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Working Capital And Profitability: A study on textile firms of Bangladesh
Abstract
Among all the problems of financial management, the problem of working capital management
has probably been recognized as the most crucial one. It is because of the fact that working
capital always helps a business concern to gain vitality and life strength. The primary aim of this
paper is to investigate the relationship between working capital management and firms
profitability. The analysis is based on a sample of 4 (Four) Bangladeshi textile firms listed in the
Dhaka stock exchange for the period 2002-2006. The results suggest that managers can
increase profitability of their firms by shortening the cash conversion cycle, the receivable
collection period and the inventory conversion period. The results suggest that managers can
also increase the profitability of their firms by lengthening the payable deferral period.
However, managers should be careful when lengthening the payable deferral period because
this could damage the firm’s credit reputation and harm its profitability in the long run.
However, the study does not examine the political and economic impacts on the working
capital management. From the analysis, we can conclude that textile firms operated in
Bangladesh are efficiently deal with their liquidity preferences and investment criteria and this
is due to the competitive nature of this industry.
Key words: Working Capital Management; Cash Conversion Cycle; Receivable Collection
Period; Inventory Conversion Period; Payable Deferral Period; Return OnAssest; Profitability.
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Working Capital And Profitability: A study on textile firms of Bangladesh
Introduction of the concepts
Working Capital Management
Working capital management refers to all management decisions and actions that ordinarily
influence the size and effectiveness of the working capital. It is concerned with the most
effective choice of working capital sources and the determination of the appropriate levels of
the current assets and their use. It focuses attention to the managing of the current assets,
current liability and their relationships that exist between them. In other words, working capital
management may be defined as the management of a firm’s liquid assets viz-cash, marketable
securities, accounts receivable and inventories.
In the present day context of rising capital cost and scarce funds, the importance of working
capital needs special emphasis. It has been widely accepted that the profitability of a business
concern likely depends upon the manner in which its working capital is managed. The inefficient
management of working capital not only reduces profitability but ultimately may also lead a
concern to financial crisis. On the other hand, 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. Excessive working capital leads to un-remunerative use of scarce funds.
On the other hand inadequate working capital usually interrupts the normal operations of a
business and impairs profitability. There are many instances of business failure for inadequate
working capital. Further, 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. If new ideas, methods and techniques are not injected or brought into practice for
want of working capital, the concern will certainly not be able to face competition and survive.
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Working Capital And Profitability: A study on textile firms of Bangladesh
In this context, working capital management has a special relevance and a thorough
investigation regarding working capital practice in the banks.
Working capital in simple terms is the amount of funds which a company needs to finance its
day by day operations. Opinions differ on the concept of working capital. Gross working capital
is defined as the firms' total currents asset. The purpose of the present study is to analyze the
various concepts of working capital and find out the feasibility of the concept of working capital
in the light of better planning and control of working capital. A concept of gross working capital
adheres to the overall investment in current assets and financing of the same. Networking
capital refers to the excess of current assets over current liabilities (1990).
Problems of working capital management involve the problem of determining the optimum
level of investment in each component of current assets i.e. inventory, receivables cash, and
other short-term investment. The basic focus in managing working capital should be to
optimize the firm's investment in them. An expert in the financial management is of the opinion
that problem of working capital is one of the factors responsible for the low profitability in
manufacturing sector. Better planning and control of working capital or in other words, proper
utilization of optimum quantity of working capital increases the earning power subject to the
existence of operating margin (1980).
Working Capital Management Concepts
The working capital meets the short-term financial requirements of a business enterprise. It is
the investment required for running day-to-day business. It is the result of the time lag between
the expenditure for the purchase of raw materials and the collection for the sales of finished
products. The components of working capital are inventories, accounts to be paid to suppliers,
and payments to be received from customers after sales. Financing is needed for receivables
and inventories net of payables. The proportions of these components in the working capital
change from time to time during the trade cycle. The working capital requirements decide the
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Working Capital And Profitability: A study on textile firms of Bangladesh
liquidity and profitability of a firm and hence affect the financing and investing decisions. Lesser
requirement of working capital leads to less need for financing and less cost of capital and
hence availability of more cash for shareholders. However, the lesser working capital may lead
to lost sales and thus may affect the profitability.
The management of working capital by managing the proportions of the WCM components is
important to the financial health of businesses from all industries. To reduce accounts
receivable, a firm may have strict collections policies and limited sales credits to its customers.
