VSRD International Journal of Business and Management Research, Vol. 3 No.

2 February 2013 e-ISSN : 2231-248X, p-ISSN : 2319-2194 VSRD International Journals : www.vsrdjournals.com

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RESEARCH ARTICLE

INVENTORY MANAGEMENT OF WORKING CAPITAL COMPONENTS IN AUTOMOBILE INDUSTRY IN INDIA EMPIRICAL STUDY
D.P. Singh
Research Scholar, Department of Management Studies, Singhania University, Jhunjhunu, Rajasthan, INDIA. Corresponding Author : prof.d.p.singh@gmail.com

ABSTRACT
Present study made an attempt to investigate the relation between return on capital employed and various components of working capital. Study investigated various relationships at 01% and 05% significance level between profitability a measure of return on capital employed and all important components of working capital. We have collected the financial data of 12 firms from automobile industry for twelve years starting from 1999 till 2010. In all we therefore have 144 firm year observations. We have used SPSS and found results for three analyses as descriptive, correlation and regression. On interpreting descriptive analysis results it is observed that working capital components are very well managed in automobile industry. We attributed this fact to be as a result of matured and growing automobile industry. For investigating various significant relationships we run correlation using SPSS and found that working capital turnover ratio (WCTR), current ratio (CR), days inventory outstanding (DIO) and day's sales outstanding (DSO) are negatively correlated at 1% significance. Inventory turnover ratio (ITO), sales to turnover ratio (STAR) and SIZE of the firms are positively related to profitability at 1% significance. But current ratio (CR), and cash conversion cycle (CCC) is though negative but at 5% significance level. However we observed no relationship between net working capital ratio (NWCR) and profitability of the firms in automobile industry. Our results regarding the relationships of CR and CCC are departing from earlier studies. Keywords : Return On Capital Employed, Working Capital Components, Descriptive Analysis, Correlation Analysis, Regression Analysis, Corporate Finance, Significant Relationships.

1. INTRODUCTION Corporate financial theory is essentially about three areas of financial management, that is capital budgeting, capital structure and working capital management. Capital investment decisions are constant challenge to all levels of financial mangers. It is a systematic process which broadly includes classification of capital budgeting proposals pertain to capital investments, determining the relevant cash flows from the proposals, assessing economic value of the proposal, incorporating risk into capital budgeting decision and finally evaluating whether to leave or borrow-to-buy (Pamela P. Peterson and Frank J. Fapozzi feb, 2002). Capital structure plays a crucial role in corporate finance not only because of its influence on shareholders wealth but also because it commands sustainability of a firm in a recession or depression. Capital can be broadly classified into debt and equity capital. Each of these capitals has its advantage and disadvantages. A mature corporate management tries to strike a trade-off to find a capital structure in terms of risk and return. Equity capital refers to money put up and owned by shareholders (owners). They are of two types contributed capital in exchange of shares of stock and retained earnings. The later represent profit from past years that have been retained by the company to finance additional operations for growth. Debt capital in a companys capital structure is the borrowed money that is at work in the business. The typical instruments of debt are long-term bonds and short-term commercial papers issued am money market to meet day to day capital requirements.

The trade off theory of capital structure means a company chooses how much debt finance and how much equity finance to be used to balance the cost and benefits. Third and last area of corporate finance is working capital management. Working capital refers to the firms investment in short term assets. Working capital management is an important component of corporate finance. It deals with financing short term financial needs of business organizations. Existing literature characterized working capital management as an area largely lacking in theoretical perspective (Van Horne, 1977). Limited general theories which pertain to working capital management are the off shoots of the finance literature and rather focuses on the relationship between risk and profitability (Smith 1980).Traditionally in the past finance literature has focused on the study of long term financial decisions, and capital structure. Padachi (2006) emphasized that the management of working capital is important to the financial health of businesses of all size. There are many reasons for the importance of working capital management. First, very high amount of capital invested in working capital in proportion to total assets. As these net current assets constitute significant part of capital employed, it is required to use these funds in an efficient way. Second the management of working capital directly affects the liquidity and profitability of a firm and consequently its net worth (Smith, 1980). Working capital management therefore aims at maintaining a trade off balance between liquidity and profitability while carrying out day to day activities of the

