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The Impact of Working Capital Management on Firm Profitability and Fixed Investment in Pakistan

Author

Listed:
  • Ali, Madiha
  • Ali, Syed Babar

Abstract

The research is done with a purpose of increasing knowledge about the importance of working capital management. The research investigates impact of working capital management on the profitability of the firms along with the impact of the same on the fixed capital investment of the firm. The research also finds out the interrelationship of fixed capital investment and the profitability because the ultimate goal of the firms is to achieve maximum profitability at the lowest level of risk. The research has thoroughly examined impact of variables involved through ratio analysis and tools like regression and correlation. The data was gathered from Karachi Stock Exchange. The data gathering was archival and panel data was used as a method to extract the needed information. The 20 companies are selected from KSE-30 index because they were considered the best performing stocks in the market. The remaining 10 companies fall in the Banking sector which has a totally different perspective of debt and equity situation, thus, commercial banks are eliminated from the KSE-30 companies in this research. The results of the study shows that the working capital management does not affect the profitability of the firms in isolation, but there is a slight impact of managing the current assets and current liabilities. These should be accompanied by other variables as well to ensure profitability. The fixed capital investment has an extremely low, in fact negligible impact on profitability. The effect of working capital management varies among industries.

Suggested Citation

  • Ali, Madiha & Ali, Syed Babar, 2014. "The Impact of Working Capital Management on Firm Profitability and Fixed Investment in Pakistan," MPRA Paper 64520, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:64520
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    References listed on IDEAS

    as
    1. Steven M. Fazzari & Bruce C. Petersen, 1993. "Working Capital and Fixed Investment: New Evidence on Financing Constraints," RAND Journal of Economics, The RAND Corporation, vol. 24(3), pages 328-342, Autumn.
    2. Paul Geroski & Steve Machin & John Van Reenen, 1993. "The Profitability of Innovating Firms," RAND Journal of Economics, The RAND Corporation, vol. 24(2), pages 198-211, Summer.
    3. J. G. Kallberg & R. W. White & W. T. Ziemba, 1982. "Short Term Financial Planning under Uncertainty," Management Science, INFORMS, vol. 28(6), pages 670-682, June.
    4. Greg Filbeck & Thomas M. Krueger, 2005. "An Analysis of Working Capital Management Results Across Industries," American Journal of Business, Emerald Group Publishing, vol. 20(2), pages 11-20.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Working Capital Management. Profitability. Fixed Investment. Capital Investment;

    JEL classification:

    • G0 - Financial Economics - - General
    • G3 - Financial Economics - - Corporate Finance and Governance
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G39 - Financial Economics - - Corporate Finance and Governance - - - Other

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