Working Capital Management of

Pharmaceutical Companies of Bangladesh:

Evidence from Dhaka Stock Exchange Limited

MBA Program (Evening)

Department of Finance

Faculty of Business Studies

University of Dhaka

January 11, 2018

Working Capital Management of Pharmaceutical Companies
of Bangladesh:
Evidence from Dhaka Stock Exchange Limited

Signature

Dr. A. A. Mahboob Uddin Chowdhury

Professor

Department of Finance

University of Dhaka

January 11, 2018

Supervisor’s Remarks

Signature

Ashiqul Haque

Batch Number : 31 ID Number: 31012

 Student’s Declaration:

I declare that the submitted project paper is original and solely produced by me. This is not a copy in
any form from any sources. If this report is found a copy work which falls under the plagiarism
norms, this report will be deemed cancelled and can be reported to the appropriate authority of the
University.

Signature

Ashiqul Haque

Batch Number : 31st ID Number: 31012

Consultation Schedule with the Supervisor

Signature of the
Consultati Date Remarks
on # Supervisor
1
2-10-2017 First Meeting with the Supervisor

2 4-10-2017 Topic Selection

3
25-10-2017 Industry selection
4
6-11-2017 1st draft submission

5 20-11-2017 Consolation about the findings

6
13-12-2017 2nd draft submission
7
3-1-2018 Consolation about the findings
8
8-1-2018 Rechecking error
9
11-1-2018 Final submission
 Acknowledgement

This report would not have been possible if it were not for the support I received from several
individuals. It is my great joy to acknowledge them here.

Firstly, I would like to thank Almighty for His peace, grace and providence. Without you, we would
not have come this far.

Secondly, I express my gratitude and indebtedness to my respected teacher, supervisor, Dr. A. A.

Mahboob Uddin Chowdhury, Professor, Department of Finance University of Dhaka for his sublime
guidelines, valuable insights & suggestion regarding the preparation of the report & the completion
of internship report.

At fine I would like to thank all our, classmates and persons who co-operated me time to time in
preparing this report.
 Executive Summary

The subject matter of this thesis paper is Working Capital Management of Pharmaceutical Companies of
Bangladesh: Evidence from Dhaka Stock Exchange limited.

This thesis paper is originated as a mandatory requirement of MBA (Evening) program. As the
apprentice of MBA program I have tried my best to gather all necessary information. This paper is
divided into three parts.

In the first part theoretical development of working capital management is discussed. Working
capital management efficiency directly affects the profitability and liquidity of firms. All
organizations irrespective of size and nature of business needs necessary amount of working capital.
Working capital is one of the most important factors for maintaining liquidity, survival, solvency and
profitability of business. Operation of an organization is like a loop which starts at the cash and
marketable securities account and finally collected as cash from customer. In this whole loop
working capital plays an important role.

Working capital administration is discussed in the second part which is divided into three sections,
cash management, inventory management and liquidity management.

In the empirical analysis part financial ratios are calculated to understand the working capital
management of pharmaceutical industry of Bangladesh. Here variations in the performance between
companies were found. When some companies are doing well and others are not doing so well.

In the last portion of the report, relationship of working capital management and profitability of the
firm is checked through regression analysis.
 Table of contents
Topics Page
Number

Acknowledgement
Executive Summary

Introductory Part
CHAPTER : 1

Introductin 1

1.1 Literature review 1

1.2 Objectives of the Study 2

1.3 Methodology 2

1.4 Limitation of the Study 3

Theoretical Development and Previous studies

Theoretical Development 4
CHAPTER: 2

2.1 Profitability vs. liquidity 4

2.2 resource flow 5

2.3 Models for management of cash and temporary investment 6

2.4 Literature review 7

2.5 Previous Studies 8

Administration of Working Capital Management

CHAPTER : 3

3.1 Management of cash and temporary investment 9

3.2 Inventory Management 10

3.2.1 Costs in Inventory System 10

3.2.2 The Economic Order Quantity (EOQ) model 11

3.3 Liquidity mangement 11

 Empirical Analysis
4.1 Financial ratios 13
4.1.1 Net Working Capital 13
4.1.2 Current Ratio 14
4.1.3 Quick Ratio 16
CHAPTER :4

4.1.4 Receivable Turnover Ratio 17

4.1.5 Inventory Turnover Ratio 19
4.1.6 Days Sales Outstanding 20
4.1.7 Days Inventory Held 22
4.1.8 Payment Deferred Period 23
4.1.9 Cash Conversion cycle 25
4.2 Relationship between working capital management and profitability 26
4.2.1 Description of variables 26
4.2.2 Descriptive Statistics 27
4.2.3 Correlation coefficient 28
4.2.4 Regression analysis results 29

Summary and Conclusion

Findings 31
CHAPTER :5

Recommendations 31

Conclusion 32

Reference 33

Appendix 34
 Chapter-1

Introduction

As a financial manager one has to take three important decisions. Capital budgeting decision,
capital structure decision and working capital management decision are the major financial
decisions, and these decisions lead the firm to achieve its own ultimate goal. The
management of long-term capital and the working capital management in finance literature is
crucial. For this reason working capital management in an essential issue in the era of an
corporation as it has a major impact on the profitability and liquidity. Working capital can be
referred as the investment in the current assets such as cash, bank deposits, short-term
securities, accounts receivable and inventories. More specifically we have to know about the
net working capital. Net working capital means the current assets less current liabilities, for
example accounts payable and other short-term liabilities. If we say in other words, net
working capital is the surplus of current assets over the short-term liabilities and signifies the
liquidity margin available to meet the cash demands in order to maintain the daily operations
and benefit from the profitable investment opportunities. So it can be easily said that working
capital is compare as the blood of an organization. On the other hand the overall performance
is also influenced by the working capital management of an organization. So the working
capital is one area worth looking into. Working capital can include a big bunch of the total
investment of a company. Tying up cash in working capital is as much an investment as is
tying up cash in plant and equipment. We can say that, the real leaders of an organization
cannot ignore the working capital management and its crucial effect on profitability of the
firm. The main purposes of working capital management is to enable the firm have sufficient
liquidity to sustain its operations and to have to meet its obligations. Especially in today’s
global environment, all firms, regardless of their size and industry, need to acquire positive
cash flow and liquidity. On the other hand, the way working capital is managed has also
noteworthy effects on the firm’s profitability. The fact remains that working capital
management involves a tradeoff between profitability and risk. According to the theory of
risk and return, investments with higher risk may create higher return.

