Working Capital Management and Firm Profitability: A Panel Data Analysis of Pakistani Textile and Cement Manufacturing Firms

Abstract

This paper investigates how working capital management is related to the profitability of companies in the textile and cement production industries of Pakistan during the period of 2015-24. This study examines the role of the working capital elements in profitability measures by using panel data methodology and based on 20 empirical studies that have been verified to be published between 1998 and 2023. The research uses the pooled ordinary least squares, fixed effects, and random effects models as the static panel estimators with the System Generalized Method of Moments estimator as the supplement to deal with the problem of endogeneity. The analysis shows that the relationship between cash conversion cycle and profitability are found to be significant in relation to negative, similar to what is reported by Raheman and Nasr (2007), Deloof (2003) and Shin and Soenen (1998). The inventory conversion period shows the most negative relationship with the profitability whereas the accounts payable period also shows positive relationships with the returns. The analysis based on sectors demonstrates that the sensitivity of cement companies to working capital efficiency is higher than the one of textile companies due to structural differences in the production technology and market conditions. The paper adds to the new body of research in the market by including sector-specific findings that Pakistani manufacturing companies may enjoy a 0.34 percentage point increment in the payoff on assets by cutting down the cash conversion cycles by about 10 days. These results confirm the theoretical hypothesis that the effective management of working capital yields value in the form of lower financing cost and operational efficiency within the context of emerging markets.

Keywords: Management of working capital, profitability of the firms, cash conversion cycle, panel analysis of data, textile industry, cement industry, Pakistan, emerging market.