pg. 64

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Arshad Ullah Jadoon1*

, Sajad Ali2, Muhammad Tahir

3

1Northeast Normal University, Jilin Changchun, China

2Sarhad University, Peshawar, Pakistan

3 Islamia University, Peshawar, Pakistan

*Corresponding Author:

Phone : 008613009140277

Email: arshadjadoon22@gmail.com,

Published online : 15 November, 2018

Abstract: The study examined the relationship and effect of working capital management (WCM) on

the performance of the firm profitability (ROA, ROE, PM) of the textile industry of Pakistan for a

period of 2008 to 2017. Working capital management is the part of asset structure which is the

relationship of current asset and current liabilities, which are liquidated within one year or less. The

purposive sampling techniques were used. The data includes eight variables; Profitability of the firm

is used as dependent variable, Size of firm is selected as control variable whiles the remaining six are

selected as independent variables. For the relationship of variables the correlation analysis was used

andfor validity and hypothesis testing variance Inflation Factor (VIF) test was performed to support

the validity of the regression analysis. The study used the panel data; the results of the Chow Test and

Hausman Test recommend Fixed Effects Model. The finding of the study with the help of the

correlation matrix reveals that all the independent variables have positive and significance

correlated with the dependent variable with exception of App and ITID. 18.24% variation in the

dependent variable (NOP) is explained by the independent variables. The result shows that Average

Payment Period, Inventory Turnover in Days, Quick Ratio and Firm Size show a positive and

significant impact on firm profitability. While Average Collection Period, Cash Conversion Cycle,

Current Ratio have a negative and significant relationship with net operating profitability. Results

suggest that firm can improve their profitability by reducing the number of days accounts receivable

are outstanding, Cash conversion cycle could be explained with the bargaining power of supplier and

the customers minimizing the investment in current asset can help in boosting the profit.

Keywords: Working Capital management, Current Ratio, Net Operating profitability, Textile

Industry, Pakistan.

1. Introduction

Working capital managementhas positive relationship and has a significant impact on firm

financial performance of profitability (Deloof, 2003, Kesimli, 2011, Mohsen, 2012). Firms

always try to determine an optimal level of working capital both in current asset and current

pg. 65

liabilities that maximizes their value (Deloof & Jegers, 1996;Long, Maltiz & Ravid 1993).

Working capital management concept revealed that it is the money or liquid assets that are

needed to finance the daily revenue and business operation that generate activities of the firm.

Firms’ success mostly depends on effective working capital management and its component

current asset and current liabilities and the ability of financial managers (Filbeck, 2005). A

firm should determine the optimizedlevel of liquidity that maximize the profitability while

operating its day to day business operations (Deloof, 2003).

In recent years the significance of short term assets and liabilities management has attracted

worldwide attention (Kasiran, Mohamad & Chin, 2016). The efficient management of

working capital has evolved as one of the core objective of modern corporate finance, and

became a significant factor of firm’s value creation (Aktas, Croci, & Petmezas, 2015;

Padachi, 2006). To achieve the optimal level, various components of working capital such as

inventory, receivables andpayable management need to be adjusted (Hill, Kelly & Highfield,

2010). At the same time managers have to address some key questions. Such as, what is the

optimal level of working capital? How it will be financed? (Brigham & Ehrhard, 2013).

Likewise, how much liquidity risk can be absorbed by the firm? As decrease in liquid assets

against the current liabilities may increase liquidity risk and may hinder the smooth

operations of the firm. At the same time, having excessive current assets on the balance sheet

may decrease firm’s profitability. Thus to achieve an optimal level of working capital a very

delicate fine-tuning of various component are required in such a way that, it results in smooth

operation with low liquidity risk and high profitability (Van- Horne & Wachowicz,2005).

In general to increase the profitability, a firm must maintain an appropriate level of inventory,

which shall take fewest days to convert into sales (Ukaegbu, 2014). In case of receivables,

relax credit policy may lead to higher sales and subsequently results in higher profits, but it

will also increase liquidity risk (Napompech, 2012; Samiloglu & Demirgunes, 2008; Teruel

& Solano, 2007). Similarly, delayed payment to creditor increases short-term liquidity but it

may also lower profitability by not availing the discounts in early payments (Raheman &

Nasr, 2007). Another common gauge to access the working capital management of the firm is

cash conversion cycle i.e. the time involve in purchase of raw material to selling the finished

goods and collecting cash. The firms can increase profitability by shortening the cash

conversion cycle (Deloof, 2003; Raheman & Nasr, 2007; Zariyawati et al.,2009).

