Working Capital Efficiency: A Comparison of Pakistani Cement and Textile Industry

2071 Words5 Pages
bulb-icon

Recommended: MAJOR PLAYERS OF TEXTILE INDUSTRY Pakistan

Abstract

The objective of this paper is to compare working capital efficiency of Cement and Textile Industry of Pakistan for the period of 2001-2008. Working capital efficiency is measured by using three index values i.e. performance index (PI), utilization index (UI) and efficiency index (EI). In second part EBIT is associated with working capital variables i.e. account receivable in days (AR), account payable in days (AP), inventory in days (Inv) and current ratio. Size of business (Natural log of sales) and gearing are used as control variables. This study is based on secondary data and the number of observations is 400. Data sources are State Bank of Pakistan and Annual Reports of firms. Data analysis methods consist of regression analysis and index numbers. Major finding of the study is the working capital mangement of cement industry is better than textile industry. There is vast variation in managing working capital efficiency of the firms. The regression analysis shows that there is a positive relationship between current ratio and EBIT. EBIT has shown significant negative relationship with account payable in days and account receivable in days while significantly negative relationship with inventory in days. EBIT has shown significant positive relationship with the size of firm but insignificant negative relationship with gearing. Where as EAT has shown significant negative relationship. The cement industry is earning more EBIT by strict control of credit to customers, making early payments to account payable and decreasing their inventory in days. Larger firms with less gearing are also earning more profit.

I. Introduction

Main focus of finance books is on the study of long term financial decisions. Worki...

... middle of paper ...

...rmance: An Analysis of Mauritian Small Manufacturing Firms’. International Review of Business Research Papers, Vo.2 No. 2. Pp. 45 -58

Raheman, A., and M. Nasr. 2007. Working capital management and profitability: Case of Pakistani firms. International Review of Business Research 3 (2): 275–96.

Shipping Cost, Manufacturing Exports, and Economic Growth. Radelet S and Sach J (1998).

Shin H and L Soenen (1998). Efficiency of Working Capital and Corporate Profitability. Financial Practice and Education 8: 37-45.

Vishnani, S and Shah, B K (2007). ‘Impact of Working Capital Management Policies on Corporate Performance An Empirical Study’ Global Business Review; 8(2) pp 267,281

Weinraub HJ and S Visscher (1998). Industry Practice Relating To Aggressive Conservative Working Capital Policies. Journal of Financial and Strategic Decision 11(2): 11-18.

Show More
Related

  • Bestcare Health Maintenance Organization Net Working Capital

    579 Words  | 2 Pages

    Net working capital represents organization’s operating liquidity. In order to compute the net working capital, total current assets are divided from total current liabilities. When there is sufficient excess of current assets over current liabilities, an organization might be considered sufficiently liquid. Another ratio that helps in assessing the operating liquidity of as company is a current ratio. The ratio is calculated by dividing the total current assets over total current liabilities. When the current ratio is high, the organization has enough of current assets to pay for the liabilities. Yet, another mean of calculating the organization’s debt-paying ability is the debt ratio. To calculate the ratio, total liabilities are divided by total assets. The computation gives information on what proportion of organization’s assets is financed by a debt, and what is the entity’s ability to pay for current and long term liabilities. Lower debt ratio is better, because the low liabilities require low debt payments. To be able to lend money, an organization’s current ratio has to fall above a certain level, also the debt ratio cannot rise above a certain threshold. Otherwise, the entity will not be able to lend money or will have to pay high penalties. The following steps can be undertaken by a company to keep the debt ratio within normal

    Read More

  • Comparison of Wendy's International, Inc. and Starbucks Corporation Based on Finances

    3667 Words  | 8 Pages

    Seiler. M, (1996) Adverse selection in capital budgeting decision making. Management Research News, 19(8), pp.61-67

    Read More

  • Debenhams PLC

    2104 Words  | 5 Pages

    [4] Colin Drury, Management and Costing Accounting, (7th edition), Chapter 3, Cost Assignment, p. 54-59

    Read More

  • Critically assess the Pecking Order Theory of Capital Structure

    1779 Words  | 4 Pages

    The pecking order theory suggests that firms have a particular preference order for capitalised to finance their businesses. Stewart Myers put forward the idea of pecking order theory in 1984 in which mangers will prefer to use retained earnings first and will issue new equity only as a last resort (Book Reference). Companies prioritize their sources of financing according to the principle of least effort, preferring to raise equity as a financing means of last resort. Wang & Lin (2010) how internal funds are used before debt and once thi...

