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Arabian Journal of Business and Management Review (OMAN Chapter)

Vol. 1, No.12; July 2012

Working Capital Management and its affect on firm’s profitability and liquidity: In Other food sector of (KSE) Karachi Stock Exchange

Muhammad Usama Student scholar Commerce Department, University of Sargodha

Abstract

This paper aims to extend the Rehman and Nasr finding regarding Working capital management and its affect on profitability and liquidity of Pakistani firms. For the purpose of our analyses we have been selected the other food sector and selected the data from 2006-2010 of 18 companies of this sector listed on Karachi Stock Exchange. For this purpose we examine the effect of different variables of working capital management like Average collection period, average payment period, inventory turnover in days, cash conversion cycle, debt ratio, financial asset to total asset ratio, current ratio and net operating profitability. We have used pooled least square regression and common effect model. We found that there is significant positive affect of working capital management on profitability and liquidity of the firms. Size of the firm and financial asset to total asset ratio have significant positive effect on firm’s profitability while average collection period has significant negative effect on firm’s profitability. Size of firm and cash conversion cycle has significant positive effect on firm’s liquidity. Key Words: WCM, ACP, ARP, CCC, DR, FATA, CR, NOP, Pooled Least Square Regression, Common Effect Model.

1. Introduction:In the past, the corporate financial management literature has only focused on the study of long term financial assets however many studies have studied the topics related to investments, mutual funds performance, earning per share, firm’s financial structure and valuation of the firms. Meanwhile, the short-term assets of the firm that have maturity less than a year in the form of current assets are also account for significant...