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Working Capital Management

Essay by   •  December 26, 2018  •  Case Study  •  1,725 Words (7 Pages)  •  69 Views

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 Article: 1

 Summary

Research seeks to establish the impact of Working Capital Management (WCM) towards the profitability of Malaysia’s consumer product firms. This research was done on 50 companies registered in Bursa Malaysia, which covered the period of 2011 – 2015 with a total observation of 250 firms/years. Dependent variable to measure the profitability is Return on Asset (ROA). The independent variable used in this research is Inventory Turnover Ratio (ITR), Cash Conversion Cycle (CCC), Collection Period (CP) and Working Capital Turnover Ratio (WCTR). Regression analysis was used in this research to examine the effect of working capital management on the profitability of the firms. Findings show insignificant relationship between Inventory Turnover Ratio (ITR), Working Capital Turnover Ratio (WCTR) and Collection Period (CP) on Return on Asset (ROA). Only significant relationship was found between Cash Conversion Cycle (CCC) and Return on Asset (ROA).

Objectives:

  1. To analyze the consequences of Inventory Turnover Ratio on ROA.
  2.  To analyze the consequences of Cash Conversion Cycle on ROA.
  3.   To analyze the consequences of Average Collection Period on ROA.
  4.  To analyze of Working Capital Turnover Ratio on ROA.

Working Capital Management (WCM) is to sustain the optimum balance among the components working capital, which are cash, receivable, inventories and payable are fundamental part of comprehensive corporate strategies on creating values and an important source of competitive advantage in business. Conducted a research to examine the effect of working capital management to profitability and found significant negative correlation between WCM firms to profitability.

H1: There is a positive significant impact of Inventory Turnover Ratio on Return on Asset.

H2: There is a positive significant impact of Cash Conversion Cycle on Return on Asset.

H3: There is a positive significant impact of Collection Period on Return on Asset.

H4: There is a positive significant impact of Working Capital Turnover Ratio on ROA.

t inventory turnover ratio, collection period and working capital turnover ratio does not place a significant impact on firm profitability which shows that quick dispatched of inventory stock does not places influence impact on the profitability of the sample consumer product companies registered in Bursa Malaysia. While flipping the other side of coin, The cash conversion cycle has significant positive impact on return on asset, which indicates that the quick conversion of cash places a significant influential impact on the profitability of the consumer product company registered in Bursa Malaysia.

Article: 2

 Summary

Management of short-term assets and liabilities play vital role in generating profit in business sector. Textile sector from all over the world is also emphasizing on to maintain optimal working capital to generate more profit. Researchers and practitioners around the world have done lot of work on how to maintain working capital in optimal level. Bangladesh, textile sector has concentrated to ensure efficient working capital management. But inadequate research work has been done on working capital management in textile companies of Bangladesh.

The objective of that article is to examine the impact of different components of working capital management on profitability of the Bangladeshi textile companies. 8 (eight) years data from the time period of 2007-2014 of 22 textile companies listed in Dhaka Stock Exchange (DSE) and logistic regression has used to analyze the data. “Working capital includes all short term assets which company uses it in daily activities. Working capital is an indicator for measuring the liquidity which is defined as adequacy of cash for doing firm’s obligations”.

Adopting methods for managing proper level in various components of working capital i.e., cash receivables, inventory and payables etc. Textile companies are dealing with accounts payables and accounts receivables routinely along with their day to day activities for purchasing raw materials and for selling products. But due to the lack of knowledge regarding the working capital and lack of management’s ability to plan and control its components, textile companies are facing insolvency, in long run their performance is deteriorating and causing bankruptcy. With the findings and indicate that there is significant relationship between different variables of working capital management and firms’ profitability.

 Cash conversion cycle and ROA: Cash Conversion Cycle (CCC) has immense impact on Return on Asset (ROA), which cause positive or negative impact on firm’s profitability. When the cash conversion cycle increases it leads to decrease the profitability of the firm. the result indicate that there is a negative significant relationship between cash conversion cycle and return on asset.

Current ratio and ROA: The sample of 349 telecommunication equipment companies for the time period of 2001-2007 and also found that current ratio is negatively associated with profitability.

Current assets to total assets ratio and ROA: Research studies have been conducted previously by different researchers by using current liabilities to total assets ratio (CLTAR) and return on assets (ROA) and researchers have found mixed opinion in different studies. Negative significant relationship has been found between current liabilities to total assets ratio (CLTAR) and return on assets (ROA).

Cash conversion cycle and ROE: The study of listed manufacturing company of Pakistan on cash conversion cycle and firm’s profitability has found that cash conversion cycle is significantly and inversely related to ROE. Which clearly indicate that lesser the cash conversion cycle greater the profitability if measured by the ROE.

 Current assets to total assets ratio and ROE: ROE is positively correlated with Current Assets to Total Assets Ratio and Return on Equity.

Current liabilities to total assets ratio and ROE: Both positive and negative relationships have been found between Current Liabilities to Total Assets and ROE.

ROA is calculated by= (Operating Profit)/(Total Assets)

Current Liability to Total Asset has major impact on Return on Asset and Current Ratio has major impact on Return on Equity of RMG sector of Bangladesh. different component of working capital management, current liability to total asset and current ratio have significant effect on profitability of the Bangladeshi garments companies and moreover, effective management of working capital have significant impact on profitability of the Bangladeshi garments companies. This study demonstrates that, an efficient working capital management can increase profitability of all garments in the textile industry of Bangladesh. This study is limited to the sample of Dhaka Stock Exchange listed textile companies only. The findings of the study could only be useful for the textile or similar sort of companies only.

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