Investment in fixed assets and firm profitability in textile sector of Pakistan
Literature Review:
Investment is the sacrifice of present condition for the future perspective in which risk lies as the factor that can affect the investment decision. So, the investment in the fixed assets can be checked out through the fixed asset turnover ratio and we can know that how efficiently fixed assets are getting used to generate sales.
High fixed asset turnover ratio indicates efficient utilization of fixed assets in generating sales and vice-versa. The Impact of investment in the fixed assets on profitability of the firm depends upon the nature, size, and requirements for the current operations of the firms which may lead to impact on profitability of the firm as the investment decision in fixed assets varies from sector to sector according to their working requirements and services.
In the textile sector of Pakistan the investment in fixed assets may not be strong or significant impact on profitability on the firm because in textile firms the current situations are very important and they have to invest in the current resources to generate more sales and by increasing sales volume they compete with others and by investing in fixed assets they would not be much satisfied or profitable than in C.A.
Abarbannel and Bushee (1997-1998) stated that there is negative relationship between investment intensity and profitability. Deloof (2003) took the sample of non-financial firms total of 1000 Belgium based firms and studied the relationship between profit ratio and the asset management and concluded that there is indirect relationship between the profit ratio and the asset management of all firms in Belgium and the profit rate can be dec...
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Ratio analysis of Hafren Baum are the evidence for the lack of efficiency in 1994 and 1995. First, the total asset turnover implies that the firm is investing high as compared to its sales growth. However, in 1994 Hafren Baum constructed 3 addition outlets in suburbs which could be the main reason for short TAT from 2.1 which was before expansion to 1.5 of TAT after expansion. Secondly, the fixed asset turnover for Hafren Baum would not be as important as it would be for a capital intensive manufacturing firm like Wiegandt. In 1993, FAT was 9.1 which displays Hafren Baum’s ability in generating sales were higher as compared to FAT of 7.1 in 1995. Again, the important factor that is effecting this efficiency is the construction of new outlets in addition to lower sales
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Measuring the liquidity through the current ratio, with 2.74 in the year 2009,0.74 above the standard, with the decline in the following year meeting exactly the standard at 2% in the year 2010, and a steep decline in the year 2011-2012 as compared to its standard.Resulting in the decline in firm’s ability to meet its day-to-day operating expenses. The current liabilities from 2009 to 2012 have increased by 27.03 billion whereas the investments in current assets have increased just by 26.09 billion, which causes the decline in the current ratio. To cope up with this problem the company should invest more in current assets and should reduce its current liabilities.
...To check how successful it has been, we calculate debtor collection period ratio. (Dyson, 2004) Fixed Asset turnover: In this ratio, we seek the amount of sales that can be generated (or the amount of fixed assets necessary to achieve a level of sales) from a given level of fixed assets. (Klein, 1998) Total asset turnover: This ratio determines that how efficiently a firm is utilizing its assets. If the asset turnover ratio is high, the firm is using its assets effectively in generating sales. If this ratio is low, the firm may not be using its assets efficiently and shall either increase sales or eliminate some of the existing assets. (Argenti, 2002) Solvency Ratio Gearing: Gearing reflects the relationship between a company’s equity capital (ordinary shares and reserves) and its other form of long-term funding (preference share, debenture, etc.) (Black, 2000)
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There are many techniques used to manage cash including, the nature of asset growth, controlling assets, patterns of financing, the financing decision, a decision process and shifts in asset structure. For any company the growth of asset results in a growth in wealth if managed effectively. The typical firm usually forecast the rate of sales to ensure that the production of goods match sales so there is not an overflow if inventory. As a company expands and produces more items they will acquire permanent current assets. Permanent current assets can be described as a constant inventory of items because it is almost impossible to predict the market and the demands of the consumer.
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