This would increase cash inflow. However, the strict collection policies and lesser sales credits
would lead to lost sales thus reducing the profits. Maximizing account payables by having
longer credits from the suppliers also has the chance of getting poor quality materials from
supplier that would ultimately affect the profitability. Minimizing inventory may lead to lost
sales by stock-outs. The working capital management should aim at having balanced; optimal
proportions of the WCM components to achieve maximum profit and cash flow.
Measures of Working Capital Management Efficiency
The form and amount of working capital components vary over the operating cycle. It would be
hard to get the amounts of the components used in operations for an operating cycle. Hence,
the working capital management efficiency is measured in terms of the “days of working
capital” (DWC). DWC value is based on the dollar amount in each of equally weighted
receivable, inventory and payable accounts. The DWC represents the time period between
purchases of materials on account from suppliers until the sale of finished product to the
customer, the collection of the receivables, and payment receipts. Thus it reflects the
company’s ability to finance its core operations with vendor credit. The firm’s profitability is
measured using the operating income plus depreciation related to total assets (IA). This
measure is indicator of the raw earning power of the firm’s assets. Another profitability
measure used for this analysis is the operating income plus depreciation related to the sales
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Working Capital And Profitability: A study on textile firms of Bangladesh
(IS). This indicates the profit margin on sales. To measure the liquidity of the firm the cash
conversion efficiency (CCE) and current ratio (CR) are used. The CCE is the cash flow generated
from operating activities related to the sales. The formulae for calculating these values are
given in the following Table 1.
Cash Conversion Cycle
What Is It?
The CCC is a combination of several activity ratios involving accounts receivable, accounts
payable and inventory turnover. AR and inventory are short-term assets, while AP is a liability;
all of these ratios are found on the balance sheet. In essence, the ratios indicate how efficiently
management is using short-term assets and liabilities to generate cash. This allows an investor
to gauge the overall health of the company.
If the company sells what people want to buy, cash cycles through the business quickly. If
management cannot figure out what sells, the CCC slows down. For instance, if too much
inventory builds up, cash is tied up in goods that cannot be sold - this is not good news for the
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Working Capital And Profitability: A study on textile firms of Bangladesh
company. In order to move out this inventory quickly, management might have to slash prices,
possibly selling its product at a loss. If AR is handled poorly, it means that the company is having
difficulty collecting payment from customers. This is because AR is essentially a loan to the
customer, so the company loses out whenever customers delay payment. The longer a
company has to wait to be paid, the longer that money is unavailable for investment elsewhere.
On the other hand, the company benefits by slowing down payment of AP to its suppliers,
because that allows the company to make use of the money for longer. (To learn more, read
Measuring Company Efficiency and Understanding The Time Value Of Money.)
The cash conversion cycle is one of several tools that can help to evaluate management,
especially if it is calculated for several consecutive time periods and for several competitors.
Decreasing or steady CCCs are good, while rising ones should motivate we to dig a bit deeper.
CCC is most effective with retail-type companies, which have inventories that are sold to
customers. Consulting businesses, software companies and insurance companies are all
examples of companies for whom this metric is meaningless.
Source:
1. http://www.investopedia.com/articles/06/cashconversioncycle.asp#ixzz206e1aU2x
2. http://www.investopedia.com/articles/06/cashconversioncycle.asp#ixzz206eHjx2s
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Working Capital And Profitability: A study on textile firms of Bangladesh
Objectives of the study
Broad Objective:
Discover the relationship between the WCM efficiency and firm’s profitability to find if there is evidence of WCM in textiles and apparels industry.
Specific Objective:
Identify their Return on Assets and Cash Conversion Cycle for 5 years to get the clear picture of the relationship between WCM and profitability
Place the pearson correlation between the ROA and CCC to find out the linear direction.
Research Methodology
The sample of the study: 4 (Four) textile firms, which are enlisted in Dhaka stock exchange. The study covers 5 years period.
This study is based only on secondary data. Secondary data are the annual reports of the companies and various studies made available through library work.
The collected data then was tabulated, analyzed and interpreted with the help of different financial and statistical tools like percentages, correlation etc.
MS EXCEL was used in the report for the calculation.
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Working Capital And Profitability: A study on textile firms of Bangladesh
Literature Review
Working Capital Management
Working capital management is an important issue from the corporate perspective, that’s why
many researchers from different areas study it with different views and in different
environments. Available literatures related to this study are as below.