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business. Efficiency in working capital is vital (Ganesan Vedavinayagam, 2007) as almost half of the total assets are employed in the form of capital employed .In the trading and manufacturing firms they are even more thereby affecting profitability and liquidity of the company (Rahemen and Nasr. 2007). If we ignore optimum working capital management even in case where profitability keeps on increasing, inaccurate working capital management procedure may lead to bankruptcy (Samiloglu and Demirgunes, 2008). If we exercise no control over the levels of current assets it will deteriorate profitability and such situation can easily result in a firms realizing a substandard return on investment (Rahemen and Nasr. 2007). Success of the firm mainly depends on efficient management capability of finance director to manage receivables, inventories, and liabilities (Filbeck and Krueger, 2005). Efficient working capital management can strengthen the firms funding capabilities significantly. The fundamentals of good working capital management are to provide optimum balance between each element forming working capital. Efficient management of working capital is a very important function of and fundamental strategy in creating shareholders value. Therefore firms try to keep an optimum level of working capital that maximizes their value (Afza and Nazir 2007; Dellof 2003).Most of the efforts of finance director in a firm revolve around searching for an optimum level of current assets and liabilities and to bring them at optimum level in case they are not.(Lamberson, 1995). All corporate decisions which tend to increase the profitability also lead to increase the risk. Also simultaneously corporate decisions taken to reduce the potential risk will reduce profitability. It is very important to maintain liquidity in day to day business operations. This is required to smoothly run the business without any interruptions. Therefore an important part of managing working capital is maintaining the liquidity in day-to-day operations to ensure smooth running and meeting its obligations (Eljelly, 2004). It is difficult to run a business efficiently as well as profitably, as running a business efficiently does not means enhanced profitability. When business is run efficiently there is always a chance of mismatching current assets and current liability. This mismatch affects both growth and profitability of a firm. One of the main principles of finance is to collect money as soon as possible and make payment as late as possible It makes the most important part of working capital management, to plan and control cash. Management of cash is usually based on the cash conversion cycle. Cash conversion cycle is the length of time from the payment for the purchase of raw materials to manufacture a product until the collection of accounts receivable associated with the sale of the product (Besley, Brigham, 2000). Long cash

conversion cycle causes a reduction in the profitability of a company (Shin and Soenen 1998) as longer cycle leads to blockage of funds and therefore less profitability. However, longer cash conversion cycle may also lead to higher profitability by using credit sales strategy as it will lead to higher sale. Conversely profitability may decrease with cash conversion cycle, if the cost of higher investment in working capital rises faster than the benefits of holding inventory or granting more credit to customers (Shin and Soenen 1998). (Shin and Soenen 1998) highlighted the importance of shortening cash conversion cycle, as managers can create value for their shareholders by reducing the cash conversion cycle by minimum reasonable. A firm may adopt an aggressive working capital policy with low level of current assets but if the inventory level is reduced too much, the firm may risk losing any opportunity of increased demand (Wang 2000). Also too much reduction in trade credit may negatively impact sales for the customer requiring credit. In fact the opportunity cost may exceed 20%, depending on the discount percentage and discounted period granted (Ng et al 1999, Wilner, 2000). Conversely if we maintain high level of current asset adopting conservative policy, it may lead to higher profitability. Conservative approach reduces production interruptions and possible loses for scarcity of products, reduced supply of cost and can protect against price fluctuations (Gartia-Teruel and Martinez-Solano, 2007). Net working capital level is a measure of a companys ability to cover its short term financial obligations by comparing its total current assets to its total assets. This ratio can provide some insight as to what is the liquidity of a company. An increasing working capital to total asset ratio is a positive sign for a company, showing companys improving liquidity over time. A decreasing ratio indicates that company may have too many total current liabilities and therefore reducing working capital which is available to the company. This ratio actually is represented as net current asset of a company as a percentage of total assets (SEN Mehmet and ORUC Eda 2009). This study attempts to understand how the net working capital ratio varies from one industry to other. Working capital turnover ratio is yet another important tool to find useful information on how effectively a company is using its working capital to generate sales. The working capital turnover ratio is used to analyze the relationship between the money used to fund operations and the sales generated from these operations. Higher working capital turnover ratio is better because it means that the company is generating adequate sales compared to the money it uses to fund the sales (Singh J. P. and Shishir Pandey). However a very high turnover indicates a sign of overtrading which may in some case put the firm in financial difficulties. We will also make an investigation on how working capital turnover ratio varies across industries for the Indian firms.

