2013) concluded that there is no significant relationship between the working
capital components including inventory conversion period, receivables period, number of days
payables, cash conversion cycle and profitability. In his research on impact of working capital
management on profitability of manufacturing firms of United Kingdom, he suggested that the
managers should focus on the core business objective to maximize the shareholders wealth by for
instance innovating the business processes and the product.

Rehn (2012) observed that the inventory conversion period does not have significant relationship
with the profitability. The reason of these findings could be due to the fact that the researchers
had investigated firms from different industries. A further study need to be done on a separate
industry to prove or disapprove these findings. Research on this area should be industry specific
because there are some industries such as service industries which do not hold inventories.

It is clear from the above paragraphs that the researchers have greatly disagreed on the direction
of the relation between inventory conversion period and the profitability. They have found

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conflicting results in the study of the effects of inventory conversion period on companys
profitability. In addition, there is ambiguity as regards the proxies of the working capital
variables which act as the independent variables. Further, although many researchers have used
return on assets (ROA) as the proxy for the dependent variable, they have disagreed on how to
measure it and is therefore necessary for the researcher to extend these studies by use of
appropriate and single measure of working capital management to investigate the effects of
inventory conversion period on the profitability of tea factories. (Harrison, Virginia, Rita 2015)

Current Ratio:
Current ratio is a financial ratio that shows the proportion of current assets to current liabilities.
The current ratio is used as an indicator of a company's liquidity. In other words, a large amount
of current assets in relationship to a small amount of current liabilities provides some assurance
that the obligations coming due will be paid. The current ratio is called current because, unlike
some other liquidity ratios, it incorporates all current assets and liabilities. The current ratio is
mainly used to give an idea of the company's ability to pay back its liabilities with its assets.It is
used extensively in financial reporting. The current ratio is also known as the working
capital ratio. (Solano, Teruel 2007)

Current ratio can be used to take a rough measurement of a companys financial health. When
looking at the current ratio, it is important that a company's current assets can cover its current
liabilities; however, investors should be aware that this is not the whole story on company
liquidity. The higher the current ratio, the more capable the company is of paying its obligations.
Acurrent ratio of 2 represents a fairly comfortable cushion of current assets compared to current
liabilities. A ratio under 1 indicates that a companys liabilities are greater than its assets and
suggests that the company in question would be unable to pay off its obligations if they came due
at that point which is a risky situation indeed and shows that the company is not in good financial
health. (Al 2004)

A moderately high current ratio is considered safe and healthy. However, if the current ratio is
too high, it means that company is not effectively managing its current assets. Common
symptoms include a lot of obsolete inventory as well as trouble getting paid on time by the
debtors. A current ratio shows the companys liabilities and assets position for the next 12
months. It is possible that the liabilities may be due in the next 6 months whereas the assets may
be due for realization only after 9 months. The current ratio does not provide conclusive
information about the liquidity position of the company. Since receivables are included in the
calculation, an analyst must also be aware about the age of these receivables. Older receivables
are less likely to be collected and therefore investors must be careful about making predictions
based on these receivables.

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While using the ratio to compare different companies with one another, one limitation of using
the current ratio emerges. Because business operations can differ substantially between
industries, comparing the current ratios of companies in different industries with one another will
not necessarily lead to any productive insight. (Sharma, A.K., & Kumar 2011)

Relationship of Current Ratio with ROA:

Clausen (2009) expressed about the liquidity ratio in which the current ratio or working capital
ratio, measures current assets against current liabilities to measure the profitability. He thinks a
higher ratio indicates the company is better equipped to pay off short-term debt with current
assets.
Thachappilly (2009) also stated that the liquidity ratios help good financial condition because
current ratio works with all the items that go into a business' working capital, and give a quick
look at its short-term financial position. Weinraub and Visscher (1998) observed a tendency of
firms with low levels of current ratios to have low levels of current liabilities.
Eljelly (2004) found significant negative relationship between the firm's profitability and its
liquidity level, as measured by current ratio using correlation and regression analysis.
Thisrelationship is more pronounced for firms with high current ratios and long cash conversion
cycles. At the industry level, however, he found that the cash conversion cycle or the cash gap is
of more importance as a measure of liquidity than current ratio that affects profitability.
Smith (1997) said that some conflict arises because the maximization of the firms returns could
seriously threaten liquidity, which is determined by current ratio while measuring profitability
and on the other hand, the pursuit of liquidity has a tendency to dilute returns.

