IMPACT OF WORKING

CAPITAL ON PROFITABILITY
PERFORMANCE
Objectives of the stud
To establish a relationship between working
capital management and profitability.
To examine the combine effect of the working
capital ratios on profitability.
To determine the working capital leverage for
examining the sensitivity of ROI to changes in the
level of gross working capital of the company
!"othesis of the stud
1. H0 there is no relationship between working
capital and profitability
!. H0 there is no effect of working capital
components on profitability
#$t$ b$se $%d &ethodo'o(
The ratios relating to working capital management
which have been selected and comp"ted for the st"dy
are #i$ %orking &apital Ratio #%&R$ #ii$ 'cid Test
Ratio #'TR$ #iii$ %orking &apital T"rnover Ratio
#%TR$ #iv$ &"rrent 'ssets to (ales Ratio #&T(R$ #v$
&"rrent 'ssets to Total 'ssets Ratio #&TTR$ #vi$
Inventory T"rnover Ratio #ITR$ #vii$ )ebtors
T"rnover Ratio #)TR$ #viii$ &ash T"rnover Ratio
#&TR$. *or determining the sensitivity of ROI to
change in the level of working capital+ the working
capital leverage has been comp"ted. 'll statistical
calc"lations have been done thro"gh (,((
#1-.version$.
A%$'sis $%d I&"'ic$tio%s
T$b'e )
*i&"'e Co++e'$tio% A%$'sis bet,ee% *e'ected R$tio%s Re'$ti%( to Wo+-i%( C$"it$' M$%$(e&e%t $%d
Retu+% o% I%vest&e%t
Ye$+ CR ATR CTTR CT*R WTR ITR #TR CTR ROI ./0
!000.!001 0.-/ 0.01 0.!/ 0.2! .3.-1 0.!0 0.42 1/.1/ .3.01
!001.!00! 0.-- 0.0- 0.40 0.02 .-.1! 3.30 3.12 !-.12 3.3!
!00!.!004 0.1/ 0.-1 0.!- 0.42 .1!/.3- 10.!1 2.!- 41.23 3.4!
!004.!000 1.02 1.!- 0.30 0.1- 4.!3 -.-0 2.10 40.23 .4.41
!000.!003 1.1/ 1.00 0.30 0./4 -./2 10.3- /.02 40./- .2.02
!003.!002 0.12 0./- 0.23 0.2- .00.1/ 10.33 1./2 3-.04 .0.32
!002.!00- 1.!0 1.03 0.-0 1.0- 3.2! -./4 1.03 1-.01 .10.41
!00-.!00/ 4.2/ !.1/ 0./3 0.-1 1.1! -.40 11.1- 0-./2 !0.02
!00/.!001 !.4- 1.10 0.03 0.3/ !.1- 1.0- 11.-2 -0.!! !0.!1
!001.!010 1./0 1.3! 0.41 0.24 4.32 10.43 40.4- 312./0 .1.-/
correlation co.#r$
.-01
1
.210
5
.014 ..0-- ..o40 ..0/2 .42! ..04-
1(ignificant at 0.03 level of significant 55(ignificant at 0. 3 level of significant
Table val"e of with #n.!$ i.e.+ / degree of freedom at 0.03 and 0.3 levels of significance are !.41 and 0.-1
respectively.
*ou+ce2 co&"i'ed f+o& $%%u$' +e"o+ts of A%dh+$ ce&e%t Ltd
T$b'e 34 co++e'$tio% &$t+i5
P$+ticu'$+s CR ATR CTTR CT*R WTR ITR #TR CTR ROI
&R
1
'TR
.11!
55
1
&TTR
.30/ .201
5
1
&T(R
.011 .1-3 .24!
5
1
%TR
.403 .44! .441 .310
5
1
ITR
..0!4 .021 .!!0 ..0!! ..4!2 1
)TR
.20/
5
.2!-
5
.0-3 ..0-! .!/- .!3- 1
&TR
.12- .111 ..!-- ..1!2 .131 .!01 ./32
55
1
ROI
.-01
55
.210
5
.014 ..0-- ..040 ..0/2 .42! ..04- 1
55
&orrelation significant at the 0.01 level #!.tailed$
5
correlation significant at the 0.03 level #!.tailed$
6ote &R7&"rrent Ratio+ 'TR7'cid Test Ratio+ &TTR7&"rrent 'ssets to Total 'ssets Ratio+ &T(R7&"rrent
'ssets to (ales Ratio+ %TR7%orking &apital T"rnover Ratio+ ITR7Inventory T"rnover Ratio+ )TR7)ebtor
T"rnover Ratio+ &TR7&ash T"rnover Ratio+ ROI7Ret"rn On Investment.