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Inventory turnover ratio shows how many times a companys inventory is sold and replaced over a period of time. This ratio varies from one industry to other depending on various factors relating to the industry. This ratio for a company should be compared with the industry average. A lower ratio will imply poor sales and for high turnover otherwise. A high ratio will imply either sales or ineffective purchasing (Abuzar Eljelly 2004). We will make an investigation, how inventory turnover ratio makes an impact on profitability of a firm. 2. LITERATURE REVIEW In the past many research have been conducted to investigate the relationship between working capital management and profitability of the firm in different environments. Shin and Soenen (1998) used a sample of 58,985 firms years covering the period 1975-1994 in order to investigate the relationship between net-trade cycle which was used as a measure of working capital management efficiency and corporate profitability. He observed a strong negative relationship between the length of net-trade cycle and its profitability. Mehmet Sen and Eda ORUC (2009) examined the relationship between efficiency level of firms which are traded on ISE (Istanbul Stock Exchange) and their return on total assets. The study found that there is a significant negative relationship between cash conversion cycle, net working capital level, current ratio, accounts receivable period, inventory period and return on total assets. The study used fixed effect and random effect model for model building for five industries undertaken for the study. Deloof (2003) made an investigation for the relationship between working capital management and corporate profitability. He used a sample of 1009 large Belgium nonfinancial firms for the period from 1992 to 1996. The results showed a negative relationship between gross operating income, a measure of corporate profitability and cash conversion cycle as well as days account receivable and inventories. Lazaridis and Tryfonidis (2006) also investigated relationship between working capital management and corporate profitability for the firms listed in Athens Stock Exchange for a sample of 131 listed companies. Researcher used the company financials from 2001-2004 for the study. The results of the study of regression analysis showed that there was a statistically significant relationship between gross operating profit, a measure of profitability and the cash conversion cycle. He suggested that by optimizing the cash conversion cycle the managers could create value for the share holders. M. A Zariyawati, M. N. Annuar, and A. S. Abdul Rahim, investigated the relationship between working capital management and profitability of the firm. Researchers have used cash conversion cycle as a measure of working capital

management. This study has used a panel data of 1628 firm year for a period of 1996 to 2006. The coefficient results of pooled OLS regression analysis provide a strong negative significant relationship between cash conversion cycle and profitability of the firms. It is revealed that by reducing cash conversion cycle firms profitability can be increased. Raheman and Nasr (2007) also investigated relationship between cash conversion cycle and its components by taking a sample of 94 firms listed on Karachi Stock Exchange for a period of six years from 1999-2004. He investigated that cash conversion cycle is negatively related to net operating profit which is a measure of profitability. Similar relationship was observed for average collection period, inventory turnover in days, and average payment period. Lyroudi and Lazaridis (2000) considered cash conversion cycle as a measure of liquidity indicator for the firms in Greek food industry. He examined the relationship of cash conversion cycle with current and quick ratio. Researchers examined the implications of the cash conversion cycle in terms of profitability, indebtedness, and firm size. The outcome of the study was a significant positive relationship between the cash conversion cycle and the traditional liquidity measures of current and quick ratios. Wang (2002) made a study for the firms in Japan and Taiwan to find a relationship between liquidity management and operating performance. He also investigated the relationship between liquidity management and corporate value of firms. The empirical findings for both countries show a negative relationship between CCC and ROA and CCC and ROE. These results were in line with Jose et al. (1996) and Shin and Soenen (1998) that lower cash conversion cycle corresponds with better operating performance. Further in case of both countries it was investigated that aggressive liquidity management is associated with higher corporate value. Eljelly (2004) empirically investigated the relationship between profitability and liquidity for a sample firms in Saudi Arabia. Researcher took cash gap and current ratio as a measure of liquidity. Using correlation and regression analysis a negative relationship was investigated between liquidity and profitability, where current ratio was taken as measure of liquidity. At company level it was observed that cash gap (cash conversion cycle) is more important as measure of liquidity than the current ratio as measure of liquidity that affects profitability. At industry level it was observed that size have significant effect on profitability. Padachi (2006) investigated the working capital management practices for the manufacturing firms in Mauritius by taking a sample of 58 small firms. Researcher examined the trends in working capital management and its impact on performance. Regression results observed negative relationship between inventories and receivables