It is important to find out the working capital management of the firms. So this study explore
to find out the working capital management of pharmaceutical companies listed in Dhaka
Stock Exchange Limited.

1
1.2 Scope and Objective

The scope of working capital management is very wide. It covers cash management,
inventory management and liquidity management. So the area of the study is big. However
the specific objectives of the study are as follows:

 To give an overview of theoretical development and previous studies.

 To shed light on the administration of working capital management.
 To analyze the working capital management of pharmaceutical industry of
Bangladesh.
 To assess the relationship between working capital management and profitability.
 To identify the problems and provide suggestions.

1.3 Methodology

1.3.1 Sample Selection

For this study 13 companies from pharmaceutical industry were selected. List of those 13
companies provided in the index.

1.3.2 Selection of Period

The study was conducted December 2017. To make the study up to date, the data should be
of latest. Therefore 5 annual reports of the 13 selected companies were collected for the year
of 2012 to 2016.

1.3.3 Data Sources

The present study was conducted on the basis of secondary data. The secondary data were
collected from annual report of the selected companies, research paper etc. The annual
reports were collected from the website of the respective companies. Various Theoretical
aspects were collected from Text book.

1.3.4 Techniques used for data analysis

The collected data were analyzed and interpreted with the help of different financial ratios,
statistical tools like Mean, Standard Deviation (S.D), and Correlation Coefficient etc.
Correlation Matrix and Ordinary least square regression model will be used to analyze the
working capital management behavior of the pharmaceutical firms listed in Dhaka Stock
Exchange.

1.4 Limitation of the Study:

The limitation of the study is defined by the expensiveness of the facts covered by the study
and those that left out. Information needed for preparing the report was very hard to collect
because all information is not open for public. Unavailability of research work related to
working capital management is one the limitations. I have worked with five year’s data. I
couldn’t present much information because of unviability of data publicly.

2
 Chapter-2

Theoretical development

In any typical organization a financial manager has to perform three functions like as: The
management of long-term assets, the management of long-term capital and the management
of short-term assets and liabilities. The management of short-term assets and liabilities refers
to management of working capital. A firm is required to maintain a balance between liquidity
and profitability while conducting its day to day operations. Working Capital Management
includes maintaining optimum balance of working capital components-receivables, inventory
and payables and using the cash efficiently for day-to-day operations. Proper optimization of
working capital balance means minimizing the working capital requirement and realizing
maximum possible revenues. Both excessive as well as inadequate working capital positions
are dangerous from the firm’s point of view. Excessive working capital means holding costs
and idle funds which earn no profits for the firm. Paucity of working capital not only

impairs the firm’s profitability but also results in production interruptions and inefficiencies
and sales disruptions.

Van Horne and Wachowicz (2004) stated that excessive level of current assets may have a
negative effect on firm’s profitability, whereas a low level of current assets may lead to
lowers of liquidity and stock-outs, resulting in difficulties in maintaining smooth operations.
Smith (1980) pointed out that working capital management plays and important role in a
firm’s profitability and risk as well as its value. The firm should maintain a sound working
capital position. It should have adequate working capital to run its business operations.

The ability of the company to earn profit can be referred to as the profitability. There is a
strong linear relationship between profitability of the firm and its working capital efficiency.
Profit is determined by deducting expenses from the revenue incurred in generating that
revenue. Profit is determined by matching revenue against cost associated with it. The
amount of profit can be a good measure of the financial performance of a company, therefore
we can use profitability as a measure of the financial performance of a company. Effective
working capital management is very important due to its significant effect on profitability of
company and thus the existence of company in the market. If a firm minimizes its investment
in current assets, the resulting funds can be invested in value creating profitable projects,
therefore it can increase the firm’s growth opportunities and shareholders return. In a perfect
world, there would be no necessity for working capital assets and liabilities. In such a world
there would be no uncertainty and no transaction cost information search cost, scheduling
cost or production and technology constraints. The unit cost of producing goods would not
vary with the amount produced. Firms would borrow and lend at the same interest rate,
capital Labor and product market would reflect all available information and would be
perfectly competitive. In perfect world it can be shown that there would be no advantage for
firms to invest or finance in the short term.But the world in which real firms operate is not
perfect. It is characterized by the firms considerable uncertainties regarding the demand,
market price, quality and availability of its own products and those of suppliers, there are

3
transaction costs for purchasing and selling. Information is costly to obtain and firm is faced
with limits on the production capacity and technology it can imply and there are spread
between borrowing rate and lending rates for investment and financing of equal risk.
Information is equally distributed and may not be fully reflected in price of products and
labor market and these markets may not be perfectly competitive.

These real world circumstances introduce problem with which the firm must deal. While the
firm has many strategies available to address these circumstances strategies that utilize
investment or financed with working capital accounts often offer a substantial advantage over
other technologies.

For example, assume that the firm is faced with uncertainty regarding future cash flow and
will incur substantial costs if it has insufficient cash on hand to meet expenses. This problem
can be solved by the strategy that involves working capital management like holding cash or
financing in short term marketable securities.

2.1 Profitability vs. liquidity

Working capital management efficiency directly affects the profitability and liquidity of
firms. All organizations irrespective of size and nature of business needs necessary amount of
working capital. Working capital is one of the most important factors for maintaining
liquidity, survival, solvency and profitability of business. The impact of working capital
management on profitability is highly important because firms required a balance between
risk and efficiency to achieve an optimal level of working capital. When there is a surplus
working capital, it may lead to unnecessary purchasing and accumulation of inventories
causing more chances of theft, waste and losses.

On the other hand for inadequate working capital, the firm cannot pay day to-day expenses of
its operations and it creates inefficiencies, increases costs and reduces the profits of the
business. Therefore, efficient management of working capital is a fundamental part of the
overall corporate strategy to create shareholder value. In general, companies try to keep an
optimal level of working capital that maximizes their value. Some firms try to increase their
profits at the cost of liquidity which can bring serious problems to the firm.

Therefore, there must be a swap between these two objectives of the firms. If we do not care
about profit, we cannot survive for a longer period. On the other hand, if we do not care about
liquidity, we may face the problem of insolvency or bankruptcy. For these reasons working
capital management should be given proper consideration and will ultimately affect the
profitability of the firm.