T$b'e64 Mu'ti"'e co++e'$tio%s $%d &u'ti"'e +e(+essio% $%$'sis
8ariables in the e9"ation ROI7 :0; :1 &R; :! &TTR; :4&T(R; :0%TR; :3ITR; :2)TR; :-&TR+%here as+
.i0 Wo+-i%( C$"it$' R$tio .WCR0
.ii0 Acid Test R$tio .ATR0
.iii0 Wo+-i%( C$"it$' Tu+%ove+ R$tio .WTR0
.iv0 Cu++e%t Assets to *$'es R$tio .CT*R0
.v0 Cu++e%t Assets to Tot$' Assets R$tio .CTTR0
.vi0 I%ve%to+ Tu+%ove+ R$tio .ITR0
.vii0 #ebto+s Tu+%ove+ R$tio .#TR0
.viii0 C$sh Tu+%ove+ R$tio .CTR07
8$+i$b'e
Re(+essio%
Coefficie%t
*t$%d$+d E++o+ of Re(+essio%
Coefficie%t
9t: 8$'ue *i(7t
&R 11.001 0.-0! !.0!0 .142
&TTR .!-.0!! 1-.104 .1.204 .!30
&T(R .!3.04! 14.440 .1.10/ .11-
%TR .00- .031 ./02 .303
ITR .234 .-/0 ./4/ .010
)TR .-11 ./24 ./44 .01!
&TR ..0-4 .00! .1.-40 .!!3
constant /.!-0 /.311 /.311 .04/
m"ltiple R7.1// R
!
7.1-2 ad<.R
!
7./11 (.=.of R70.!400!
1
si(%ific$%t $t ;7;< 'eve' of si(%ific$%ce
11
si(%ific$%t $t ;7< 'eve' of si(%ific$%ce
T$b'e v$'ue of ,ith . %4-4)0 i7e7=3 de(+ee of f+eedo& $t ;7;< $%d ;7< 'eve's of si(%ific$%ce >76; $%d 37?3
+es"ective'
T$b'e >2 Wo+-i%( c$"it$' 'eve+$(e R$tio
Ye$+ *$'es.Rs7i% co+e+0 Wo+-i%( c$"it$' Wo+-i%( c$"it$' 'eve+$(e +$tio
!001 10.14 .13.10 .3.-!
!00! 1!4.3/ .1-.43 .-.1!
!004 100.00 .1.1! .1!/.3-
!000 101.04 44.2/ 4.!3
!003 111.01 13.!0 -./2
!002 131.2! .4.-0 .00.1/
!00- 101.!1 1/.01 3.2!
!00/ 00!.!- !40.1/ 1.1!
!001 421.42 1!0.4- !.1-
!010 !10.3/ /!.-3 4.32
.*ou+ce2 A%%u$' +e"o+t of A%dh+$ ce&e%ts Ltd0
Table1 shows that co.efficient of correlation between selected rations relating to working capital management and
ROI from the table1 it is inferred that co.efficient of correlation between ROI and &R is #;.-01$ which indicate that
there is a higher degree of positive association between ROI and &R. The val"e of co.efficient correlation is fo"nd
to be significant at 3 percent level. (imilarly+ from the table1 it is observed that co.efficient correlation between
ROI and 'TR is #;.210$ which indicate that there is a higher degree of positive relation between ROI and 'TR
which is significant at 3 percent. The relationship between ROI and &TTR #;.014$+ )TR #;.42!$.which is fo"nd that
lower degree of relationship between ROI+ &TTR and )TR and which is significant at 0.03 levels. The rest of
working capital ratio s"ch as &T(R #..0--$+ %TR #..040$+ ITR #..0/2$ and &TR #..04-$ are negatively correlated
with ROI and which is insignificant at 0.03 levels.