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with profitability. The study has also shown a positive relationship between various working capital components and profitability. An increasing trend was observed in the short-term component of working capital financing. Garcia-Teruel and Martinez-Solano (2007) examined effect of working capital management on profitability for small and medium size Spanish firms first time. Using panel data authors revealed that there is a negative relationship between inventories and days account outstanding and profitability. The authors further concluded that by managing working capital such that the cash conversion cycle is reasonably, minimum, the managers can create value for SMEs. Samiloglu and Demirgunes (2008) examined the effect of working capital management on the profitability of the firms listed at Istanbul Stock Exchange (ISE). By using multiple regressions the study shows that there exist negative relationship between account receivable period, inventory period and leverage and profitability of the firms. However growth (in sales) affects firms positively. (SEN Mehemet, KOKSAL Can Deniz and ORUC Eda) investigated the change in working capital as a result of change in working capital management efficiency is compared by company size and sectors. With the data available the researchers calculated the effect of change in working capital management efficiency on to the effect of working capital change. It is observed that efficiency change in management of the short term commercial receivables and short term commercial liabilities by a company size and sectors makes a positive effect in to the change in working capital 3. OBJECTIVE AND HYPOTHESES OF THE STUDY Based on the study we formulated following hypotheses for the firms in automobile industry in India. Net working capital ratio is positively related to profitability. Working capital turnover ratio is positively related to profitability. Inventory turnover ratio is positively related to profitability. Current ratio is positively related to profitability. Days inventory outstanding is negatively related to profitability. Days sales outstanding are negatively related to profitability. Days payable outstanding is positively related to profitability. Cash conversion cycle is negatively related to profitability. Sales to total asset ratio is positively related to profitability. Size of the firms is positively related to profitability.

4. VARIABLES AND RESEARCH METHODOLOGY We have considered return on capital employed as a measure of profitability which is a dependent variable. Net working capital ratio, working capital turnover, current ratio, inventory turnover, days inventory outstanding, days payable outstanding, days sales outstanding, cash conversion cycle and sales to total asset ratio. We have selected 12 companies randomly belonging to automobile sector. All companies selected are listed on National Stock Exchange in India and the financial data is available authentically. We have collected data from EMIS (emerging market information service) for twelve years from 1999-2010. 5. RESULTS AND INTERPRETATIONS Descriptive Analysis : In the study there are statistics that describes the companies in a particular industry on the basis of investigated variables. Descriptive statistics shows the average and standard deviation of different variables of interest in the study for the firm in a particular industry. It also presents the minimum and maximum values of a variable a firm can take. This will give fairly good idea of what can go wrong with a company in extreme situations. This also set benchmarks for companies to achieve. Standard deviation explains the spread of data from the mean. Table 1 presents descriptive statistics of 12 Indian firms belonging to automobile industry for a period of twelve years from 1999 to 2010 and for a total of 12*12=144 firm year observations. The mean value of return on capital employed (ROCE) is 16.60 % of the capital employed, and standard deviation is 25 %. It means that the value of return on capital employed can deviate from mean to both sides by 25%. This also explains that a company in automobile industry can achieve ROCE as high as 20.75%. Also if a company is operating on a ROCE lesser than 12.45%, it actually is under performing. The extreme values of ROCE are 98.61% to -103.24% for the companies in a year for automobile industry. Net current asset which is the measure of working capital efficiency for the particular industry is on average Rs. 255.24 crores. This can be said to be industry average for automobile. Standard deviation is 771.89. The variation in the net working capital can be minimum -5672.92 and maximum as 2784.05. This explains variations because of seasonal fluctuations and necessary inventory build-ups for imports and factor financing. The minimum and maximum is the function of company size also. Industry average for the working capital turnover is 7.43 which mean that the working capital is turned 7.43 times for achieving the company sales in automobile industry. Maximum for the industry is 100 and minimum is -100. This means that working capital turnover for the automobile