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Receivable collection Period (RCP):
A comparison of the receivables to the sales activity of a business is called the accounts
receivable collection period or day sales outstanding. This comparison is used to evaluate how
long customers are taking to pay a company. A low figure is considered best, since it means that
a business is locking up less of its funds in accounts receivable, and so can use the funds for
other purposes. Also, when receivables remain unpaid for a reduced period of time, there is less
risk of payment default by customers. (Leach 2009)

Companies must balance speeding up the collection of accounts receivable with the possibility of
gaining customers by issuing credit and implementing easy payment terms. For speeding up the
collections company can set up some policies. The first step in implementing an accounts
receivable system is developing policies and procedures for invoicing. A business can speed up
collection by issuing invoices as soon as the sale is complete. Unless customers always pay in
advance, they typically receive credit, at least until they pay their bills. Customers that receive
credit must have accounts for which the company has performed a credit check and which it
monitors for prompt payment. The final step in the operation of an accounts receivable system is
collecting the amounts due as rapidly as possible. If a company operates in an industry where
payment in 30 days is the standard, it can offer discounts or incentives for earlier payment.
(Chiou 2006)

Businesses both large and small often sell their product to their customers on credit. Credit sales,
unlike cash transactions, must be carefully managed in order to ensure prompt
payment. Calculating the accounts receivable collection period tells companies how long
customers are taking to pay the company for their credit sales. A lower figure is better. This
means that customers are paying the company in a timely manner. If customers pay in a shorter
amount of time, the company then has fewer funds tied up in accounts receivable and more funds
available to use for other purposes. A low number also indicates that customers are less likely to
default on credit payments. (deloof 2003)

The formula that is used in order to calculate the receivable collection period is:

RCP=360 / (Sales/ Accounts Receivables)

Relationship of RCP with ROA:

There have been a number of studies and academic researches to find out the relationship
between working capital management and profitability. The management of working capital is
defined as the management of current assets and current liabilities, and financing these current
assets. Napompech (2012) argued that working capital is needed for day-to-day operations of a
firm. This research examined the effects of working capital management on profitability. Deloof
(2003) used correlation and regression tests he found a significant negative relationship between

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gross operating income and the number of days accounts receivable, inventories and accounts
payable of Belgian firms. According to al (2013), average collection period, inventory turnover
and cash conversion cycle has a negative relationship with profitability. Ray (2012) found a
strong negative relationship between the measures of working capital management including the
number of days accounts receivable, cash conversion cycle and the average collection period.

Working capital turnover ratio:

Working capital turnover ratio indicates the velocity of the utilization of net working capital. It is
a financial analysis tool which is used to measure how well a business is using its working
capital to support a given sales level. This ratio shows how many times working capital turned
over to produce the sales volume for the given period. (Pandey 2002) It can be compared to
previous records or against companies in the same industry to gauge efficiency in using working
capital to generate sales. The main advantage of looking at the working capital position is being
able to foresee future financial difficulties caused by short-term cash flow and capitalization
requirements (Chandra 2002).

To calculate the ratio, divide net sales by working capital (which is current assets minus current
liabilities). The calculation is usually made on an annual or trailing 12-month basis, and uses the
average working capital during that period. (Jain 2003)

The higher working capital turnover ratio is the more efficient are in using working capital to
generate sales but a very high working capital turnover ratio can show that a company does not
have enough capital to support its sales growth. Working capital turnover ratios must be
compared with those of businesses in the same industry to know what is normal and what is not.
A higher than industry average margin means our company is performing better than similar
businesses. For example, if three of our close competitors have working capital turnover ratios of
5.5, 4.2 and 5, our ratio of 7 is high because it exceeds theirs (Kuchhal 1993).