In order to "nderstand infl"ence on profitability+ a liner m"ltiple regression models were "sed in Table! and Table4
represent the m"ltiple correlation matrix and m"ltiple regression techni9"e have been "sed to st"dy the impact on
working capital ratios on profitability performance of the firm. In this st"dy &R+ 'TR+ &TTR+ &T(R+ %TR+ ITR+
)TR and &TR have been "sed as the explanatory variables and ROI has been "sed as dependent variable. In this
analysis+ the correlation matrix representing correlation co.efficient between the explanatory variables have been
constr"cted in table!. The table reveals that there is a very high degree of correlation between &R and 'TR #.11!$+
&R and )TR #.20/$+ 'TR and &TTR #.24!$+ &T(R and %TR #.310$+ )TR and &TR #./32$.d"e to this ca"se
&R+'TR+)TR.&TTR+&T(R+%TR+)TR and &TR have been "sed for analysis. The regression model "sed in this
analysis is here"nder. ROI7 :0; :1 &R; :! &TTR; :4&T(R; :0%TR; :3ITR; :2)TR; :-&TR+where :0+ :1+ :!+ :4+
:0 and :3+are the parameters of the ROI line to be estimated.
The pooled regression res"lts of the model exhibiting the impact of working capital on profitability of the firm are
depicted in the Table4. The model for the working capital management and firm>s profitability is selected on the
basis of strong diagnostics and high val"e for the R.s9"ared the res"lt is represented in table4. Table4 exhibiting the
relationship between the dependent variable ROI+and all the independent variables taken together and the impact of
these independent variables on the profitability of the company. %hen &R increased by 11.001 "nits which was
statistically significant at 0.3.when )TR increased by one "nit+ profitability of the company increased by 0.-11 "nits
which was statistically significant at 0.3 levels. %hen ITR increased by one "nit+ the ROI of the company increased
by 0.234 which is statistically significant at 0.3 levels+ the remaining working capital ratios s"ch as &TTR #.
!-.0!!$+&T(R#.!3.04!$+&TR#..0-4$ are negatively infl"ence the profitability of the firm+ which is statistically
significant at 0.3 levels and insignificant at 0.03 levels. The m"ltiple correlations co.efficient of ROI on &R+ &TTR+
&T(R+ %TR+ ITR+ )TR and &TR is 0.1//. it reveals that the profitability of the company was highly infl"enced by
&R+&TTR+&T(R+%TR+ITR+)TR and &TR. it is also endorsed that from the R
!
val"e

that the independent variables
&R+&TTR+&T(R+%TR+ITR+)TR and &TR contrib"ted 1-.2 percent of the variation in the profitability of the
company.
In table 0 it has been attempted to meas"re the sensitivity of ROI d"e to variability in the level of working capital
with the assistance of calc"lation of the %orking &apital ?everage of the company. Table 0 shows that in the year
!003 the %&? of the company was the highest among all the years "nder the st"dy was -./2 representing maxim"m
sensitivity of ROI d"e to changes in the level of working capital investment. In the year !004 the %&? was .1!/.3-
which is the lowest among the all years which shows that least sensitivity of ROI d"e to variability in the working
capital investment maxim"m helpf"l in the
!003 in increasing the profitability of the company "nder st"dy. The table 0 reveals that d"ring !000#4.!3$+ !00-
#3.2!$+ !00/ #!.1-$+ !001 #!.1-$ and !010 #4.32$ %&? of the company is greater than one and d"ring the periods
!001 #.3.-!+$ !00! #.-.1!$+ !004 #.1!/.3-$ and !002 #.00.1/$ the %&? of the company is negative. It represent that
in all the years of the st"dy period increases in the rate of ret"rn on investment was less than proportionate to
decrease n working capital.
Co%c'usio%
%orking capital management and profitability disclosed both negative and positive association. O"t of nine rations
selected for the st"dy three ratios namely+ &T(R+ %TR and &TR registered negatively correlation with profitability.
The slope of the ROI e9"ation depicted that positive and negative infl"ence of variations in the independent
variables on the profitability of the company. O"t of seven regression coefficient of the ROI line+ three coefficient
which are &TTR #.!-.0!!$+ &T(R #.!3.04!$+ &TR #..0-4$ are negatively infl"ence on the profitability. The
coefficient of m"ltiple determinations #R
!
$ makes it clear that 1-.2 percent of the total variation in the profitability of
the firm.
%&? of the company concl"ded+ the increase in the profitability of the company was less than the proportion to
decrease in working capital.
.i50 Wo+-i%( C$"it$' R$tio .WCR0
.50 Acid Test R$tio .ATR0
.5i0 Wo+-i%( C$"it$' Tu+%ove+ R$tio .WTR0
.5ii0 Cu++e%t Assets to *$'es R$tio .CT*R0
.5iii0 Cu++e%t Assets to Tot$' Assets R$tio .CTTR0
.5iv0 I%ve%to+ Tu+%ove+ R$tio .ITR0
.5v0 #ebto+s Tu+%ove+ R$tio .#TR0
.5vi0 C$sh Tu+%ove+ R$tio .CTR07