2.2 resource flow

Along with its use as means of handling uncertainty, the management of working capital
plays an important role in maintaining the financial health of the during the normal course of
business. This critical role can be discussed with the help of resource flow through the firm.
This is the loop that starts at the cash and marketable securities account, goes through the
current accrual accounts as direct labor and materials are purchased and used to produce

4
inventory, Which is in turn sold and generates account receivables, which are finally
collected to replenish cash. The major point to notice about the cycle is that the turnover of
resources through this loop is very high relative to the other inflows and outflows of the cash
account.

2.3 Models for management of cash and temporary investment

Management of cash and temporary investment includes discussion of four models which can
give solution to the problem of transaction costs involving investment of disinvestment
decisions. These four models are the Baumol Model, the Beranek model, the Miller-Orr
model and the stone model.

2.3.1 The Baumol Model

In this model the firm is assumed to receive cash periodically but to pay out cash
continuously at a steady rate. That is the inflows are lumpy but outflows are not. The firm
puts enough cash in its disbursement account to cover outflows until the next inflow is
received.

5
2.3.2 The Beranek Model

Beranek hypothesized firms where the cash inflows were steady, but the outflows were
periodic. This is the mirror image of the time pattern of cash flows within the Baumol model.
In this pattern of cash flows, the challenge is to profitably invest the funds between the time
of their receipt and the time when a group of checks are presented to the bank for payment.

2.3.3 Miller-Orr Model

Miller-Orr cash management model is basically an application of control limits theory to the
cash investment decision. Control limits are set up using a formula derived by Miller-Orr.
When firms total cash goes outside the upper control limit investments are made to bring the
cash balance back down to the return point, when the firm’s cash balance goes below the
lower control limit disinvestments are made to bring the balance back up to the return point.

2.3.4 The Stone Model

Like Miller-Orr Stone model also follows a control limit approach. When cash balance fall
outside the control limit, the firm is signaled to do something. But in the Stone model the
signal does not automatically result in an investment or disinvestment, the recommended
action depends on management’s estimates of future cash flows. The model signals an
evaluation by management rather than an action.

Another important topic in working capital management is uncertainty of cash forecasting.

There are many sources of uncertainty of cash forecasting, some sources are sales
uncertainty, collection rate uncertainty, production cost uncertainty and capital flow
uncertainty.

Sales uncertainty refers to the risk regarding the firm future level of sales. Sales dollar
projection is combination of two other kinds of projections, units to be sold and price per
unit. Both are quite uncertain and depend on economic and competitive conditions. any error
in sales forecast can have a multiple impact on firm’s cash flows, They impact on receivable
level and also on production expenses.

Collection rate uncertainty is the uncertainty regarding the firm’s actual collection patterns of
receivables. The firm historically may have collected an average of a certain percentage of its
outstanding receivables from a particular period in another particular period. But this average
contains considerable variability.

Production cost uncertainty has to do with the risk of the actual labor and material costs that
go into the making of a product or service. Labor productivity may be more or less than
expected, making labor cost uncertain. The cost of materials used to may vary due to
unexpected changes in price or in the amount of materials necessary to produce product and
services.

Capital outflow uncertainty is one of the biggest sources of surprises in cash flow
forecasting,. This is the uncertainty regarding the timing of the cash disbursements related to

6
the firms major capital expenditure and construction programs. The uncertainty arises from
the nature of payments made for new constructions.

2.4 Literature Review

The relationship between working capital management and firm’s profitability in Nigeria
Stock Exchange (1996 to 2005) and New York Stock Exchange (2005 to 2007), respectively .
The results of the study show a significant and positive relationship between firm’s
profitability and cash conversion cycle. They also opine that higher cash conversion cycle
will lead to higher profitability of the firms and vice versa.

Samilogu and Demirgunes also elucidated the linkage between the management of working
capital and firm profitability and they found that the cash conversion cycle has no effect on
firm’s profitability.

There is a significant and negative relationship between net operating profitability and the
average collection period. This seems to suggest that the profitability will decrease if the
number of days’ collection from debtor increases.

There is a significant and negative relationship between net operating profitability and the
inventory conversion period in days. It specifies that shortening the number of days of
inventories turnover can maximize the firm profitability and hence create shareholder wealth.

2.5 Previous studies

A large number of business failures have been endorsed to inability of financial managers to
plan and control properly the current assets and current liabilities of their relevant firms
(Smith, 1973). Due to be deficient in of a proper plan for working capital requirements most
firms often experience excess working capital or shortage of working capital (Agarwal 1977).
Working capital management is important because of it causes firms’ profitability, risk, and
consequently its value (Smith, 1980). The greater the investment in current assets, the lower
the risk, but also the lower the profitability obtained.

Contrary to this, Carpenter and Johnson (1983) provided empirical evidence that there is no
linear relationship between the level of current assets and revenue systematic risk of the US
firms; however, some indications of a possible nonlinear relationship were found, which were
not highly statistically important. When any company retains its liquidity through borrowing,
then there exists a swap between the profit earned from the investments in the assets that
were financed from borrowing and the interest payable to creditors. Ultimately, it can be said
that the too much little level and too high level of liquidity, both have costs associated with
them (Yeager and Seitz, 1989).

Opposite to traditional belief, more investment in working capital (conservative policy) might
also increase profitability. When high inventory is maintained, it lessens the cost of

7
disruption in the production process, decrease in supply cost, protection against price
fluctuation and loss of business due to stock out (Blinder and Maccini, 1991).

Czyzewski and Hicks (1992) also concluded that firms with the highest return on assets hold
higher cash balances but they did not consider liquidity management beyond stagnant cash
and assets ratio. Govind Rao and Rao (1999) studied the impact of working capital on
profitability in Indian cement industry and found both positive as well as negative
correlations between working capital related ratios and profitability.

Lyroudi and Lazardis (2000) investigated the cash conversion cycle and liquidity position of
the food industry in Greece. They used cash conversion cycle (CCC) as a liquidity level
indicator of the food industry in Greece and tried to verify its relationship with the traditional
liquidity measurement and profitability measurement of return on investment (ROI), return
on equity (ROE) and net profit margin. They found significant positive relationship between
cash conversion cycle and current ratio, acid-test ratio, receivables collection period and
inventory turnover period and negative relationship between cash conversion cycle and
payable deferral period. The relationship between liquidity measurement variable and
profitability measurement variables were not statistically significant and there was no
relationship between cash conversion cycle and leverage ratio. A shorter Cash Conversion
Cycle (CCC) and net trade cycle is related to better performance of the firms. Moreover,
efficient working capital management is very vital to create value for the shareholders.