A high working capital turnover ratio can potentially give a competitive edge in the industry. It
indicates use up working capital more times per year, which suggests that money is flowing in
and out of your small business smoothly. This gives more spending flexibility and can help avoid
financial trouble. Experience more demand for products are less likely to suffer inventory
shortages that sometimes come with rising sales. (Horne 2005)

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A working capital turnover that is too high can be misleading. On the surface, it appears that are
operating at a very high efficiency, but in reality working capital level might be dangerously low.
Very low working capital can possibly cause to run out of money to fund a business.
(Wachowicz 2005)

Relationship with ROA:

There have been various studies to analyze the relationship of working capital management and
the profitability of a firm. These include firms of varied nature across the world and have used
various variables like sales growth, working capital, working capital turnover ratio, return on
assets etc. Though the results are mixed, majority of these studies conclude a strong relationship
between working capital management and the firms profitability and indicate that effective
management of working capital is an important indicator of financial health of an organization.
Hofer (1983) chose sales growth as the measure of financial performance. Et al. (1988)
observed correlate among return on assets, sales growth, and assets growth to be positive and
significant parameters as important variables to measure financial performance of a company.
The working capital of a business concern is directly related to sales. The current assets liked
debtors, bills receivable, cash, and stock are changed with the increase or decrease of sales.
Working capital turnover ratio measures the efficiency with which the working capital is being
used by a firm. A higher ratio indicates an efficient utilization of working capital and a low ratio
indicates otherwise. However, a very high working capital turnover ratio is not a good situation
for any firm. (Walker 1974)

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5. Research Question & Hypotheses
Research questions and hypotheses are done for testing the significant relationship between the
dependent and independent variable. The thing which is done here for this hypotheses is
Individual Significance Test that indicates, if there is one dependent variable for many
independent variables, whether the independent variables actually have significant impact on the
movement of the dependent variable or not. For testing it the Null hypothesis Ho and the
Alternative hypothesis H1 are used.

Research Question: Is there any significant relationship between the different factors of
working capital management on profitability of firms performance?

Null hypotheses Alternative hypotheses

There is no significant relationship between There is a significant relationship between
Return on Assets and Inventory conversion Return on Assets and Inventory conversion
period. period.

There is no significant relationship between There is a significant relationship between

Return on Assets and Current ratio. Return on Assets and Current ratio.

There is no significant relationship between There is a significant relationship between

Return on Assets and Receivables collection Return on Assets and Receivables collection
period. period.

There is no significant relationship between There is a significant relationship between

Return on Assets and Working capital Return on Assets and Working capital
turnover ratio. turnover ratio.

There is no significant relationship between There is a significant relationship between

Return on Assets and Cash Conversion Return on Assets and Cash Conversion
Cycle. Cycle.

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6. Methodology
6.1 Sampling Method:
Sample refers to all the members of a real or hypothetical set of people, events or objects to
which we wish to generalize the results of our research. There are different types of sampling
methods. The given research is on the pharmaceutical industry of Bangladesh to find the working
capital impact on companys profitability from where The Convenience Sampling method is
used to choose five companies randomly for samples. Though this sampling method might not
represent the whole industry properly, it is very useful to gather necessary data of those selected
units or companies. It is quite impossible to find out the impact of whole industry based on only
5 random selected companies. Listed companies were appropriate for the study since they are
public entities operating under strict corporate governance regulations, making their financial
and accounting disclosures largely reliable.

6.2 Data Collection:

The study was based on Quantitative data collection methods. The information of the 5
companies those are chosen for analysis are collected by going to the DHAKA STOCK
EXCHANGE. This used only secondary data, which are retrieved from a sample of 5 random
selected companies from the list of companies listed in DSE and which are actively trading there.
The data was obtained from document analysis of audited financial reports. There are different
types of measurement scales. The scale that has been used for this research is Interval scale.
Interval scale is a numerical scale in which intervals have the same interpretation throughout.
The sample interval is for five year period from 2007 to 2014 of the 5 companies. The difference
between each year represents the same time difference. This is because each 1 year interval has
the same physical meaning The necessary elements of this research extracted from annual report
of the selected companies. The use of the secondary data enabled the researcher to collect
reliable information from the target population.