Panel methodology in order to avoid unobservable heterogeneity.This study will extend the

literature on working capital management and profitability in certain ways. First, it will

explore the different proxies of working capital and how it can be employed for value

pg. 66

creation. Second, by introducing the leverage as a moderating variable will explore the

effects of financial leverage in a capital structure on key working capital management

decisions. Third, this study will provide latest empirical evidence of non- financial sector of

Pakistan by using panel methodology in order to avoid unobservable heterogeneity.

1.1 Objectives of the Study

To examine working capital management (WCM) in the textile sector of Pakistan.

To determine and established a relationship between Working Capital Management

selected components and net operating Profitability for textile sector in Pakistan.

To find out the significant effect between Liquidity selected components Cash

Conversion Cycle, Average Payment Period, Current ratio, Quick ratio, firm size and

Inventory Turnover in Days (ITO in days), Average Collection Period and as well as the

net operating Profitability for textile sector in Pakistan.

2. Literature review

The fundamental idea of optimal working capital originated from the research of Nadiri

(1969). Since then various researchers have presented their results and suggested different

financial indicators and level of working capital required for different types of firms (Gupta,

1969; Gupta & Huefner, 1972). But at any point of time the risk and return trade-off between

will be crucial to decide on an aggressive or conservative working capital management policy

(Gardner, Mills, & Pope, 1986; Weinraub & Visscher,1998).

According to one strand of literature, large investment in working capital will help to reduce

supply cost, provide hedge against fluctuations in prices, and minimize loss of sales due to

potential stock-outs (Blinder & Maccini, 1991; Corsten & Gruen, 2004; Fazzari & Petersen,

1993). Trade credit also results in higher sales, price discrimination, insure product quality,

and build long term customer relationship (e.g., Brennan et al., 1988; Wilson & Summer,

2002). On other hand, over investments in firm’s current assets may results in value reduction

and agency cost (Khan, Bibi & Tanveer, 2016). Increasing investment in working capital will

results in additional financing, interest expense, bankruptcy and opportunity cost (Kieschnick

et al., 2013). Too much of investment working capital may also result in missing out on

attractive short term investments (Ek & Guerin, 2011). The associated benefits and cost of

high working capital presents a classical case of non-linear relationship between firm

performance and level of working capital. There is high probability that overinvestment in

working capital will results in destruction of firm’s value and viceversa.

In previous studies a number of variables are used to analyze the profitability of the firms.

Like Return on Equity (ROE) measured as net earnings divided by total equity (Jose et al.,

pg. 67

1996 & Wang, 2002), Return on Sales (ROS) obtained by dividing net income by sales (Shin

& Soenen, 1998), Gross Operating Profit (GOP) calculated as gross operating profit divided

by sales (Deloof, 2003; Lazaridis & Tryfonidas, 2006), Return on Capital Employed (ROCE)

measured as net income divided by total capital employed (Meyer & Ludtke, 2006), Net

Operating Profit (NOP) measured as net operating profit divided by total sales (Raheman &

Nasr, 2007) and Return On Investment (ROI) measured as net income divided by total

investments (Haq et al., 2011). But Return on Assets (ROA) is most widely used variable to

measure the profitability of firms (Deloof, 2003; Jose et al., 1996; Karaduman et al., 2010;

Padachi, 2007; Raheman & Nasr, 2007; Sharma & Kumar, 2011; Shin & Soenen, 1998;

Wang, 2002) which is net earnings divided by total assets of the firms. This study used ROA

as a measure forprofitability.

2.1.1. Working Capital Management (WCM)

Ghosh and Maji (2003) tried to examine theworking capital management efficiency of and

found that as a wholeIndustry did not perform well and the overcomes the risk of not

meeting the fleeting commitments getting to be distinctly due and in the meantime abstain

from blocking superfluous substantial sum in these advantages (Eljelly, 2004). As mentioned

by Wachowicz, (2008) that working capital is normally measured as the current asset minus

current liabilities. Subramanian and Wild (2009) and Ross et al.(2008) stated that the

centrality of working capital, basically: "managing the organization's working capital

incorporates different events pertaining to the affiliation's receiving and apportioning of

currency. Working capital isbasic as a measure of liquid assets of a firm that give a security.