    Read More

  • Exploring Fairmount Energy: A Natural Resources Giant

    858 Words  | 2 Pages

    The working capital of Fairmount Energy as calculated using the current assets, and current liabilities given in the annual report of the year ended March 31st, 2009 is -$6,978,713. Given this information, an auditor can conclude that the company has a very low working capital. On March 31st, 2009, Fairmount Energy has a large amount of liabilities and a small amount of assets, which creates a working capital deficit. In addition, the annual report of the year ended March 31st, 2008 shows that the working capital of Fairmount Energy is -$13,897,716 which is an extremely low working

    Read More

  • Working Capital Strategis

    1247 Words  | 3 Pages

    Financial statements are a vital factor of any business organization; they show where a company’s money came from, where it went, and where it is now, according to Securities and Exchange Commission website (2008). In addition, four main financial statements consist of the balance sheet, income statement, cash flow statement, and statement of shareholders’ equity. These four financial statements will be evaluated from Nike Inc. and more in depth information will be included from information on the previous paper which will be link to the working capital strategies. Furthermore, a detail working capital recommendation to senior management will be included and the impact of Nike Inc. revenue increase of their working capital.

    Read More

  • Financial Analysis Of Two Qatari Companies

    1681 Words  | 4 Pages

    The receivables turnover is based on the assumption that all sales are credit sales. The values of receivables turnover for 2004 and 2005 are 10.21 times and 8.83 times, respectively. This means that IQ’s efficiency is considerably declining in terms of cash collection. The decrease in receivables turnover is explained by the higher increase in average net receivables (71%) than the increase in net credit sales (25%).

    Read More

  • The Importance of Proper Asset Allocation

    1614 Words  | 4 Pages

    Hensel, C. R., Ezra, D., & Ilkiw, J. H. (1991). The Importance of the Asset Allocation Decision.

    Read More

  • Research on the Sources of Finance for a Business

    700 Words  | 2 Pages

    Research on the Sources of Finance for a Business Firms sometimes need to raise finance for Working Capital and Capital Expenditure. Explain what each is and give examples. · Working Capital (or Revenue Expenditure) The working capital is made up of the current assets net of the current liabilities. It is vital to a business to have sufficient working capital to meet all its requirements. Many businesses have gone under, not because they were unprofitable, but because they suffered from shortages of working capital.

    Read More

  • Advantages And Disadvantages Of Capital Structure

    1186 Words  | 3 Pages

    The capital structure of a firm is the way in which it decides to finance its operations from various funds, comprising debt, such as bonds and outstanding loans, and equity, including stock and retained earnings. In the long term, firms seek to find the optimal debt-equity ratio. This essay will explore the advantages and disadvantages of different capital structure mixes, and consider whether this has any relevance to firm value in theory and in reality.

    Read More

  • Cash Management

    1080 Words  | 3 Pages

    Maintaining a company’s financial assets is a daunting task. Cash management techniques and short-term financing provide accounting executives with the tools needed to survive the constant changes within the economy. The combination of these tools and the knowledge of the world economy will assist companies in maintaining current assets and facilitates growth.

    Read More

  • Airline Game: Report on the Simulation

    2976 Words  | 6 Pages

    Johnson, G., Scholes, K., Johnson, G. and Whittington, R. 2011. Exploring strategy. Harlow: Financial Times Prentice Hall.

    Read More

  • Comparing Physical to Financial Capital Maintenance

    877 Words  | 2 Pages

    The capital maintenance concept used results in differences between the relevance and faithful representation of the data that appears in the balance sheet and income statement. The difference between financial capital maintenance and physical is the treatment of unrealized holding gains and losses. Financial capital maintenance does not allow for unrealized holding gains and losses. Only realized gains and losses are included in income because they “are considered a return on capital” (Schroeder et al., 2013). This means, “income is measured only after the investment is recovered” (Gamble, 1981). Physical capital maintenance “consider[s unrealized holding gains and losses] as returns of capital and do[es] not include them income.” (Schroeder et al., 2013). Instead, they are treated as adjustments to equity and included in other comprehensive income. Therefore, with physical capital maintenance “an increase in an entity’s wealth as...

    Read More

  • Company's Cost of Capital

    1176 Words  | 3 Pages

    a.     1. What sources of capital should be included when you estimate Harry Davis’s weighted average cost of capital (WACC)?

    Read More

  • Banking and Finance

    1013 Words  | 3 Pages

    Studying Banking and Finance at University of St.Gallen will help me further increase my proficiency of corporate finance and financial markets. The in-depth research of specific topics, as well as a comprehensive curriculum, is a possibility for me to focus on my topic of interest ...

    Read More

More about Working Capital Efficiency: A Comparison of Pakistani Cement and Textile Industry

Open Document