The management of working capital is defined as the “management of current assets and
current liabilities, and financing these current assets.” Working capital management is
important for creating value for shareholders. Management of working capital management
was found to have a significant impact on both profitability and liquidity in studies in different
countries.
Long et al. [Long MS, Malitz IB, Ravid SA, 1993.Trade credit, quality guarantees, and product
marketability. Financial Management, 22: 117-124.]developed a model of trade credit in which
asymmetric information leads good firms to extend trade credit so that buyers can verify
product quality before payment. Their sample contained all industrial (SIC 2000 through 3999)
firms with data available from COMPUSTAT for the three-year period ending in 1987 and used
regression analysis. They defined trade credit policy as the average time receivables are
outstanding and measured this variable by computing each firm's days of sales outstanding
(DSO), as accounts receivable per dollar of daily sales. To reduce variability, they averaged DSO
and all other measures over a threeyear period. They found evidence consistent with the
model. The findings suggest that producers may increase the implicit cost of extending trade
credit by financing their receivables through payables and short-term borrowing.
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Working Capital And Profitability: A study on textile firms of Bangladesh
Shin and Soenen[Shin HH, Soenen L, 1998.Efficiency of working capital management and
corporate profitability. Financial Practice and Education, 8: 37-45] researched the relationship
between working capital management and value creation for shareholders. The standard
measure for working capital management is the cash conversion cycle (CCC). Cash conversion
period reflects the time span between disbursement and collection of cash. It is measured by
estimating the inventory conversion period and the receivable conversion period, less the
payables conversion period. In their study, Shin and Soenen [7] used net-trade cycle (NTC) as a
measure of working capital management. NTC is basically equal to the cash conversion cycle
(CCC) where all three components are expressed as a percentage of sales. NTC may be a proxy
for additional working capital needs as a function of the projected sales growth. They examined
this relationship by using correlation and regression analysis, by industry, and working capital
intensity. Using a COMPUSTAT sample of 58,985 firm years covering the period 1975-1994, they
found a strong negative relationship between the length of the firm's net-trade cycle and its
profitability. Based on the findings, they suggest that one possible way to create shareholder
value is to reduce firm’s NTC.
To test the relationship between working capital management and corporate profitability,
Deloof [Deloof M, 2003. Does working capital management affect profitability of Belgian firms?
Journal of Business Finance and Accounting, 30: 573-588.] used a sample of 1,009 large Belgian
non-financial firms for a period of 1992-1996. By using correlation and regression tests, he
found significant negative relationship between gross operating income and the number of
days accounts receivable, inventories, and accounts payable of Belgian firms. Based on the
study results, he suggests that managers can increase corporate profitability by reducing the
number of day’s accounts receivable and inventories.
Ghosh and Maji[Ghosh SK, Maji SG, 2003.Working capital management efficiency: a study on
the Indian cement industry. The Institute of Cost and Works Accountants of India] attempted to
examine the efficiency of working capital management of Indian cement companies during
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Working Capital And Profitability: A study on textile firms of Bangladesh
1992 - 93 to 2001 - 2002. They calculated three index values - performance index, utilization
index, and overall efficiency index to measure the efficiency of working capital management,
instead of using some common working capital management ratios. By using regression analysis
and industry norms as a target efficiency level of individual firms, Ghosh and Maji tested the
speed of achieving that target level of efficiency by individual firms during the period of study
and found that some of the sample firms successfully improved efficiency during these years.
Eljelly [Eljelly A, 2004. Liquidity-profitability tradeoff: an empirical investigation in an emerging
market. International Journal of Commerce and Management, 14: 48-61] empirically examined
the relationship between profitability and liquidity, as measured by current ratio and cash gap
(cash conversion cycle) on a sample of 929 joint stock companies in Saudi Arabia. Using
correlation and regression analysis, Eljelly found significant negative relationship between the
firm's profitability and its liquidity level, as measured by current ratio. This relationship 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. The firm size variable was
also found to have significant effect on profitability at the industry level.
Lazaridis and Tryfonidis[Lazaridis I, Tryfonidis D, 2006.Relationship between working capital
management and profitability of listed companies in the Athens stock exchange. Journal of
Financial Management and Analysis, 19: 26-25.]conducted a cross sectional study by using a
sample of 131 firms listed on the Athens Stock Exchange for the period of 2001 - 2004 and
found statistically significant relationship between profitability, measured through gross
operating profit, and the cash conversion cycle and its components (accounts receivables,
accounts payables, and inventory). Based on the results analysis of annual data by using
correlation and regression tests, they suggest that managers can create profits for their
companies by correctly handling the cash conversion cycle and by keeping each component of
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Working Capital And Profitability: A study on textile firms of Bangladesh
the conversion cycle (accounts receivables, accounts payables, and inventory) at an optimal
level.