It is also imperative in measuring the liquidity of the advantages (Abuzayed, 2012).Working

capital is frequently used to assess a firm’s liquidity (Ding et al., 2013).Importance of

working capital management is organization of affiliation's available assets and anticipated

financing that would provision current assets (Agha,2014).

2.1.2. Cash Conversion Cycle (CCC)

Cash conversion cycle is described as the time gape from the certifiable cost of cash for

purchases of a firm until the receivables accumulation originating from stock or organizations

(Chaitou, 2012). Calculation of the Cash Conversion Cycle(CCC) could be "subtract the

organization's payable turnover in days from its working cycle,contrary to that, they can be

condensed by changing the stock,payable period and receivable." (Gill, 2010;

Howorth,2003). Working Cycle is described as "the period of time from obligation of cash

for purchases of the firm until the increasing of receivables happening on account of the offer

of items or organizations" and "numerically, an affiliation's working cycle is proportionate to:

pg. 68

Receivable Turnover in Days (RTD)and Inventory Turnover in Days (ITD)" (Charitou, 2012;

Jafari,2014). According to (Pouraghajan, 2012) an organization could fabricate the efficiency

of their firm by lessening its cash change cycle.

2.1.3. Average Collection Period (ACP)

In the first place, definition would be the accounts receivable period which is the period of

time between offer of stock and aggregation of the firm’s receivables (Ross, Westerfield &

Jordan, 2008). Average collection period extent gives learning into all the way of the

affiliation's receivables and how viable a firm is in terms of its collections. This extent is

considered by isolating receivables along with yearly net credit bargains (Mohammad,2010).

The greater the turnover, the shorter the time would be between the regular arrangement and

cash aggregation (Napomech,2012; Zawaira,2014).Subramanyam and Wild (2009) argues

that average collection period has significant positive effect on firm financial performance.

2.1.4. Average Payment Period (APP)

The essential term to Accounts Payable Period(APP) which can be described as the time

period between the receipt of stock and the portion for it (Ross, Westerfield and Jordan,

2008). As Wachowicz and Van Horne (2008) said, that they figure payable turnover

comparatively they did in receivable turnover, and according to them, "the ordinary payable

period is beneficial information in surveying the probability that a credit applicant will or will

not pay on time (Van Horne and Wachowicz, 2008, Subramanyam and Wild, 2009).

2.1.5. Inventory Turnover in Days (ITID)

The measure of stock the association keeps has all things considered an effect on its

arrangements and productivity, In light of threats in holding the inventories and moreover

given the inventories are further ousted from cash than receivable are, they are ordinarily,

seen as the scarcest liquid current asset." (Subramanyam& Wild, 2009; Ross, Westerfield &

Jordan, 2008).The basic role behind figuring the Inventory Turnoverextent, is "to choose how

effectively a firm is administering stock to get an indication about the liquidity of stock

(Wachowicz, 2008)

2.1.6. Current Ratio

The two essential standards of finance are come out from working capital management

strategies: a) Reverse relationship betweenprofitability and liquidity b) Risk and return move

simultaneously, (greater risk, greater profitability, and the other way around)(Van Horne and

Machowicz, 2009). Haq, Sohail, Zaman and Alam (2011) investigated theassociation

between Working Capital Management and Profitability in Cement Industry of Pakistan. The

study examines the association betweenprofitability and working capital management by

pg. 69

using data of fourteen companies of Khyber Pakhtunkhuwa in cement industry and found

significance result.

2.2.7. Quick Ratio

Working Capital Management includes both setting Working Capital management

arrangement and practicing that strategy in everyday operation. A harmony amongst hazard

and effectiveness makes an ideal level of working capital.

The result of Deloof (2003) paper says that keeping up working capital at ideal level could

conceivably boost the gainfulness. That demonstrates the way working capital is overseen

could significantly affect a Firm's productivity.

2.2.8. Total Asset of Firm (size of firm)

Lamberson (1995) postulated that the management of working capital has turned into a

critical issue in numerous associations as the budgetary chiefs confront challenges in

recognizing the driving segment and in this manner, choosing the ideal level of working

capital .In this way, in the event that they can completely comprehend the part of working

capital determinants, it would help the organizations in enhancing their general execution by

lessening the hazard included. A harmony amongst hazard and effectiveness makes an ideal

level of working capital. The result of Deloof (2003) paper says that keeping up working

capital at ideal level could conceivably expand the productivity. That demonstrates the way

working capital is overseen could significantly affect an association's benefit.