6.3 Data Research Design:

The research design can be chosen from a broad category where the degree to which the research
question has been crystallized or structured through Exploratory or formal study, method of data
collection can be through monitoring or communication study, the time dimension through cross-
sectional or longitudinal research. (Cooper & Schindler 2012)

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Monitoring, Cross Selection, ex post-facto are used in this research for designing the research for
the given data.
Research Design Category
Monitoring approach
Cross-sectional research
Ex post facto
6.4 Data Analysis Method
For data analysis Panel time series data is used to run ordinary least squared method (OLS)
for this multiple regression model. The term panel data refers to multi-dimensional data
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Explanations
Monitoring approach was used to collect data from annual
report. It is the systematic, regular collection and occasional
analysis of information to identify and possibly measure
changes over a period of time. No interview was taken from
people and records their response. Quantitative information
was collected after monitoring the 8 years secondary data
which were gathered from DSD. This research was on the
basis of the annual report and financial condition of those
companies. Different type of methods were used which were
also used in previous researches to find out the impact of
working capital on profitability.
Cross-sectional study is that it can compare different
population groups at a single point in time. The research was
on Cross-sectional research study which is based on
observations that take place in different companies at one
time. This type of research will not be done in every month
of one year. Generally this research can be conducted after
one or more than one year .So, this study is not repeated over
an extended period. This cant be track changes over time.
An ex post facto research design is a method in which groups
with qualities that already exist are compared on some
dependent variable. This research used ex post facto research
to find out how examining how the independent variables
(RCP, ICP, CCC, WCTR, and CR) affect a dependent
variable (ROA) of five companies were selected. These
variables cant be manipulated or controlled. Although
different companies are analyzed and compared in regards to
independent and dependent variables it is not a true
experiment because it lacks random assignment. The
variables were selected from the given concept to find out the
impact.
frequently involving measurements over time. Panel data contain observations of multiple
phenomena obtained over multiple time periods for the same firms or individuals. Ordinary least
squares linear regression is the most widely used type of regression for predicting the value of
one dependent variable from the value of one independent variable. It is also widely used for
predicting the value of one dependent variable from the values of two or more independent
variables. When there are two or more independent variables, it is called multiple regression.
(Davis, Lahiri 1995) As we have one dependent variable ROA and many other independent
variables such as CR, CCC, ICP, RCP, WCTP we are using the OLS method for multiple
regression model analysis.

7. Findings
7.1 Descriptive Analysis
The descriptive statistics was compute, so that it gives detail understanding to the trend of
working capital management, profitability among the sample firms and it is used as stand to give
recommendations after identifying the association between the variables from correlation and
regression analyses. Descriptive analysis shows the average, and standard deviation of the
different variables of interest in the study. It also presents the minimum and maximum values of
the variables which help in getting a picture about the maximum and minimum values a variable
can achieve. The descriptive statistics of the data is:

Std.
Variables Mean Median Maximum Minimum Dev.
-
CCC -12.252 5.330723 12.38921 -80.43764 24.02021
CR 1.77238 1.659901 4.640843 0.79489 0.819942
ICP 4.16273 3.002547 11.56235 1.155008 2.837003
RCP 10.1134 8.297469 34.22612 2.036093 7.692926
ROA 0.09775 0.108022 0.192646 0.02837 0.048016
WCTP 5.63564 4.415638 34.59581 -30.07847 8.78961

Table-1 is explaining the descriptive statistics which covers the mean, median &
Standard deviation

In the analysis, Cash conversion cycle is -12.25 days on average and the standard deviation is
24.02 days. The minimum value of -80.44 days shows that a firm records a large inventory turn-
over and/or cash collections from credit sales before making a single payment for credit
purchases. It means that the accounts receivable period and/or the inventory holding period are
very short and/or the accounts payable period of the firm is very long. On the other hand, the
maximum time for cash conversion period is 12.28 days. In the same way to check the liquidity

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of the companies, a traditional measure of liquidity (current ratio) is used. The average current
ratio for the pharmaceutical firms is 1.77 with a standard deviation of 0.82. The highest current
ratio for a company in a particular year is 4.64 times and in the same way the minimum ratio for
companies in a year is 0.79.The mean value of firms return on asset is 9.77 percent of total
assets, and it deviates 4.80 percent. It means that value of profitability can deviate from mean to
both sides by 9.77 percent. Its minimum value is 2.83 percent while the maximum is 19.26
percent. Here, we can say that lower standard deviation is more reliable.

7.2 Testing for Multicollinearity

Correlation is used to measure the direction of the linear relationship between two variables as
well as to measure the strength of association between variables (Tabachnick, Fidell 2007). In
this study, the Pearsons Correlation Coefficient is calculated to see the relationship between all
variables. As for the direction of the relationship, the positive correlation indicates that when one
variable increase another also increases while the negative correlation show inverse relationship
(Pallant 2007). In our research we have been able to establishing correlation between DV & IV.

