Working Capital Management
SEMINAR IN ECONOMIC POLICY THESIS
IMPACT OF WORKING CAPITAL MANAGEMENT ON PROFITABILITY
THE CASE OF KSE QUOTED OIL & GAS (E&P) FIRMS
KHALID HAMEED SHAIKH (9102)
INSTITUTE OF BUSINESS MANAGEMENT (IoBM)
SECTION A
December 28, 2011
IMPACT OF WORKING CAPITAL MANAGEMENT ON PROFITABILITY
THE CASE OF KSE QUOTED OIL & GAS (E&P) FIRMS
Abstract:
This research report investigates the effect of working capital management on the firm’s financial performance. The report hypothesize that working capital management leads to improved profitability in the Oil and Gas (Exploration & Production) Industry of Pakistan. The dependent variable, Return on Assets (ROA) is used as a measure of profitability and the relation between working capital management is studied for a sample of 4 Oil and Gas (E&P) companies listed in Karachi Stock Exchange using panel data analysis for the period 2006-2010. Specifically, results indicate that the cash conversion cycle and liquidity are associated with the firm’s profitability.
Introduction
Working capital, also referred to as net working capital (NWC), is an absolute measure of a company’s current operative capital employed and is defined as:
(Net) working capital = Current assets – Current liabilities.
Today, many companies still underestimate the importance of working capital management as a lever for freeing up cash from inventory, accounts receivable, and accounts payable. By effectively managing these components, companies can sharply reduce their dependence on outside funding and can use the released cash for further investments or acquisitions. This will not only lead to more financial flexibility, but also create value and have a strong impact on a company’s enterprise value by reducing capital employed and thus increasing asset productivity. A frequently used measure for the effectiveness of working capital management is the so-called cash conversion cycle, or cash-to-cash cycle (CCC).
IMPACT OF WORKING CAPITAL MANAGEMENT ON PROFITABILITY
THE CASE OF KSE QUOTED OIL & GAS (E&P) FIRMS
KHALID HAMEED SHAIKH (9102)
INSTITUTE OF BUSINESS MANAGEMENT (IoBM)
SECTION A
December 28, 2011
IMPACT OF WORKING CAPITAL MANAGEMENT ON PROFITABILITY
THE CASE OF KSE QUOTED OIL & GAS (E&P) FIRMS
Abstract:
This research report investigates the effect of working capital management on the firm’s financial performance. The report hypothesize that working capital management leads to improved profitability in the Oil and Gas (Exploration & Production) Industry of Pakistan. The dependent variable, Return on Assets (ROA) is used as a measure of profitability and the relation between working capital management is studied for a sample of 4 Oil and Gas (E&P) companies listed in Karachi Stock Exchange using panel data analysis for the period 2006-2010. Specifically, results indicate that the cash conversion cycle and liquidity are associated with the firm’s profitability.
Introduction
Working capital, also referred to as net working capital (NWC), is an absolute measure of a company’s current operative capital employed and is defined as:
(Net) working capital = Current assets – Current liabilities.
Today, many companies still underestimate the importance of working capital management as a lever for freeing up cash from inventory, accounts receivable, and accounts payable. By effectively managing these components, companies can sharply reduce their dependence on outside funding and can use the released cash for further investments or acquisitions. This will not only lead to more financial flexibility, but also create value and have a strong impact on a company’s enterprise value by reducing capital employed and thus increasing asset productivity. A frequently used measure for the effectiveness of working capital management is the so-called cash conversion cycle, or cash-to-cash cycle (CCC).
References: [1] Brigham, E.F. and Ehrhardt, M.C. (2004). Financial Management: Theory and Practice (11th Edition). New York: South-Western College Publishers. [2] Deloof, M [3] Ghosh, S.Kr. and Maji, S.G. (2004). Working Capital Management Efficiency: A Study on the Indian Cement Industry. The Management Accountant, 39(5), 363-372. [4] Uyar, A [5] Jose, M. L., C. Lancaster, and J. L. Stevens, (1996). Corporate Returns and Cash Conversion Cycles. Journal of Economics and Finance. 20(1), 33-46. [6] Raheman, A. and M. Nasr, (2007). Working Capital Management and Profitability – Case of Pakistani Firms. International Review of Business Research Papers, 3 (2), 275 - 296. [7] Shah, A. and A. Sana, (2006). Impact of Working Capital Management on the Profitability of Oil and Gas Sector of Pakistan. European Journal of Scientific Research. 15(3), 301 - 307.