Deloof (2003) found a negative relationship between profitability and conversion of

receivables and payables points to the fact that reduction of indices of conversion of
receivables and payables can increase the profit of an enterpris

8
 Chapter- 3

Administration of Working Capital Management

There are some guidelines concerning management of working capital. These includes
guidelines about hedging cash balance uncertainties, management of cash and temporary
investment, inventory management and management of firm’s level of aggregate liquidity.

3.1 Management of cash and temporary investment

The basic element of working capital is current asset namely cash and near cash items like
marketable securities. Although Cash and marketable securities are the firm’s least
productive assets but they are very important for running the day to day operation. They are
not producing goods or services, unlike firms fixed asset. They are not part of the process of
selling as are inventory and account receivables. Despite all these reasons firm need to
maintain cash and near cash assets. Firm’s portfolio of cash and marketable securities are
comprised of three parts. These three parts are:

Cash for transaction- One very important reason for holding cash in the form of noninterest
bearing currency and checking deposits is transactions demand. Firm needs to maintain some
cash to pay the suppliers and other account payables.

Cash and near cash assets as hedges- There may come many unexpected needs which can’t
be met with cash retained for transaction purpose. Emergencies may arise for which the firm
needs immediate cash. The firm should be happy for these types of uncertainties.

Temporary investments- Many firms faces seasonality in their operation. They might have
a bigger amount at a point of time in the year which will be needed later of the year. In That
moment firm will invest the firm into near cash assets (marketable securities) from the time
cash is available to the time cash is needed.

3.1.1 Hedging cash balance uncertainties

It means,holding of some cash or near cash asset for the time of future uncertainties. At the
end of each period of the cash forecast the firm expects to be in either a surplus or deficit
position. If the firm is in a period of borrowing, is at its maximum available borrowing limits
determined by the credit line management and cash flows turn out to be less than expected so
the borrowing needs would be greater than expected, the firm would be faced with substantial
problem and all the solutions of this problem is costly. The point is that without some kind of
hedge against the uncertainties of future cash flows the firm incurs costs that would be
avoided by the use of hedging strategy. Some of the possible hedging methods and their cost
are discussed below:

Holding a stock of extra cash, this means firm will maintain a stock of extra cash beyond
that needed for transactions. Cash is the most flexible but most costly hedge available to the
firm. Here flexible means the fund can be used any time without occurring any transaction

9
cost but there it is the most costly hedge because that fund could be used to invest in other
projects or could keep in interest bearing account from where income would came.

Holding a stock of near-cash assets, another strategy that is nearly flexible as holding cash
and that reduces the cost disadvantages of cash is holding a stock of near cash assets. Near
cash assets are securities such as repurchase agreements or nearly matured treasury bills.
Since maturity is very near these assets carry almost no interest rate risk and thus are almost
safe as cash.

Extra borrowing capacity, one common strategy for funding the firms expected financing
needs is the establishment of a reserve credit line with a bank or group of banks. In doing this
the firm arranges for the maximum credit line with the banks to exceed the expected amount
of borrowing. This extra credit line beyond that which the firm is expected to need, is a hedge
against cash flow uncertainty. This approach to the hedging problem is fairly convenient and
low cost.

Investing temporary surpluses in near cash assets, If the yield curve is up sloping, the firm
has an incentive to invest surplus funds for the longest possible time, matching the maturity
of the investment made with the surplus funds to the length of time until the funds will be
needed.

3.2 Inventory Management

Management of inventory is another important factor is working capital; there are three types
of inventory

Raw material inventories are maintained for having an available stock of raw materials to
smoothen the production process, another reason for maintaining raw material inventory is to
avoid price changes for these goods.

Work in progress inventory is maintained for buffer production which is mainly a

precautionary action for inability to produce by any process point of the production cycle.
After every process point a work in progress inventory is maintained so that if for any reason
that process gone shut than that inventory can be used to continue production.

Finished goods inventory is maintained to provide immediate service. When customer wants
to purchase goods and services ready availability of these is a substantial advantage in
making a sale.

3.2.1 Costs in Inventory System

There are some costs involved with inventory system. Costs directly proportional to the
amount of inventory held, it includes the costs that are directly proportional to the level of
inventory carried by the firm. These are called carrying cost of inventory or holding cost of
inventory. All the costs that fluctuate directly with the level of inventory are included here.

Costs not directly proportional to the amount of inventory held, In addition to those costs
that are directly proportional to the amount of inventory held, there is also a group of costs

10
that vary with inventory sixe but not in direct proportionally, instead they assume some other
mathematical relationship with the amount of inventory held.

Costs directly proportional to the number of order, whether firm produces its own
materials for inventory or orders goods from another firm there are costs to the ordering,
delivery and payment processes. These costs directly depend on the number of times that
order are placed and received.

The price per unit of Inventory obtained, Due to quantity discounts and economics of scale
in production the price per unit of goods purchased or produced for inventory may vary with
the amount ordered.

Stock out Cost, another cost that is dependent on the firm’s inventory strategy is stock out
cost. Stock out cost ours when immediate service is required but inventory is unavailable.

3.2.2 The Economic Order Quantity (EOQ) model for minimizing inventory costs

For many small businesses, the primary source of revenue is inventory turnover. If a
company maintains too large an inventory, inventory storage, spoilage and obsolescence
costs can increase operating costs and decrease a company’s income. The economic order
quantity model minimizes these inventory costs by determining the optimal inventory
quantity the company should keep on hand and ensuring inventory arrives in time to meet
customer needs. The EOQ model accomplishes these goals by monitoring inventory and,
when inventory levels fall below a certain point, ordering the inventory needed to avoid
shortages. To meet these requirements, the EOQ model determines the optimal-reorder
quantity for each order as well as the appropriate reorder point. The EOQ model is simple,
but it is applicable only to those inventory situations described by its assumptions, which
includes:

 There are only two types of costs: costs that are directly proportional to the amount
of inventory held and costs that are directly proportional to the number of orders
received. Call the former carrying or holding cost and the latter order cost. There are
no costs that are indirectly proportional to the amount of inventory held and the price
per unit of inventory obtained does not vary with the amount of inventory received.
Stockout costs are modeled separately and are not considered in the EOQ model.
 There may be lead times of any length.
 There in so risk.
 The replenishment rate in infinite.