Table-2: Testing multicollinearity using co-relation model

The correlation between two independent variables is equal to 1 or -1. Perfectly positive co-
relation is +1 and perfectly negative co-relation is -1. The less the co-the relation the better,as it
reduces risk more. If the co-relation among the IVs are greater than 0.70, there will be
multicollinearity. Multicollinearity is the mutual co-relation among the independent variables. It
occurs when several independent variables in a multiple regression model are closely correlated
to one another. 5 or greater indicates a reason to be concerned about multicollinearity. But in this
study, we have not faced Multicollinearity. The Independent variables are moderately correlated
with each other. Because correlated values of the independent variables are less than 0.70.

7.3 Regression Analysis

The aim behind running the above models is to examine if working capital management affects
firms profitability. Each of the above models are estimated using the OLS and considering that

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pooled time series cross-sectional data requires various stochastic specifications, we control in
all regressions for fixed firm and time effects.

Equation:
========
ROA= 0+ 1CCC+2CR+3ICP+4RCP+5WTCP+E

Table-3: Regression Output

Estimation Equation:
================
ROA = C (1) + C (2)*CCC + C (3)*CR + C (4)*ICP + C (5)*RCP + C (6)*WCTP

Substituted Coefficients:
==================
ROA = 0.0605988172172 + 0.000925806571469*CCC + 0.00475215054728*CR +
0.00498348951966*ICP + 0.00267690049747*RCP - 0.00137389136455*WCTP

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 Table-4: Coefficient Analysis

(1) By considering the value of independent variable coefficient, CCC is 0.000710.

That means, if CCC increases 1(one) unit, ROA will increase 0.000926 units.

(2) The Current Ratio is the less influential factor for ROA.

That means, if CR increases 01(one) unit, ROA will increase 0.004752 unit.

(3) The Inventory Conversion Period (ICP) is the less influential factor for ROA.

That means, if ICP increases 01(one) unit, ROA will increase 0.004983 unit.

(4) The Receivable Collection Period is less influential for ROA.

That means, if RCP increases 01(one) unit, ROA will increase 0.002677 unit.

(5) The Working Capital Turnover Period (WCTP) is negatively related with ROA.

That means, if WCTP increases 01(one) unit, ROA will decrease -0.001374 unit.

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7.3 Goodness of Fit

Once a multiple regression equation has been constructed, one can check how good it is in terms
of predictive ability by examining the coefficient of determination R2. R2 always lies between 0
and 1. The closer R2 is to 1, the better is the model and its prediction.

Table -5: Measuring Goodness of fit using R2

Models goodness of fit for the sample and population is measured by R2 and adjusted R2 . The
adjusted R-squared is a modified version of R-squared that has been adjusted for the number of
predictors in the mode and for standardizing from population. The adjusted R-squared increases
only if the new term improves the model more than would be expected by chance. It decreases
when a predictor improves the model by less than expected by chance. The adjusted R-squared
can be negative, but its usually not. It is always lower than the R-squared.

In this research the regression output above, it is seen that the adjusted R-squared declines and
has 49% fitness which is expected to be less than the R-sqared value and the R-squared continues
to increase (Frost 2013)

R2 is used here to examine the goodness of fit in this research which measures how much of the
movement of the dependent variable is explained by all the independent variables. In this case, as
the dependent variable is ROA, so 55% movement of ROA is explained by the working capital
variables that are included in this research. The higher the percentage the better goodness of fit
is. That means the models goodness of fit is moderate.

7.4 Model Specification

Model specification talks about whether the constructed model as a whole is significant or not.
For doing so P value analysis is used to see whether to accept or reject the null hypotheses.

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Here, if P> null hypotheses is accepted

If P< null hypotheses is rejected and alternative is accepted

Table-6: Model specification analysis through P (F-statistic)

From this table Probability of F-statistic is used for model specification. As the P<, so we
reject null and accept the alternative hypotheses. That indicates the model is significant, which
tells that all the variables may not be statistically significant but as a whole the model is good
enough and we can get predictions from it.