Raheman and Nasr [Raheman A, Nasr M, 2007. Working capital management and profitability –
case of Pakistani firms. International Review of Business Research Papers, 3: 279-300.]studied
the effect of different variables of working capital management including average collection
period, inventory turnover in days, average payment period, cash conversion cycle, and current
ratio on the net operating profitability of Pakistani firms. They selected a sample of 94 Pakistani
firms listed on Karachi Stock Exchange for a period of six years from 1999 - 2004 and found a
strong negative relationship between variables of working capital management and profitability
of the firm. They found that as the cash conversion cycle increases, it leads to decreasing
profitability of the firm and managers can create a positive value for the shareholders by
reducing the cash conversion cycle to a possible minimum level.
Garcia-Teruel and Martinez-Solano [Garcia-Teruel PJ, Martinez-Solano PM, 2007.Effects of
working capital management on SME profitability. International Journal of Managerial Finance,
3: 164-177.]collected a panel of 8,872 small to medium-sized enterprises (SMEs) from Spain
covering the period 1996 - 2002. They tested the effects of working capital management on
SME profitability using the panel data methodology. The results, which are robust to the
presence of endogeneity, demonstrated that managers could create value by reducing their
inventories and the number of days for which their accounts are outstanding. Moreover,
shortening the cash conversion cycle also improves the firm's profitability.
Falope and Ajilore [Falope OI, Ajilore OT, 2009.Working capital management and corporate
profitability: evidence from panel data analysis of selected quoted companies in Nigeria.
Research Journal of Business Management, 3: 73-84.]used a sample of 50 Nigerian quoted non-
financial firms for the period 1996 -2005. Their study utilized panel data econometrics in a
pooled regression, where time-series and cross-sectional observations were combined and
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Working Capital And Profitability: A study on textile firms of Bangladesh
estimated. They found a significant negative relationship between net operating profitability
and the average collection period, inventory turnover in days, average payment period and
cash conversion cycle for a sample of fifty Nigerian firms listed on the Nigerian Stock Exchange.
Furthermore, they found no significant variations in the effects of working capital management
between large and small firms.
Mathuva [Mathuva D, 2009. The influence of working capital management components on
corporate profitability: a survey on Kenyan listed firms. Research Journal of Business
Management, 3: 1-11.] examined the influence of working capital management components on
corporate profitability by using a sample of 30 firms listed on the Nairobi Stock Exchange (NSE)
for the periods 1993 to 2008. He used Pearson and Spearman’s correlations, the pooled
ordinary least square (OLS), and the fixed effects regression models to conduct data analysis.
The key findings of his study were that: i) there exists a highly significant negative relationship
between the time it takes for firms to collect cash from their customers (accounts collection
period) and profitability, ii) there exists a highly significant positive relationship between the
period taken to convert inventories into sales (the inventory conversion period) and
profitability, and iii) there exists a highly significant positive relationship between the time it
takes the firm to pay its creditors (average payment period) and profitability.
Working capital management is particularly important in the case of small and medium sized
companies. Most of these companies’ assets are in the form of current assets. In addition,
current liabilities are one of their main sources of external finance. The objective of the
research was to provide empirical evidence about the effects of working capital management
on the profitability using Descriptive Statistics, Correlation Matrix, Mean Values by ROA
Quartiles & Effect of Working Capital Management on ROA of a sample of 8,872 covering the
period 1996-2002 (TeruelPJG and Solano PM. 2007).
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Working Capital And Profitability: A study on textile firms of Bangladesh
Afza T and MS Nazir (2008) investigated the relationship between the aggressive/conservative
working capital policies for seventeen industrial groups and a large sample of 263 public limited
companies listed at Karachi Stock Exchange for a period of 1998- 2003. Using ANOVA and LSD
test, the study found significant differences among their working capital investment and
financing policies across different industries. Moreover, rank order correlation confirmed that
these significant differences were remarkably stable over the period of six years of study.
Finally, ordinary least regression analysis found a negative relationship between the
profitability measures of firms and degree of aggressiveness of working capital investment and
financing policies.