11
 Graph-1
EOQ Model

3.3 Aggregate Liquidity

Aggregate liquidity is the relationship between the firm’s ability to generate cash and firm’s
potential needs for cash on short notice. The level of the firm’s aggregate liquidity constitutes
a multiasset hedge against multiliability cash demand. However, a firm’s aggregate liquidity
position indicates the overall relationship between total current assets (which provides cash
inflows) and total current liabilities (which require cash outflows). If current assets can
provide much more cash than is needed for current liabilities, then the chance of a cash
stockout is lessened.

3.3.1 Managing and Measuring aggregate liquidity

Firms measure and manage their aggregate liquidity positions because of the amount of
current debt relative to current assets affects the level of expected cash flows to shareholders
and the risk of these cash flows. Since any such variations in the risk and return affect
shareholder wealth, assessing and addressing these variations is a necessary function of
financial management. The management of aggregate liquidity starts with the measurement
of the size of the hedge for various potential financial strategies. Since this management is
facilitated by more precise measurement, the development and application of accurate
measures of aggregate liquidity is of substantial advantage to the firm. However, the
availability of accurate measures of aggregate liquidity has a side benefit. In addition to the
measurement of the firm’s own liquidity for the purpose of managing this position, measures
of liquidity can also be applied to outside firms as on aid in making credit granting decisions.
Aggregate liquidity is an important determinant of the probability of default, and the accurate
assessment of this aggregate liquidity position can therefore lend important insights in
estimating the default probabilities of credit applicants.

12
 Chapter-4

Empirical Analysis

In this chapter the firms level of aggregate liquidity of pharmaceutical industry is measured
with the help of Traditional measures like current ratio, quick ratio etc. Improved indices for
measuring aggregate liquidity are also used. In the later part of the chapter ordinary least
square regression model is used to assess the relationship between working capital
management and profitability.

4.1 Financial ratios

4.1.1 NET WORKING CAPITAL

Net working capital is the aggregate amount of all current assets and current liabilities. It is
used to measure the short-term liquidity of a business, and can also be used to obtain a
general impression of the ability of company management to utilize assets in an efficient
manner. Net working capital is used in various other financial formulas that deal with cash
flows. Net Working Capital=Current Asset-Current Liabilities

Table-1

Net Working capital (million)

2012 2013 2014 2015 2016

ACI Limited -1,121.27 -1,855.72 -2,204.17 -3,019.52 -1,925.82
The ACME Laboratories Limited 247.48 1,961.65 -1,794.66 216.72 3,036.56
AFC Agro Biotech Limited 29.75 48.54 94.40 172.27 210.97
Ambee Pharmaceuticals Limited 8.63 13.27 16.69 17.69 -28.46
Beacon Pharmaceuticals Limited 896.46 984.09 1,095.27 1,454.64 1,412.55
BEXIMCO Pharma 4,500.30 5,132.47 4,520.84 3,658.53 5,545.44
Central Pharma 91.30 328.44 429.34 561.77 703.21
Glaxo SmithKline PLC 1,132.51 1,391.00 1,876.91 2,037.95 1,841.43
Ibn SIna 43.26 59.55 11.73 -100.06 -133.30
Orion Pharma Limited -536.52 -1,116.78 -1,039.82 3,700.34 4,592.87
Pharma Aids Limited 38.88 2.82 24.81 44.77 67.18
Renata Limited 433.36 -1,124.90 82.19 835.97 1,683.59
Square Pharmaceuticals Limited 3,933.18 3,670.95 5,104.83 7,183.15 14,372.18

Industry 745.95 730.41 632.18 1289.55 2,413.72

13
 Graph-2

Net Working capital (million)

16,000.00 ACI

14,000.00 The ACME

12,000.00 AFC Agro

Biotech
Ambee
10,000.00
Beacon
8,000.00
BEXIMCO
6,000.00
Central
4,000.00 Pharma
GSK
2,000.00 Ibn SIna

0.00 Orion Pharma

2012 2013 2014 2015 2016
-2,000.00 Pharma Aids

-4,000.00

We are seeing that Square Pharmaceuticals Limited has maintained highest amount of net
working capital over the years, they were way above the industry average in all the years in
2016 they 14372.18 million of net working capital in their operation. Glaxo SmithKline PLC
and Beximco pharma are also maintained net working capital above industry standard.

On the contrary ACI has negative networking capital in all the years which is a alarming sign
for them, because of that they will have uncertain future and have to incur substantial cost if
they need current asset in the future.

But here an important point is industry average is mostly influenced by 3 companies, Square
Pharmaceuticals Limited, Glaxo SmithKline PLC and Beximco pharma.

4.1.2 CURRENT RATIO

Current Ratio establishes the relationship between Current assets and Current liabilities.
Normally, high current ratio is considered to be a sign of financial strength. It is the indicator
of the firm’s ability to promptly meet its short term.

Current Ratio = CR = Current Assets / Current Liability

14
 Table-2
Current Ratio

2012 2013 2014 2015 2016

ACI Ltd 0.88 0.84 0.84 0.81 0.91
The ACME Ltd 1.05 1.33 0.79 1.03 1.35
AFC Agro Biotech ltd. 3.81 1.01 2.30 2.34 2.38
Ambee Pharma Ltd. 1.04 1.05 1.05 1.05 0.92
Beacon Pharma Ltd. 2.00 2.40 2.03 2.33 2.23
BEXIMCO Pharma 2.70 2.67 2.03 1.78 2.86
Central Pharma 1.59 1.05 2.64 2.87 3.14
Glaxo SmithKline PLC 1.79 1.69 1.73 1.70 1.67
Ibn SIna 1.15 1.19 1.03 0.81 0.77
Orion Pharma Ltd. 0.85 0.76 0.79 2.16 2.15
Pharma Aids Ltd. 1.71 1.04 1.34 1.63 1.89
Renata Limited 1.15 0.79 1.02 1.15 1.33
Square Pharma Ltd. 1.91 2.12 3.13 3.82 6.34
industry 1.31 1.19 1.19 1.38 1.62

Graph- 3
Current Ratio

7.00
ACI Ltd
6.00 The ACME Ltd
AFC Agro Biotech ltd.
5.00
Ambee Pharma Ltd.
4.00 Beacon Pharma Ltd.
BEXIMCO Pharma
3.00
Central Pharma
2.00 Glaxo SmithKline PLC
Ibn SIna
1.00
Orion Pharma Ltd.
0.00 Pharma Aids Ltd.
2012 2013 2014 2015 2016

15
Current Ratio tells us how many times of current asset is maintaining by company in terms of
currents liability. From the table we are seeing that ACI and orion pharma is maintaining low
current ration comparing to industry average. So They should give emphasis on increasing
current asset improve their current ratio. Square pharma has highest current ratio comparing
to all of the company, they have 6 times more current asset than their current liability.