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industry varies between -100 to +100. Standard deviation for working capital turnover for the industry is 27.71. This explains as to how much working capital turnover varies from the mean as standard deviation is actually the square root of variance. Actually for calculating standard deviation we subtract mean 7.43 from each firms working capital turnover, square them add them and take under root and this explains the variance under root which is standard deviation. While minimum and maximum explains what the extreme values working capital turnover may take. Industry average of inventory turnover for auto industry is 10.70. This means that inventory is sold 10.7 times and replenished in a year in automobile industry. Minimum is 2.15 and maximum is 44 times. 2.15 belong to HMT Limited which is a PSU and inefficient one while 44 belongs to Hero Honda for which ROCE is more than 50. Standard deviation is 8.32 which mean the value of inventory turnover can vary by 8.32 from the mean for automobile industry. Average current ratio for automobile industry is 2.08. The minimum is .51 and maximum is 8.02. The standard deviation is 1.32. This value of standard deviation explains that the industry is a matured industry where all working capital management systems are in place. There is efficient inventory management and vendors are able to feed all materials in time. The cash conversion cycle is used to check the efficiency in managing working capital. Average value of Cash Conversion Cycle for automobile industry is 9.50 days and standard deviation is 53 days. Firms in automobile sector receive payment against sales after an average of 49 days and standard deviation is 59 days. Minimum time taken for a firm to collect payment in automobile sector is 3 days which is as good as delivery against payments to the dealers. Maximum time taken by a firm in automobile sector is 356 days. It takes an average 53 days to sale inventory with standard deviation 35 days. Here maximum time taken by a firm in automobile industry to convert inventory into sales is 235 while minimum is 5 days. Firms in automobile industry wait an average 92 days before paying their purchases with standard deviation of 54 days. Here minimum time taken for a company to pay their supplier is 18 days and maximum time is 287 days. Sales to total asset ratio is used as proxy to see the return on total assets and average value of this is 2.44 and standard deviation is 1.27. Minimum is .12 and maximum is 6.37. To check the size of the firm and its relationship with profitability in a particular industry natural logarithm of sales is used as a variable. The mean value of log of sales is 3.09 while the standard deviation is 0.77. The maximum value of log of sales in a particular year for automobile industry is 4.55 and the minimum is 1.77. Pearsons Correlation Coefficient Analysis : For

quantitative analysis we used two methods. At first correlation is used to measure the degree of association between different variables used in the study. Pearson and Spearman correlations are calculated for all variables used in the study starting with Pearsons correlation results. Table 2 presents the correlation matrix for different variables considered for the present study for automobile industry. Total observations are 144 for 12 Indian automobile firms for 12 years from 1999 to 2010. We will start our analysis of correlation results between working capital turnover and return on capital employed. There is a negative relationship between working capital turnover and return on capital employed. The result of correlation analysis shows a negative coefficient -0.214, with p-value of (0.010). This indicates that the result is highly significant at alpha=1%. This means that there is only 1% chance that working capital turnover is negatively correlated to return on capital employed by chance. That means that 99 times in 100 the relationship holds true. Therefore we accepted alternative hypotheses that working capital turnover is negatively related with profitability. Net working capital ratios are positively correlated with return on capital employed. Correlation coefficient is 0.015 and p-value is (.857). The result shows that the positive relationship is not significant and is very poor. Therefore we accept null hypotheses that there is no relation between net working capital ratio and profitability. There is positive relationship between inventory turnover and return on capital employed. The results show a positive coefficient +0.595, with p-value of (000). This also show that results are highly significant at alpha=1%. This means that 99 times out of 100 the observed relationship holds true. And this relationship occurs only 1 time by chance otherwise 99 times it holds true. This means if we turn inventory more times to achieve the sale it results to more return on capital employed in automobile industry in India. Current ratio is a traditional measure of liquidity of the firm. In this analysis current ratio has a significant negative relationship with return on capital employed. The correlation coefficient in this case is -0.199. The result is significant at alpha=5%. This indicates that the two variables liquidity and return on capital employed have inverse relationship. Therefore we accept alternative hypotheses that current ratio is negatively related to profitability. It establishes the fact that Indian firms need to maintain a trade-off between current ratio and return on capital employed. Correlation result between inventory in days and return on capital employed is negative at significance level of 1%. The correlation coefficient is -0.448, and the p-value is (000). Since there is strong negative relationship it shows that firms in automobile industry in India takes more time to sale their inventory which adversely affects the return on