In summary, the literature review indicates that working capital management impacts on the
profitability of the firm but there still is ambiguity regarding the appropriate variables that
might serve as proxies for working capital management. The present study investigates the
relationship between a set of such variables and the profitability of a sample of Bangladeshi
textile firms.
Cash Conversion Cycle
The cash conversion cycle (CCC) is one of several measures of management effectiveness. It
measures how fast a company can convert cash on hand into even more cash on hand. The CCC
does this by following the cash as it is first converted into inventory and accounts payable (AP),
through sales and accounts receivable (AR), and then back into cash. Generally, the lower this
number is, the better for the company. Although it should be combined with other metrics
(such as return on equity and return on assets) it can be especially useful for comparing close
competitors because the company with the lowest CCC is often the one with better
management.
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Working Capital And Profitability: A study on textile firms of Bangladesh
The cash conversion cycle introduced by Richards and Laughlin (1980) is a powerful
performance measure for assisting how well a company is managing its working capital.
Vaidyanathan et al. (1990) argue that a short cash conversion cycle is indirectly related to firm’s
value. Short cash conversion cycle indicates that the firm is collecting the receivables as quickly
as possible and delaying the payments to suppliers as slowly as possible. This leads to high net
present value of cash flow and high firm value.
Cash conversion cycle’s definitions are not constant. For example, Stewart (1995) define cash
conversion cycle as “ a composite metric describing the average days required to turn a dollar
invested in raw materials into a dollar collected from a customer”.
Besley and Brigham (2005) describes cash conversion cycle as “ the length of time from the
payment for the purchase of raw materials to manufacture a product until the collection of
account receivable associated with the sale of the product. Shorter cash conversion cycle could
be associated with high profitability because it improves the efficiency of using the working
capital. Although the length of cash conversion cycle is an important measure of the efficiency
of working capital management, little is known about the affect of cash conversion cycle on
firm’s profitability. the main reason for this lack of knowledge is that there are few cash
conversion cycle studies. The reason why cash conversion cycle studies are few could be that
managers of the companies are not aware of there important. Among the few studies that test
the effect of cash conversion cycle on the firm’s profitability is the study of Shin and Soenen
(1998). In their study, they used a large sample of listed American firms covering the period
1975-1994.
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Working Capital And Profitability: A study on textile firms of Bangladesh
Analysis
The analysis part was done in 3 (three) segments.
Calculating Return on Assets
Calculating Cash Conversion Cycle
Applying Pearson Correlation
The Calculation of Return on Assets
ROA offers a different take on management's effectiveness, reveals how much profit a company
earns for every dollar of its assets. Assets include things like cash in the bank, accounts
receivable, property, equipment, inventory and furniture. ROA is calculated like this:
Annual Net Income
________________________
Total Assets
The Calculation of Cash conversion Cycle
To calculate CCC, I needed several items from the financial statements:
Revenue and cost of goods sold (COGS) from the income statement
Inventory at the beginning and end of the time period
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Working Capital And Profitability: A study on textile firms of Bangladesh
Accounts Receivables at the beginning and end of the time period
Accounts Payable at the beginning and end of the time period
The number of days in the period (year = 365 days, quarter = 90)
Inventory, AR and AP were found on two different balance sheets. If the period is a quarter,
then use the balance sheets for the quarter in question and the ones from the preceding
period. For a period of a year, I used the balance sheets for the quarter (or year end) in
question and the one from the same quarter a year earlier.
This is because, while the income statement covers everything that happened over a certain
period of time, balance sheets were only snapshots of what the company was like at a
particular moment in time. For things like AP, I wanted an average over the period of time
iwere investigating, which means that AP from both the time period's end and beginning were
needed for the calculation.
The formula is:
CCC = DIO + DSO - DPO
Each component and how it relates to the business activity is discussedbelow:
Days Inventory Outstanding (DIO): This addresses the question of how many days it takes to
sell the entwere inventory. The smaller this number is, the better.
DIO = Average inventory/COGS per day
Average Inventory = (beginning inventory + ending
inventory)/2
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Working Capital And Profitability: A study on textile firms of Bangladesh
Days Sales Outstanding (DSO): This looks at the number of days needed to collect on sales and
involves AR. While cash-only sales have a DSO of zero, people do use credit extended by the
company, so this number is going to be positive. Again, smaller is better.