4.1.3 QUICK RATIO

Quick Ratio establishes a relationship between quick or liquid assets and current Liabilities.
An asset is liquid if it can be converted into cash immediately or reasonably soon without a
loss of value. Cash is the most liquid asset. And Inventory has the lowest liquidity that’s why
it has been deducted from equation. It is also known as acid test Ratio.

Quick Ratio = QR = (Current Assets – Inventory) / Current Liabilities

Table-3
Quick Ratio

2012 2013 2014 2015 2016

ACI Ltd 0.49 0.47 0.45 0.42 0.53
The ACME Ltd 0.72 1.01 0.52 0.68 1.03
AFC Agro Biotech ltd. 2.97 1.00 1.46 1.56 1.71
Ambee Pharma Ltd. 0.49 0.57 0.52 0.59 0.46
Beacon Pharma Ltd. 0.89 1.09 1.03 1.22 1.19
BEXIMCO Pharma 1.83 1.88 1.48 1.25 1.93
Central Pharma 0.69 1.02 1.50 1.72 1.96
Glaxo SmithKline PLC 1.05 1.08 1.39 1.41 1.38
Ibn SIna 0.78 0.76 0.66 0.47 0.46
Orion Pharma Ltd. 0.74 0.67 0.70 2.02 1.98
Pharma Aids Ltd. 1.56 0.92 1.21 1.42 1.75
Renata Limited 0.46 0.29 0.49 0.55 0.64
Square Pharma Ltd. 1.17 1.18 1.99 2.52 4.97
industry 0.81 0.84 0.76 0.90 1.13

16
 Graph- 4
Quick Ratio

6.00

ACI Ltd
5.00 The ACME Ltd
AFC Agro Biotech ltd.
Ambee Pharma Ltd.
4.00
Beacon Pharma Ltd.
BEXIMCO Pharma
3.00 Central Pharma
Glaxo SmithKline PLC
Ibn SIna
2.00
Orion Pharma Ltd.
Pharma Aids Ltd.

1.00 Renata Limited

Square Pharma Ltd.
industry
0.00
2012 2013 2014 2015 2016

Quick Ratio tells us how many times of most liquid asset is maintaining by company in terms
of currents liability. From the table we are seeing that half of the company is above industry
average and others are way below it. The important point is AFC, Beximco, Pharma Aid,
Square, this company is maintaining high level of quick ratio and these companies
contribution make the industry quick ratio average going higher.

4.1.4 RECEIVABLES TURNOVER RATIO

Receivables turnover tells us how many times company collect its receivable over the year. It
ratio can be calculated by dividing the net value of credit sales during a given period by the
average accounts receivable during the same period. Average accounts receivable can be
calculated by adding the value of accounts receivable at the beginning of the desired period to
their value at the end of the period and dividing the sum by two.

Account Receivable Turnover= Net Credit Sales/ Average account receivable

17
 Table - 4
Account Receivable Turnover

2012 2013 2014 2015 2016

ACI Ltd 5.52 6.40 5.92 6.37 8.35
The ACME Ltd 19.66 16.40 14.20 14.92 14.18
AFC Agro Biotech ltd. 3.69 5.85 11.24 6.47 10.21
Ambee Pharma Ltd. 6.54 4.68 4.21 4.60 7.21
Beacon Pharma Ltd. 7.79 7.77 6.38 6.73 7.71
BEXIMCO Pharma 8.07 7.99 8.40 8.02 11.92
Central Pharma 4.70 4.39 3.64 2.62 1.08
Glaxo SmithKline PLC 11.39 13.39 6.88 5.47 6.53
Ibn SIna 972.89 624.25 560.01 408.83 430.90
Orion Pharma Ltd. 4.19 5.43 5.68 2.09 2.17
Pharma Aids Ltd. 2.14 2.16 1.94 1.92 1.66
Renata Limited 9.10 6.68 8.20 7.36 0.62
Square Pharma Ltd. 24.17 24.86 30.35 29.83 30.26
industry 8.95 9.08 8.86 7.02 7.31

Graph- 5
Account Receivable Turnover

35.00
ACI Ltd
30.00 The ACME Ltd
AFC Agro Biotech ltd.
25.00
Ambee Pharma Ltd.
Beacon Pharma Ltd.
20.00
BEXIMCO Pharma
15.00 Central Pharma
Glaxo SmithKline PLC
10.00
Orion Pharma Ltd.
Pharma Aids Ltd.
5.00
Renata Limited
0.00 Square Pharma Ltd.
2012 2013 2014 2015 2016

18
It tells us how many times company can collect its receivables throughout the year. Here IBN
sina has a very awkward receivable ratio comparing to the company they collected their
receivables 430 times in 2016 which is much more than industry average.

4.1.5 INVENTORY TURNOVER RATIO

Inventory turnover is a ratio showing how many times a company's inventory is sold and
replaced over a period of time. The days in the period can then be divided by the inventory
turnover formula to calculate the days it takes to sell the inventory on hand. It is relationship
between Cost of Goods Sold and average inventory at cost.