7.5 Hypotheses Testing

For hypotheses testing P-value analysis is done to see whether to accept or reject the null
hypotheses.

P Value Analysis:

Its a two tail hypotheses.

Here, if P> null hypotheses is accepted

If P< null hypotheses is rejected and alternative is accepted

Level of significance = 10%

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In this table below the P value in analyzed and decisions are given for the output -

Null Hypothesis Alternative Hypotheses P Value Decision Rule

The value of P is 0.0367;

which is less than 0.10. In
There is no significant There is a significant
relationship between Return relationship between Return .0367 this condition; we can reject
null hypotheses (H0). That
on Assets and Inventory on Assets and Inventory
mean, there is a significant
conversion period. conversion period.
relationship between ROA
and ICP.
There is no significant There is a significant The value of P is 0.5164;
relationship between Return relationship between Return .5164 which is more than 0.10. we
on Assets and Current on Assets and Current
cannot reject null
ratio. ratio.
hypotheses (H0) .That mean,
they are related but not
significant enough.
The value of P is 0.0013;
which is less than 0.10. In
There is no significant There is a significant
relationship between Return relationship between Return this condition; we can reject
.0013 null hypotheses (H0). That
on Assets and Receivables on Assets and Receivables
mean, there is significant
collection period. collection period.
relationship between ROA
and RCP.
The value of P is 0.0495
which is less than 0.10. In
There is no significant There is a significant
this condition; we can reject
relationship between Return relationship between Return
on Assets and Working on Assets and Working .0495 null hypotheses (H0).That
mean, there is significant
capital turnover ratio. capital turnover ratio.
relationship between ROA
and WCTP.

The value of P is 0.0008;

which is less than 0.10. In
There is no significant There is a significant
this condition, we reject null
relationship between Return relationship between Return
on Assets and Cash on Assets and Cash .0008 hypotheses (H0). That mean,

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 Conversion Cycle. Conversion Cycle. there is significant
relationship between ROA
and CCC.

After doing the P value analysis in most of the cases null hypotheses is rejected and the
alternative is accepted which are statistically significant.

7.6 Summary of the hypotheses

Here are the variables which are statistically significant-

Variables Probability
Working Capital Turnover Ratio 0.0495
(WCTR)
Receivables collection period (RCP) 0.0013
Inventory conversion period (ICP) 0.0367
Cash Conversion Cycle (CCC) 0.0008

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8. Conclusion
Although this research has been conducted in accurate way, still there were some unavoidable
limitations. Insufficient experience and efficiency to prepare the report standard is one of the
main limitations for this study. In Bangladesh the pharmaceutical industry is very large and
competitive. So, another major limitation is this research had done with a small size of sample.
Only five companies had been selected considering their income statement, balance sheet and
cash flow for the last eight consecutive years. This amount of data is not adequate or all-
encompassing because it is only focusing on the five pharmaceutical companies for a particular
period of that industry .With a small data set of this research may not measure the impact of
working capital management on the profitability of Pharmaceutical companies of Bangladesh.
The result of this research is still tentative, subject to confirmation and modification through
further investigation and examination. Moreover all the theses papers and books that were used
for this research are based on USA perspective so it was difficult to extract information from
those. Also, the process of posing and answering particular research questions typically generates
more questions that need to be explored through further research.

The research study helped to understand that impact of working capital management on the
profitability of Pharmaceutical companies of Bangladesh of the selected five companies for the
last consecutive five years. At the same it also helped us to understand the overall regression
model analysis (coefficient of independent variables, p-value and r square), descriptive statistics
(mean, maximum, minimum and standard deviation) correlation matrix with the chosen
independent variables (Inventory conversion period, Receivables collection period, Current ratio,
Working capital turnover ratio and Cash Conversion Cycle) and dependent variables (ROA).
Besides, the research may help the Pharmaceutical companies to improve on their financial
decision making so as to optimize the value of the shareholders and maintain a favorable trade-
off between liquidity and profitability. This research may also be great benefit to future
researchers in the field of working capital management in providing relevant literature in
building up the course of study. It may benefit other scholars and students of finance who may
use it for academic purposes. With the working capital management playing a major role in
financial stability of different firms its efficient utilization is necessary in achieving the goals of
financial stability. The study recommended ways through which working capital can be
effectively utilized in financial decision making.

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