The Impact of Working Capital Components on Profitability of Public Limited Firms in Pakistan (A Comparison of Crisis and Pre Crisis Period)

Abstract

This study examines and compares the impact of working capital components like average collection period (ACP), inventory conversion period (ICP), average payment period (APP) and cash conversion cycle (CCC) on profitability indicator return on asset (ROA) for KSE listed manufacturing companies in two different periods. For this purpose years from 2004-2006 and years from 2008-2009 covers period before and during financial crisis respectively. Forty KSE registered manufacturing firms were taken as a research sample. Multiple linear regression and correlation techniques were used to check the influence of WC components on return on asset. It was concluded that average collection period in both period has negative impact on firm’s performance. Cash conversion cycle has positive impact before and negative impact during crisis period on company profitability. Similarly, inventory conversion period has negative impact before crisis and positive impact during crisis period. However, there is insignificant relationship between average payment period and return on asset of a company. Hence it is suggested for managers to keep average collection period, inventory conversion period up to minimum level and cash conversion cycle up to maximum level before crisis period. However, by keeping average collection period and cash conversion cycle up to minimum level and inventory conversion period up to maximum level during crisis period will enhance firm’s profitability.