RELATIONSHIP AMONG DIFFERENT FACTORS AND FIRM PROFITABILITY
Sher khan1, Hayat khan2, Amir Sohail2 , Zia ul Islam2
1 Institute of Business and Management Sciences, the University of Agriculture, Peshawar-Pakistan
2Department of Management Sciences, National University of Modern Language Islamabad Pakistan
Abstract
This paper is to identify the relationship among different factors and Firm Profitability as well as investigates that how different factors such as current ratio, quick ratio, inventory turnover ratio and debtor’s turnover are effecting working capital management. Correlation test indicates that all the variables are have no relationship with each other and so it does not violate the basic assumption that there is no issue of
…show more content…
He used OLS regression type and Panel Data of 255 companies and discovered a negative relationship in operating profits, inventory conversional and receivables collection.
Muhammad et al. (2003) established that WCM is an important element for the profitably business and it has a positive association with the firm profitability. They concluded that there is a significant and positive association between profitability and cash, account receivables and invert while there is a negative and insignificant association between Profitability and accounts payable. They suggested that increase in the cash will lead to increase the firm Profitability.
Rahman (2010) studied the impact of WCM and Profitability in the Textiles industry of Pakisatn. He collected the data from the annual reports of the textile firms and concluded that there is a positive and significant association between WCM and Firm Profitability, but the Textile industry is not using the assets effectively and efficiently.
Rai (206) used the data of 311 Indian firms for the period of 1996-2010.After applying different tools and methods, he established that there is a positive affiliation between Firm Profitability and
By lowering selling prices across the board, Opossumtown, Inc. reduced its inventory turnover ratio, cutting the number of days to sell inventory from 174 days to 104 days; that is a 40% improvement. Opossumtown, Inc. also cut the number of days it takes to collect its credit accounts from 68 to 44 days, again that is 35% better than the previous year. The company is able to do this while cutting its debt ratio by 10% and increasing its current ratio by 25%, making it appear more favorable in terms of liquidity. As promising as this may look, this is not the whole picture. Opossumtown, Inc. shows an 11% decline in gross profit as well as operating income ratios, and a 3% decrease on the profit margin ratio. The decline of these ratios is a result of the company’s new strategy of decreasing the selling price and increasing its marketing and selling expenses. Opossumtown, Inc. made some noteworthy advancements with the implementation of its new plan for 2014. However, based on the assessment of the balance sheet, income statement and the ratios, the corporation did not achieve its goal to increase operating income by 6% and net income by 4%. Opossumtown, Inc. was only able to grow its operating income by a little more than half of one percent and net income by
Various ratios are used in this analysis. The organization’s WIP and FG inventory turnover ratios from 2009 demonstrate that the firm takes fewer days to sell both inventories (3.64 days and 73.43 days respectively) than the average firm in the industry In 2009, the total asset turnover ratio for Gemini Electronics was 1.37 while the industry average was 1. This is an indication that Gemini Electronics is generating business at a steady pace. Gemini Electronics is utilizing its fixed assets at a higher rate than other firms in the industry. Their utilization shows the Gemini’s ability to use L, P, & E in order to generate sales. Gemini Electronics A/R is 40.16, which is 25% higher than the industry average. This means Gemini Electronics waits about 40 days to receive payment for goods sold. High levels of A/R can negatively affect the firm and their stock
Short-term corporate profitability: Residual income growth; sales growth; return on equity; percentage of sales from new products.
The financial challenges facing the company in the working capital management simulation showed how companies are able to play a balancing act with incoming and outgoing cash flow floats. Companies can juggle cash flows by withholding payments to retain capital or negotiate with companies that withhold payments to receive an incoming cash flow. Either way, keeping as much cash to fund operations with out heavy financial leveraging was the greatest challenge. Another juggling act was to keep management and business partners happy. The decisions made were not always positive for everyone.