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capital employed. Correlation results between days sale outstanding and return on capital employed shows negative relationship. Correlation coefficient is -214 and the p-value is (.010). The result is significant at 1%. Therefore we accept alternative hypothesis that if we give more credit to customer the return on capital employed decreases. Correlation results between payable in days and return on capital employed shows the same relationship. Here the coefficient is again negative and highly significant. Correlation coefficient is -0.364 and the p-value are (000). Therefore we accept alternative hypothesis that if we pay our supplier early return on capital employed increases. It means that less profitable firms take longer to pay their suppliers. Cash conversion cycle is the company management capability of how fast the company cash is converted to further cash for operations. There exist a negative relationship between cash conversion cycle and return on capital employed. Correlation coefficient is -0.169 and the p-value is .043. But it is significant at alpha=5%. Therefore we accept alternative hypothesis that current ratio is negatively related to profitability. It means that if the firm is able to decrease the cash conversion cycle, it can increase the firms profitability in automobile industry in India.

There is a positive relationship between sales to total asset ratio of a firm and return on capital employed. Correlation coefficient is .263 and the p-value is (.001). This means that the result is significant at alpha=1%. Positive relationship between log of sales of a firm which is a measure of companys size and return on capital employed is another important observation of the study. The correlation coefficient is positive .380 and the p-value is (000). The result is highly significant at 1%. It shows that as the size of the firm increases, the return on capital increases. Regression Analysis : From the table 3 above the slopes of the ROCE equation associated with WCTR, ITO, CR, DIO, DSO and DPO witnessed both positive and negative influences of variations in the independent variables on the profitability of the company. Of the six regression coefficients of the ROCE line four coefficients which were associated with WCTR, CR, DIO and DPO shoed negative influence on the profitability. For a unit increase in the value of ITO and DSO, there was significant improvement in the profitability of the company. The coefficient of multiple determinations (R Square) makes it clear that 0.39 percent of the total variation in the profitability of the company was explained by six independent variables WCTR, ITO, CR, DIO, DSO and DPO.

Table 1 Descriptive Statistics N ROCE DPO WCT ITO CR DIO DSO CCC STAR SIZE NCWR Valid N (listwise) 144 144 144 144 144 144 144 144 144 144 144 144 Minimum -103.24 18.29 -100.00 2.15 .51 5.40 2.83 -75.89 .12 1.77 -.49 Maximum 98.61 296.93 100.00 44.52 8.02 234.81 355.77 219.43 6.37 4.55 104.00 Mean 16.6060 91.8642 7.4394 10.7035 2.0874 52.7431 48.6280 9.5069 2.4457 3.0939 .9946 Std. Deviation 25.00084 53.53471 27.71387 8.32211 1.32395 35.15196 59.06837 52.79530 1.27725 .77686 8.64978

Table 2 : Correlation analysis Table : Pearson Correlations Coefficients (Automobile Industry) ROCE NWCR WCT ITO CR DIO DSO DPO Pearson Correlation 1 ROCE Sig. (2-tailed) 1 N 144 NWCR Pearson Correlation -.015

CCC

STAR

SIZE

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Sig. (2-tailed) N Pearson Correlation WCT Sig. (2-tailed) N Sig. (2-tailed) N Sig. (2-tailed) N Pearson Correlation DIO Sig. (2-tailed) N Pearson Correlation DSO Sig. (2-tailed) N

.857 144 .214** .010 144

**

144 .163 .051 144 -.191 .022 144 .327

** *

144 -.145 .083 144 -.024 .778 144 -.030 .718 144 -.044 .597 144 .077 .360 144 -.148 .077 144 -.049 .559 144 -.049 .560 144 1 144 -.371** .000 144 1 144 1

Pearson Correlation .595 ITO

.000 144
*

Pearson Correlation -.199 CR

.017 144 .448** .000 144

.000 144 .050 .550 144

-.674** .382** .000 144 .000 144

144 .546** .000 144 .633** .000 144 .635 .000 144 -.394 .000 144 -.598 .000 144
** ** **