Inventory Turnover = Inventory / Cost of Goods Sold

Table-5
Inventory Turnover Ratio

2012 2013 2014 2015 2016

ACI Ltd 3.38 3.68 2.89 2.88 4.01
The ACME Ltd 3.20 3.03 2.81 2.90 2.83
AFC Agro Biotech ltd. 3.36 3.05 6.62 4.33 7.18
Ambee Pharma Ltd. 1.10 1.22 0.88 0.97 1.48
Beacon Pharma Ltd. 0.45 0.66 0.84 0.87 1.09
BEXIMCO Pharma 1.79 -2.01 2.34 2.45 3.90
Central Pharma 1.07 1.04 1.10 0.98 0.54
Glaxo SmithKline PLC 3.74 3.73 5.16 4.77 4.88
Ibn SIna 11.71 9.80 10.73 10.49 11.33
Orion Pharma Ltd. 13.44 14.26 17.85 1.64 1.60
Pharma Aids Ltd. 8.58 8.77 8.49 6.04 9.23
Renata Limited 1.82 1.36 1.96 1.88 2.07

Square Pharma Ltd. 3.75 3.66 4.74 4.51 5.67

industry 3.10 2.59 3.33 2.89 3.66

19
 Graph- 6
Inventory Turnover Ratio

20.00
ACI Ltd
The ACME Ltd
15.00 AFC Agro Biotech ltd.
Ambee Pharma Ltd.
Beacon Pharma Ltd.
10.00 BEXIMCO Pharma
Central Pharma
Glaxo SmithKline PLC
5.00 Ibn SIna
Orion Pharma Ltd.
Pharma Aids Ltd.
0.00 Renata Limited
2012 2013 2014 2015 2016 Square Pharma Ltd.
industry
-5.00

It tells us how many times inventory in the hand can be sell and converted into cash
throughout the year. Here Orion and pharma Aids are doing way better than industry average.
And on the other hand ambee , beacon are not doing so well as they are behind the industry
average and they not being able to sell their inventory to compete with others.

4.1.6 DAYS SALES OUTSTANDING

Days sales outstanding (DSO) is a measure of the average number of days that a company
takes to collect revenue after a sale has been made. DSO is often determined on a monthly,
quarterly or annual basis and can be calculated by dividing the amount of accounts receivable
during a given period by the total value of credit sales during the same period, and
multiplying the result by the number of days in the period measured.

DSO= (Account Receivable/Total Sales)*360

20
 Table-6
Days Sales Outstanding

2012 2013 2014 2015 2016

ACI Ltd 65.21 56.27 60.77 56.51 43.13
The ACME Ltd 18.31 21.95 25.35 24.12 25.39
AFC Agro Biotech ltd. 97.55 61.55 32.04 55.63 35.27
Ambee Pharma Ltd. 55.06 76.90 85.43 78.33 49.91
Beacon Pharma Ltd. 46.19 46.32 56.40 53.52 46.67
BEXIMCO Pharma 44.63 45.05 42.88 44.89 30.20
Central Pharma 76.56 82.04 98.81 137.63 334.65
Glaxo SmithKline PLC 31.59 26.89 52.34 65.80 55.10
Ibn SIna 0.37 0.58 0.64 0.88 0.84
Orion Pharma Ltd. 86.02 66.33 63.43 172.38 165.58
Pharma Aids Ltd. 168.20 167.03 185.10 187.23 217.50
Renata Limited 39.57 53.90 43.92 48.93 580.57
Square Pharma Ltd. 14.89 14.48 11.86 12.07 11.90
industry 40.23 39.63 40.65 51.31 49.26

Graph- 7
Days Sales Outstanding

700.00
ACI Ltd
600.00 The ACME Ltd
AFC Agro Biotech ltd.
500.00
Ambee Pharma Ltd.

400.00 Beacon Pharma Ltd.

BEXIMCO Pharma
300.00 Central Pharma
Glaxo SmithKline PLC
200.00 Ibn SIna
Orion Pharma Ltd.
100.00
Pharma Aids Ltd.

0.00 Renata Limited

2012 2013 2014 2015 2016

21
It tells us how many times company take to take to collect its receivables. If it is lower than it
is great for the company. ACI AFC agro Pharma aid are not doing well in terms of DSO
because they taking more days to collects their receivables from customers.

4.1.7 DAYS INVENTORY HELD

Days inventory held ratio, explained as an indicator of inventory turns, is an important

financial ratio for any company with inventory. It shows how quickly management can turn
inventories into cash. In general, a decrease in days inventory held (DIH) is an improvement
to working capital, and an increase is deterioration.

Days inventory held = (average inventory / cost of goods sold) * 360 days

Table-7
Days Inventory Held

2012 2013 2014 2015 2016

ACI Ltd 106.48 97.83 124.59 125.14 89.67
The ACME Ltd 112.54 118.69 128.30 124.33 127.38
AFC Agro Biotech ltd. 107.02 118.03 54.39 83.12 50.15
Ambee Pharma Ltd. 326.06 293.89 408.27 371.23 242.86
Beacon Pharma Ltd. 793.56 543.26 428.78 411.68 331.03
BEXIMCO Pharma 201.05 -178.83 153.63 147.10 92.34
Central Pharma 337.96 346.02 327.43 367.94 662.32
Glaxo SmithKline PLC 96.20 96.63 69.81 75.49 73.79
Ibn SIna 30.74 36.72 33.56 34.31 31.77

Orion Pharma Ltd. 26.78 25.24 20.16 219.11 225.25

Pharma Aids Ltd. 41.96 41.04 42.39 59.57 38.99

Renata Limited 197.60 265.55 183.41 191.73 173.62

Square Pharma Ltd. 96.10 98.41 76.03 79.75 63.47

industry 116.10 139.03 108.23 124.61 98.45

22
 Graph- 8
Days Inventory Held

1000.00

ACI Ltd
800.00 The ACME Ltd
AFC Agro Biotech ltd.
600.00 Ambee Pharma Ltd.
Beacon Pharma Ltd.
400.00 BEXIMCO Pharma
Central Pharma
200.00 Glaxo SmithKline PLC
Ibn SIna
0.00 Orion Pharma Ltd.
2012 2013 2014 2015 2016
Pharma Aids Ltd.
-200.00 Renata Limited
Square Pharma Ltd.
-400.00 industry

It tells us how quickly management can turn inventories into cash. A decrease in days
inventory held (DIH) is an improvement to working capital, and an increase is deterioration.
Only GSK, Ibn SIna Orion Pharma, Pharma Aid and square are doing well than industry
average So others has scope to improve in terms of DIH.

4.1.8 PAYMENT DEFERRED PERIOD

Days payable outstanding (DPO) is a company's average payable period. Days payable
outstanding tells how long it takes a company to pay its invoices from trade creditors, such as
suppliers. DPO is typically looked at either quarterly or yearly.