2.2.9. Working Capital Management and Firms’ Profitability

The cash conversion cycle (CCC) as a sweeping determinant of working capital management

(WCM), it is considering each one of its determinants which are, DSO the days sales

outstanding, the payable deferral period and inventory turnover in days also known as days

inventory outstanding. Deloof (2003) in his study also found with the Pearson correlation that

there is inverse relationship between working capital and firm’sincome on the Pakistani

firms.

Rehman and Nasir (2007) picked an example of Ninety four Pakistani companies and found

the data from diverse regionfor a specific period. According to Rehman and Nasr (2007)

picking each one of these elements were basic since each one of them have an associations

that firmly impact working capital management (WCM)with its components and expected

that there is a negative relationship between networking financial performance that is

profitability and the measures of working capital organization. Remembering the ultimate

objective to show this relationship, Rehman and Nasir (2007) investigate that the load up data

pg. 70

backslide examination of cross-sectional and time course of action data and used two sorts of

data examination, which are the quantitative inn Africa, particularly Nigeria (Barine , 2012).

The examination of Barine (2012) conducted a study about upgrading the spots of gross

working capital of the referred to Nigerian firms did not partake in improving the benefit of

these associations.

Ukaegbu (2014) in his study interpreted the associationbetween working capital organization

and association's efficiency, Ukaegbu (2014) found a proof from the data examination focus

that there is a retrogressive relationship (in term of econometric) between the advantage of

the firm in term of profitability and the amount of days an organization takes to accumulate

cash from its customers over all the four countries.

Sharma and Kumar (2011) investigated that there is a positive relationship between the

standard measure of liquidity (current extent) and benefit for assets of Indian associations. In

addition, Alipour, (2011)investigated as the relationship and concluded that there is a

negative strong relationship between stock turnover in days. According to Cranky and

Adarquah, (2013), disclosures' shown that working capital cycle has a truthfully enormous

negative association with affiliation's benefit. Furthermore, watched that Accounts

Receivable Collection Period, Inventory Turnover Period and Accounts Payable Payment

Period are unfavorably related with advantage. Uremadu et al. (2012) in his research found

the result of stock change period and record holder's collection period on benefit for assets

and found a negative effect of cash change cycle and advance supervisor's portion period on

benefit for assets. Tahir and Anuar (2015) analyzed in study in an investigation on sample of

one hundred twenty seven material firms with results.Day’s sales outstanding, the value of

net working capital level, current assets minus current liabilities, current points of interest for

arrangements extent, and current liabilities to total assets adversely influence net profit

margins.

pg. 71

Average collection period

Inventory turnover in days

Average payment period

Cash Conversion Cycle

Net operating Profitability

Current Ratio

Quick Ratio

Total Assets (size)

3. Research methodology

The researcher uses quantitative research strategy in light of the way that numerical change

can in like way just decisively be inspected using quantitative systems (Sukamolson,

2010).This research is aimed atdetermining the association between working capital

management and its effect on profitability of textile industry of Pakistani firms listed on stock

Exchange of Pakistan for a period of 10 years (2008– 2017). The study comprises of the

panel data regression analysis which includes boththe cross-sectional data and time series

data. It uses the pooled regression which is a type of panel data analysis.

3.1.1. Sampling and Data Sources

There are total 156 textile companies listed on Pakistan Stock Exchange (PSE). This study

takes 30 companies on the basis of their total asset (which are more than 30 millions).The

purposive sampling technique was used for selecting these firms. The data collected from

PSE, companies’ annual reports and their websites. Data was also obtained from theanalysis

of balance sheet of non- financial firm’s published by Pakistan’s state bank. The population

of this research includes all the156 Textile companies of Pakistan listed in PSE (SBP, 2015).

pg. 72

3.1.2. Data collection

Data was gathered for the period of 2008 to 2017. According to Sehrish, Faiza and Khalid

(2012) data of the most recent years should be incorporated in the research study for the

purpose of data analysis for getting contemporary, unbiased and clear results. That’s why

panel data period for the study is from 2008 to 2017 on per annum basis is collected.

3.1.3. Model of the Study

The fixed effect regression model is as follows

NOP it = β0+β1 (ACP it) + β2 (ITID it) + β3 (APP it) + β4 (CCC it) + β5 (CR it) + β6 (QRit) + β6

(LSIZE it) + ε

Where we have:

NOP = Net Operating Profitability. (DV)

ACP = Average Collection Period. (IV)

ITID = Inventory Turnover in Days. (IV)

APP = Average Payment Period. (IV)

CCC = Cash Conversion Cycle. (IV)

CR = Current Ratio. (IV)

QR = Quick Ratio. (IV)

LSIZE = Natural log of total assets. (CV)

3.1.4. Control Variables

For the purpose of having an appropriate analysis of the effect of working capital

management on the profitability of firms, the study takes into consideration one control

variable. The natural logarithms of total assets of the companies is adopted for size as one of

the control variables. This is similar with the works of Owolabi and Alu (2012) and Dong and

Su (2010).