.192* .214** .010 144 .021 144 .028 .740 144

*

-.377** .712** .000 144 .000 144

144 .741** .000 144 .731 .000 144 -.634 .000 144 -.419 .000 144
** ** **

DPO

Pearson Correlation .364** Sig. (2-tailed) .000 N 144 Pearson Correlation -.169 Sig. (2-tailed) .043 N 144
**

-.484** .332** .000 144 -.381 .000 144 .448 .000 144 .540 .000 144
** ** **

.000 144 .714 .000 144 -.596 .000 144 -.400 .000 144
** ** **

144 .237** .004 144 -.489 .000 144 -.425 .000 144
** **

CCC

.220 .008 144

**

1 144 -.476** .000 144 -.436 .000 144

**

Pearson Correlation .263 -.216 STAR Sig. (2-tailed) .001 .009 N 144
**

**

1 144 .248** .003 144 1 144

144 .094 .263 144

Pearson Correlation .380 SIZE Sig. (2-tailed) .000 N 144

**. Correlation is significant at the 0.01 level (2-tailed). *. Correlation is significant at the 0.05 level (2-tailed). Multiple regression analysis Regression model equation ROCE=b0+b1(WTR)+b2(ITO)+b3(CR)+b4(DIO)+b5(DSO)+b6(DPO) R=0.625, R Square=0.390, Adj. R Square=0.363, F=16.620, Sig. F=7.4E-13 Variables Intercept (ROCE) WCTR ITO CR DIO B 13.355 -0.114 1.397 -1.440 -0.070 Table 3 Standard error of B 8.647 0.063 0.291 2.099 0.075 t-values 1.544 -1.833 4.810 -0.686 -0.936 p-levels 0.013 0.069 3.92E-06 0.494 0.351

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DSO DPO

0.088 -0.092

0.064 0.059

1.373 -1.552

0.172 0.123

6. CONCLUSION OF THE STUDY The out put of multiple regression is model which explain the contribution of different working capital components towards roce and the model is ROCE = b0 + b1(WTR) + b2(ITO) + b3(CR) + b4(DIO) + b5(DSO) + b6(DPO) 7. LIMITATIONS OF THE STUDY The study solely depends on the published financial data, so it is subject to all limitations that are inherent in the condensed published financial statements. We have considered some operational firms in our study sample and not considered the entire operating unit as sample, which may leave some grounds for error. 8. FUTURE STUDY The study can be further taken up to investigate the relationship for other important industries in India and other countries. Also the study can be extended to develop a model which will explain how working capital management impact profitability. 9. REFERENCES
[1] Autocorrelation Notes_3, GEOS 585A, spring 2009. [2] Ashish K. Bhattacharya, Financial Accounting for business managers, Prentice Hall of India Private Limited. Cannaught circus, New Delhi, 2007. [3] Appuhami B. A Rajnith, 2008, The impact of firms capital expenditure on working capital management: an empirical studies across industries in Malaysia. International management review, Vol. 4 No. 1. [4] Charles T. Horngren, Gary L Sudem, John A Elliot, Introduction to financial accounting, Eighth edition Pearson Education (Singapore) Pte. Limited. [5] Uyar Ali (2009) The Relationship of cash conversion cycle with firm size and profitability: An empirical investigation in Turkey International research Journal of finance and economics. ISSN 1450-2887 Issue 24. Euro Journal Publishing Inc. [6] Dong Huynh Phuong and Su Jyh-Tay, The relationship between working capital management and profitability: A Vietnam case International research journal of finance and economics, ISSN-1450-2887Issue 49 (2010), Euro journals Publishing Inc. 2010. [7] E W Walker, Essentials of fundamental management, Prentice Hall Inc. New Delhi 1935. [8] Eljelly Abuzar M. A. 2004, Liquidity-profitability tradeoff: An empirical investigation in an emerging market IJCM VOL 14, NO. 2 2004, 48 [9] 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. [10] Ghosh Kumar Santanu and Maji Santi Gopal, Working capital management efficiency: A study on Indian Cement Industry. [11] Ganesan Vedavinayagam (2007) An analysis of working

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