Transactions in business to business are usually in huge quantities and involve huge cash expenditure. Businesses usually buy in large quantities to sell to many customers. Businesses also buy raw materials in large quantities to finish the raw materials into final products and sell them in large quantities. On the other hand, business to customer involves transactions related to the sale of one product and this involves less capital expenditure (Barschel, 2007). Most of the customers do not buy in large quantities. No customer will buy two vehicles since this would be expensive. Even though business to business transaction may be for final consumption, the quantity dealt with is usually large because the number of users in the organization is usually high.
Return on sales is decreasing and is below the industry average, but the goods news is that sales and profits have been increasing each year. However, costs of goods are increasing and more inventory is left over each year causing the return on sales to decrease. For 1995, it was 1.7% which is less than the average of 2.44% but is a lot higher than the bottom 25% of companies as seen in exhibit 3, which actually have negative sales return of 0.7%. Return on equity is increasing each year and at a higher rate than industry average. In 1995, it was 20.7%, greater than the average of 18.25% and close to the highest companies in exhibit 3, of 22.1% showing that the return in investment in the company is increasing, which is good for the owner.
Product delivery and customer service contribute significant overhead to your operation; so once you subtract your costs of production, the expense of returns, selling, general, and administrative expenses, interest expense on outstanding loans, and all other expenses including taxes, you 've got to generate enough in profits to satisfy yourself, if you are a sole proprietor, or your investors; otherwise you 're out of business.
Looking at the ratio (total liabilities / assets) of both companies is evident in the case of Sears a ratio of 5.93 times, while in Wal-Mart, of 1.38 times. For the foregoing and in view of the increased risk associated with debt, the profitability required by the shareholders at Sears should be greater than that required to Wal-Mart.
InJanuary and October, Timmy is facing the problem of negative net cash flow, i.e.-£2400 ad -£7300, respectively. Quarterly bills payment are causing this problem during these months, as a result of which cash inflows are lower than cash outflows. However, Timmy can eliminate this problem in the future by reducing costs, increasing sales, and seeking for bank overdrafts(Ljubić, Mrša and Stanković, n.d.).
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%).
There is not a big difference between the current and quick ratio so we can say that company is not dependent on the sale of its inventory as the termination of inventory head from the ratio there is no such big clauses. Figure 1.2 shows that company quick ratio fluctuate during last three years but low from bench mark of quick ratio. In 2013 quick ratio of company is 0.46 and 2014 is 0.31 and 2015 it is 0.34. According to the industry average we can see that the company is fall below the industry average. But industry average also fluctuates. The investor will not do a good investment but on the other hand we see raw material provides by the company has high inventory dependence it means they are buying more from him but not a good view from clients as they are sale on the credit basis that they must
A benchmarking analysis against competitors is provided in excel. These data indicate that Primo was performing poorly against its three competitors in terms of day’s receivable and day’s inventory. The fact that day’s payable was 40 days versus 30 days for the credit terms offered by its suppliers, and much higher than for its competitors, helps explain much of the reason for complaints from the company’s suppliers about late payments. In the future, Primo might have limited access to supplier credit, and suppliers might ultimately refuse to sell to the company unless payment is made up front in cash. The data also indicate that the company was performing poorly against its competitors in every profitability metric displayed.
Accounting is the language of business. Accounting records and processes financial information into an accessible format that can be understood by anybody in the business world. It is defined in business that accounting is “the recording, measurement, and interpretation of financial information.” (Ferrell, Hirt, Ferrell, 2016, p. 286). Companies uses accounting tools to evaluate organizational operations. Accountants summarize the information from a firm’s business transactions in various financial statements for a variety of stockholders. There is a lot of business failures that happen because of information that is “hidden” in the financial statements. Cash flow is the greatest concern of management. For businesses to succeed, they need
With the dramatic changes of business environment, the traditional measure that focuses on minimising production costs is no longer well-matched (Hall, 1980). As a result, contemporary performance measurement which adopts both financial and non-financial has been developed in prior to business strategies.