4. Results and discussion

4.1.1. Multi co linearity Diagnostic Test

For the purpose of identifying that whether there is Multi co linearity among our variables or

not, along with our correlation analysis the Variance Inflation Factor (VIF) test is also

performed to support the validity of the regression analysis. If we get the result of VIF below

10, then it means there is no Multi co linearity (Gujrati, 2003).

Table 1: Co linearity Statistics for IV’s and NOP

Model Co linearity Statistics

pg. 73

Tolerance VIF

(Constant)

Average Collection Period 0.888 1.067

Inventory Turnover in Days 0.865 1.149

Cash Conversion Cycle 0.251 4.532

Average Payment Period 0.884 1.094

Current Ratio 0.758 3.562

Quick Ratio 0.825 4.655

Log of total assets 0.695 3.265

DV: NOP

In the words of O'Brien and Robert, (2007) if tolerance less than 0.20 as well as the value of

VIF are greater than 10 indicate the multicollinearity problem (Gujrati, 2003). The result of

above table shows that the value of VIF and tolerance are in normal range which shows no

multicollinearity issue in the data. The result of VIF is quite good. The result postulated that

our variables have a VIF value less than ten. All the values of VIF in our model range from

1.067 to 4.655 for Average collection period and Quick Ratio and similarly all the variables

have a value of less than ten thus it is showing that there is no Multicollinearity among our

variables in the model.

4.1.2. Model selection Tests

The study comprised of the panel data for determining the profitability in textile sector of

Pakistan. Wehave three different sorts of methods which are being used widely for the

measurement of the panel data, these includethe FEM, REM and POLS method. Thedata

being used determines the model for the panel data measurement. Further, there are three

different tests which are being used for the selection of model .These tests include the Chow

test, Hausman test and Breusch Pagan test. Thus in order to select the model for analyzing the

regression in this study these tests are run. The results obtained of these tests are given in

table 2.

Table 2:Model Selection Tests (Net Operating Profitability)

Test Models Results

Conclusio

n

Chow Test Between Pooled OLS & Fixed Effects

F test all

u_i 0.000 Fixed

F(9, 93) 4.05

Prob> F

0.000

2

Breusch-

Pagan

Between Pooled OLS & Random

Effects sigma_u 0.0 Pooled

sigma_e .0062

pg. 74

2

Rho 0.0

Hausman

Test

Between Random Effects & Fixed

Effects Chi2 (6) 0.000 Fixed

Prob> Chi2 0.000

The results of tables show that the Hausman Test andChow Test recommend Fixed Effects

Model for our dependent variable (Net Operating Profitability). On the other hand, the

BreuschPagan Test suggested the Pooled Ordinary Least Square. Therefore, according to the

above given results it can be concluded that the Fixed Effects Model is the most suitable

model for regression analysis in our study. Therefore the regression analysis is performed

while using the Fixed Effects Model.

Table 3:Matrix Correlation

NOP ACP ITID APP CCC CR QR Size

NOP 1.0000

ACP 0.3630 1.0000

ITID 0.1966 .02454 1.0000

APP 0.3660 0.3717 0.4456 1.0000

CCC 0.1262 0.0585 0.7410 -0.0067 1.0000

CR 0.2214 -

0.0689

-0.1347 -0.0529 0.529 1.0000

QR 0.369 0.0287 -0.0682 -0.0147 -0.0329 0.8210 1.0000

SIZE 0.4568 0.2345 -

0.03545

0.03214 0.00346 0.1548 -

0.12345

1.0000

The correlation matrix showed the association between all pairs of independent variables with

the dependent variable being used in the regression model. It showed that all the independent

variables have got a positive correlation with the dependent variable with exception of

Inventory Turnover in days and APP; these different components of working capital

arecontributing significantly to the profitability of the companies.Each variable is perfectly

correlated with itself which is shown by the values on the diagonal which are all

1.0000.Further, all of our independent variables have a positively correlated with Net

Operating Profitbut with exception of ITID and APP, this shows that as the CCC, CR, ACP

,QR and LOGSIZE increases, the firm’s profitability increases and vice versa. On the other

hand, the negative association that exists between the ITID,APP and NOP indicate that there

pg. 75

is an inverse association between the ITID and APP and the profitability of the textile

industry of Pakistan.

