Determinants of Profitability of Automobile Sector in Pakistan
Research Research
Impact of Working Capital Management and Capital Structure on Profitability
IMPACT OF WORKING CAPITAL MANAGEMENT AND CAPITAL STRUCTURE ON PROFITABILITY: THE CASE OF KSE QUOTED AUTOMOBILE FIRMS*
H. Jamal Zubairi Finance and Accounting Department Mirza Aqeel Baig Economics Department College of Business Management, Karachi Abstract For any business concern the net profit or bottom line for a particular time period is the end result of its investing, financing and operating activities. These activities can be visualized as being influenced by management’s decisions and a host of internal and external environmental factors. This paper investigates how profitability of firms, in the automobile sector of Pakistan, is influenced by working capital management and capital structure of firms. The current ratio was taken as representative of the result of working capital management policy and financial leverage as the benchmark for capital structure. Supplementary analysis was also undertaken to assess the impact of operating leverage and firm size on profitability. The purpose of the research was to determine empirically, using pooled data analysis, whether the linkage of profitability with the selected indicators, is in line with the relevant generally accepted finance theory. Furthermore, the conclusions arrived through data analysis could be used in formulating some policy recommendations for a better management of profitability by automobile sector firms in Pakistan. Key Words: Profitability, Operating Leverage, Financial Leverage, Firm Size, Liquidity, Pakistan’s Automobile Industry, Panel Data JEL Classification: C23, G32, G33
*Refereed version of a paper earlier presented at the Second International Conference on ‘Promoting Socio-Economic Development of Sindh’ organised by the Institute of Business Management, Karachi in January 2010.
444
PAKISTAN BUSINESS REVIEW OCTOBER 2010
Impact of Working Capital Management and Capital
Impact of Working Capital Management and Capital Structure on Profitability
IMPACT OF WORKING CAPITAL MANAGEMENT AND CAPITAL STRUCTURE ON PROFITABILITY: THE CASE OF KSE QUOTED AUTOMOBILE FIRMS*
H. Jamal Zubairi Finance and Accounting Department Mirza Aqeel Baig Economics Department College of Business Management, Karachi Abstract For any business concern the net profit or bottom line for a particular time period is the end result of its investing, financing and operating activities. These activities can be visualized as being influenced by management’s decisions and a host of internal and external environmental factors. This paper investigates how profitability of firms, in the automobile sector of Pakistan, is influenced by working capital management and capital structure of firms. The current ratio was taken as representative of the result of working capital management policy and financial leverage as the benchmark for capital structure. Supplementary analysis was also undertaken to assess the impact of operating leverage and firm size on profitability. The purpose of the research was to determine empirically, using pooled data analysis, whether the linkage of profitability with the selected indicators, is in line with the relevant generally accepted finance theory. Furthermore, the conclusions arrived through data analysis could be used in formulating some policy recommendations for a better management of profitability by automobile sector firms in Pakistan. Key Words: Profitability, Operating Leverage, Financial Leverage, Firm Size, Liquidity, Pakistan’s Automobile Industry, Panel Data JEL Classification: C23, G32, G33
*Refereed version of a paper earlier presented at the Second International Conference on ‘Promoting Socio-Economic Development of Sindh’ organised by the Institute of Business Management, Karachi in January 2010.
444
PAKISTAN BUSINESS REVIEW OCTOBER 2010
Impact of Working Capital Management and Capital