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Working Capital Efficiency: A Comparison Of Pakistani Cement And Textile Industry

2129 words - 9 pages


The objective of this paper is to compare working capital efficiency of Cement and Textile Industry of Pakistan for the period of 2001-2008. Working capital efficiency is measured by using three index values i.e. performance index (PI), utilization index (UI) and efficiency index (EI). In second part EBIT is associated with working capital variables i.e. account receivable in days (AR), account payable in days (AP), inventory in days (Inv) and current ratio. Size of business (Natural log of sales) and gearing are used as control variables. This study is based on secondary data and the number of observations is 400. Data sources are State Bank of Pakistan and Annual Reports of firms. Data analysis methods consist of regression analysis and index numbers. Major finding of the study is the working capital mangement of cement industry is better than textile industry. There is vast variation in managing working capital efficiency of the firms. The regression analysis shows that there is a positive relationship between current ratio and EBIT. EBIT has shown significant negative relationship with account payable in days and account receivable in days while significantly negative relationship with inventory in days. EBIT has shown significant positive relationship with the size of firm but insignificant negative relationship with gearing. Where as EAT has shown significant negative relationship. The cement industry is earning more EBIT by strict control of credit to customers, making early payments to account payable and decreasing their inventory in days. Larger firms with less gearing are also earning more profit.

I. Introduction

Main focus of finance books is on the study of long term financial decisions. Working capital management was unable to gain due attention. Current assets and liabilities are important components of total assets and they should also be managed efficiently. Management of working capital needs more attention because it can play key role for the profitability of firms (smith, 1980).

Working capital means funds necessary for the working of a business. It is calculated by deducting current liabilities from current assets. Current assets are those assets which can be converted in to cash within short period of time without undergoing diminishing in the value and without disruption of business. Current liabilities are obligations of business which are payable in short period of time. Every business has to make arrangements for sufficient working capital for day to day expenditure (Ramachandran et al., 2009).

Working capital management is very important component of corporate finance because it directly affects the liquidity and profitability of the company. It deals with current assets and current liabilities. Working capital management is important due to many reasons. Excessive levels of current assets can easily result in a firm’s realizing a substandard return on investment. However firms with too...

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