Table 4:Regression analysis

Variable Coefficient Std. Error t-ratio p-value

Constant 0.215652 0.01536 14.0371 <0.0001

ACP 1.19857 0.03813 3.1433 0.000

ITID 1.19906 0.38113 3.1463 0.000

APP 1.19874 0.28164 4.256 0.000

CCC 0.91840 0.09172 10.0513 0.000

CR 0.07739 0.01128 6.8600 <0.0001

QR 0.06018 0.01177 5.1099 <0.0001

LSIZE 0.69845 1.24586 3.2654 0.3264

P<0.05 significant

Mean dependent var 0.109017 S.D. dependent var 0.055471

Sum squared res 0.752125 S.E. of regression 0.050752

LSDV R-squared 0.341621 Within R-squared 0.3382424

LSDV F(7, 292) 9.313031 P-value(F) 2.05e-10

*Shows 1% significance level

** Shows 5% significance level

*** Shows 10% significance level

The table summarized the empirical results for our dependent variable i.e. NOP. This

indicates that how effectively a firm is managing its assets to generate income. Our NOP

model is a multiple regression equation which comprises of the seven independent variables.

The model for the textile company profitability is being selected on the grounds of strong

diagnostics and a value of R-squared. The value of R-Square in our case is 0.3424, which

means that 34.24% variation in our dependent variable (NOP) is explained by the

independent variables. such as inventory turnover in days(ITID),average collection

period(ACP), cash conversion cycle(CCC), average payment period(APP), current ratio(CR),

quick ratio(QR) and firm size(FS) and remaining 66.76% can be explained by the other

variables which are not a part of our model. The value of F-statistics in above table is 2.05

which indicates that the data is relevant and valid to model of our study.

The result shows that there is a negative association between ACP and profitability of the

textile companies in Pakistan. The result is significant which indicate that ACP have

significant role in the profitability of textile companies in Pakistan.ITID also show

asignificant and positive impact on firm profitability which means that there exists a positive

relationship between ITID and profitability.APP also showed a significant and positive

pg. 76

impact on firm profitability.CR has a negative but significant association with profitability of

textile companies in Pakistan.CCC also shows a negative and significant association with

firm’s profitability.The variable QR has a positive as well as significant impact on firm

profitability.

5. Conclusions

It can be concluded that the working capital position of the companiesare sound. The

companies have usedinvestment andfinancing decisions to a good effect. This implies thatthe

sales and collection policy that get along with the receivables management. The firms have

not compromised on profitability despite the high liquidity is commendable. The study was

aimed at determining the effect of working capital management on the profitability of the

textile industry of Pakistan for a period of 2006 to 2015. The study used the fixed effects

model to investigate the effect ofinventory turnover in days(ITID), average collection period

(ACP), cash conversion cycle (CCC), average payment period (APP), current ratio (CR),

quick ratio (QR) and firm size (FS) on profitability of textile industry of Pakistan measured

by net operating profit. The study concluded that there was a negative relationship between

ACP and profitability of the textile companies in Pakistan. The result is also insignificant

which indicate that ACP does not have significant role in the profitability of textile

companies in Pakistan. According to results ITID also show a negative and insignificant

impact on firm profitability. This implies that any increase or decrease in the inventory

turnover in days (ITID) does not have significant effect on profitability of the firm. Thusit

means that the inventory policy will influence profitability of a firm. The inventory will

decrease the profitability of a firm if it is not converted in sales. APP shows a positive but

insignificant impact on firm profitability which indicates that if there is any decrease or

increase takes place in the average payment period(APP), it will insignificantly affect firm’s

profitability. The positive association between average payment period(APP) and profitability

shows that the profitable firms do not wait too long to pay their bills. Moreover the result of

CCC showed a positive relationship with firm profitability. This means that with a decrease

or increase in the cash conversion cycle(CCC) period will significantly affects the firm’s

profitability. CR has a negative but significant relationship with profitability of textile

companies in Pakistan. The only one variable QR has a positive as well as significant impact

on firm profitability. The result also shows that the control variable i.e. firm size which is

being measured by taking natural log of total assets also have a positive impact on the

profitability of textile companies in Pakistan.

pg. 77

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