DSO = Average AR / Revenue per day
Average AR= (beginning AR + ending AR)/2
Days Payable Outstanding (DPO): This involves the company's payment of its own bills or AP. If
this can be maximized, the company holds onto cash longer, maximizing its investment
potential; therefore, a longer DPO is better.
DPO = Average AP / COGS per day
Average AP = (beginning AP + ending AP)/2
The DIO, DSO and DPO were all paired with the appropriate term from the income statement,
either revenue or COGS. Inventory and AP was paired with COGS, while AR is paired with
revenue.
Correlation
The correlation coefficient allows researchers to determine if there is a possible linear
relationship between two variables measured on the same subject (or entity). When these two
variables are of a continuous nature (they are measurements such as weight, height, length,
etc.) the measure of association most often used is Pearson’s correlation coefficient.
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Working Capital And Profitability: A study on textile firms of Bangladesh
The Pearson Product-Moment Correlation Coefficient (r), or correlation coefficient for short is a
measure of the degree of linear relationship between two variables, usually labeled X and Y.
While in regression the emphasis is on predicting one variable from the other, in correlation the
emphasis is on the degree to which a linear model may describe the relationship between two
variables. In regression the interest is directional, one variable is predicted and the other is the
predictor; in correlation the interest is non- directional, the relationship is the critical aspect.
The correlation coefficient may take on any value between plus and minus one.
The sign of the correlation coefficient (+ , -) defines the direction of the relationship, either
positive or negative. A positive correlation coefficient means that as the value of one variable
increases, the value of the other variable increases; as one decreases the other decreases. A
negative correlation coefficient indicates that as one variable increases, the other decreases,
and vice-versa.
In this report, the function “pearson”in MSEXCEL 2010 was used to find out the correlation
coefficient based on two arrays- Return on Assets and Cash Conversion Cycle.
The detailed worksheet of the analyses can be found in the appendix section.
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Working Capital And Profitability: A study on textile firms of Bangladesh
Scatter Graphs to show the Correlation
The correlation between two independent variables can be evaluated by the scatter graph. It is
shown below:
Alltex Industries LTD:
Metro Spinning LTD:
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Working Capital And Profitability: A study on textile firms of Bangladesh
Rahim Textiles Mills:
Square Textiles:
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Working Capital And Profitability: A study on textile firms of Bangladesh
Research Findings
Specific Findings:
Alltex industriesLTD has a pearson coefficient -0.08393, meaning if the CCC and ROA has a negative linear relation and if the value of one variable increases, the value of the other variable decreases by the factor of 0.08393.
Metro Spinning LTD has a pearson coefficient -0.6077, meaning if the CCC and ROA has a negative linear relation and if the value of one variable increases, the value of the other variable decreases by the factor of 0.6077.
Rahim Textile Mills has a pearson coefficient 0.041513, meaning if the CCC and ROA has a positive linear relation and if the value of one variable increases, the value of the other variable increases by the factor of 0.041513.
Square Textiles has a pearson coefficient -0.27883, meaning if the CCC and ROA has a negative linear relation and if the value of of one variable increases, the value of the other variable decreases by the factor of 0.27883.
Broader findings:
Three out of the four correlations were negative. So, it can be clearly said that in the textile industry, Working capital plays a vital role on profitability. Most of the higher the Cash conversion Cycle is, the lower the Return on Assets get.
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Working Capital And Profitability: A study on textile firms of Bangladesh
Conclusion
One of comprehensive measures of working capital management efficiency is the cash
conversion cycle that conceders all financial flows associated with inventory, receivable and
payables. The traditional link between the cash conversion cycle and firm's profitability and
market value is that reducing the cash conversion cycle by reducing the time that cash are tied
up in working capital improves firm’s profitabilityand market value. This could happen by
shortening the inventory conversion period via processing and selling goods to customers more
quickly, by shortening the receivable collection period by speeding up collections, or by
lengthening the payable deferral period via slowing down payments to suppliers. On the other
hand, shortening the cash conversion cycle could harm the firm's profitability; reducing the
inventory conversion period could increase the shortage cost, reducing the receivable collection
periods could makes the company's to louse it's good credit customers, and lengthening the
payable period could damage the firm's credit reputation. However, achieving the optimal
levels of inventory, receivable, and payable will minimizes the carrying cost and opportunity
cost of holding inventory, receivable, and payable and leads to an optimal length of the cash
conversion cycle. Hence, I suggest an optimal cash conversion cycle as more accurate and
comprehensive measure of working capital management that maximizes sales, profitability and
market value of firms.
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