Payment deferred period = (Sum of Accounts Payable/Cost of Sales)*360

23
 Table-8
Payment Defferd period

2012 2013 2014 2015 2016

ACI Ltd 5.31 -6.22 2.39 9.71 33.16
The ACME Ltd 30.08 31.82 51.59 46.13 51.02
AFC Agro Biotech ltd. 140.58 112.35 132.74 176.80 159.81
Ambee Pharma Ltd. 21.41 17.41 16.74 14.48 12.03
Beacon Pharma Ltd. 59.87 5.39 9.76 13.07 17.10
BEXIMCO Pharma 112.50 -96.94 89.48 90.15 98.23
Central Pharma 92.05 128.98 166.75 153.43 166.41
Glaxo SmithKline PLC 22.15 43.11 66.49 73.61 60.52
Ibn SIna 19.56 23.42 28.46 33.79 20.59

Orion Pharma Ltd. 70.46 59.21 43.50 519.28 504.34

Pharma Aids Ltd. 78.21 20.94 76.35 106.80 85.89
Renata Limited 123.12 128.18 113.66 114.02 111.50
Square Pharma Ltd. 94.48 115.81 118.06 124.95 169.10
industry 36.15 39.84 33.50 47.47 34.29

Graph- 9
Payment Deferred period
600.00
ACI Ltd
500.00 The ACME Ltd
AFC Agro Biotech ltd.
400.00
Ambee Pharma Ltd.
300.00 Beacon Pharma Ltd.
BEXIMCO Pharma
200.00
Central Pharma
100.00 Glaxo SmithKline PLC
Ibn SIna
0.00
2012 2013 2014 2015 2016 Orion Pharma Ltd.
-100.00 Pharma Aids Ltd.
Renata Limited
-200.00

24
It tells us how many days company can delay its payments. Its higher results tell us that
company can use that amount for extra some days. That’s why it is good to be higher.
REanata Beximco and AFC agro are doing great in terms of Payment deferred period. They
can use that borrowed amount for more days which give them opportunity yto use that fund
for their own purpose.

4.1.9 CASH CONVERSION CYCLE

The CCC start when the raw material purchase and not pay at the spot. The stay in giving the
due is the outcome in delay in delay in the payable duration. The firm uses the raw material
which will be converting into finished goods for sale.

Cash Conversion Cycle = Operating Cycle Time-Payment Deferral Time

CCC = DSO+DIH-DPO

Table-9
Cash Conversion Cycle

2012 2013 2014 2015 2016

ACI Ltd 166.38 160.32 182.98 171.94 99.65
The ACME Ltd 100.76 108.82 102.05 102.33 101.75
AFC Agro Biotech ltd. 63.98 67.23 -46.31 -38.05 -74.38
Ambee Pharma Ltd. 359.71 353.37 476.96 435.08 280.75
Beacon Pharma Ltd. 779.89 584.19 475.42 452.12 360.60
BEXIMCO Pharma 133.18 -36.84 107.02 101.84 24.31
Central Pharma 322.47 299.07 259.49 352.14 830.55
Glaxo SmithKline PLC 105.65 80.42 55.66 67.67 68.36

Ibn SIna 11.55 13.87 5.73 1.40 12.01

Orion Pharma Ltd. 42.34 32.35 40.09 -127.79 -113.51
Pharma Aids Ltd. 131.95 187.13 151.13 140.00 170.60
Renata Limited 114.05 191.27 113.67 126.64 642.69
Square Pharma Ltd. 16.51 -2.92 -30.18 -33.14 -93.74

25
 Graph- 10
Cash Conversion Cycle

1000.00
ACI Ltd
The ACME Ltd
800.00
AFC Agro Biotech ltd.
Ambee Pharma Ltd.
600.00 Beacon Pharma Ltd.
BEXIMCO Pharma
400.00 Central Pharma
Glaxo SmithKline PLC

200.00 Ibn SIna

Orion Pharma Ltd.
Pharma Aids Ltd.
0.00
2012 2013 2014 2015 2016 Renata Limited
Square Pharma Ltd.
-200.00

The lower the result of CCC that is better for the company. If the result is negative than it is a
good sign for company. Negative result of CCC means that company is collecting its
receivables quicker but paying its payables later. The result of CCC is better for square
pharma.

26
4.2 Relationship between working capital management and profitability

4.2.1 Description of variables

The dependent variable in this study is return on asset, as a measure for firm’s profitability.
Exogenous or independent variable consists of ash conversion cycle, average collection
period, average payment period, inventory turnover period and firm size as a proxy for
component of working capital management.

Table-10
Description of variable

Description Measurement Variable

Return on asset (ROA) (Net income)/(Total assets) Dependent

Cash Conversion Cycle (Days Inventory held)-(Payment Deferred Period)+(days

Independent
(CCC) Sales OutStanding)

Account receivable
(Credit Sales)/( Average Account Receivable) Independent
turnover (ART)

Inventory Turnover (IT) (Cost of Goods Sold) /(Average Inventory) Independent

Firm Size (SZ) Natural Logarithm of Sales Independent

Hypotheses

The hypotheses are derived based on our objectives. The four hypotheses are stipulated to
examine the relationship between working capital management and firm’s performance in
term of profitability (ROA).

H1: There is a relationship between log cash conversion cycle and firm’s profitability

H2: There is a relationship between log Account receivable Turnover and firm’s profitability

H3: There is a relationship between log Inventory turnover and firm’s profitability

H4: There is a relationship between firm size and firm’s profitability.

4.2.2 Model Specification

The model of Pooled Ordinary Least Square (OLS) is used in this study in order to estimate
the impact of working capital management on profitability. The regression model as follows:

27
ROAit=C+β1 (LCCCit)+β2(LARTit)+β3 (LITit)+ β5(SZit)+ɛit

Where,

C = Constant term

ROA = Return on Assets

LCCC = Natural logarithm of Cash Conversion Cycle

LART=Natural logarithm of Account Collection Period

LIT=Natural logarithm of Inventory Conversion Cycle

SZ=Firm Size (measured by Log of Sales)

ɛ=Error Term

4.2.2 Descriptive Statistics

Table 11 reports descriptive statistics of all the data in this study. The return on assets (ROA)
has a mean of 13.49 percent of total asset, and standard deviation is 2.91 percent. The
maximum value for the ROA is 1.18 percent and the minimum value is -1.55

The log of cash conversion cycle (LCCC) is used to test the liquidity of the companies which
has shown an average of 159.11 with a standard deviation of 202.27. The log of average
collection period (LART) is also used as a proxy to verify the liquidity of the companies
which is defined as the ability of the firm to covert it receivables into cash. The mean value
of LART is 54.07 Times with the standard deviation of 168.63. Maximum time taken by a
firm to collect it receivable is 972.89 times, while the minimum level is .62 times.
Correspondingly, the log of inventory Turnove (LIT) also applies in this research study to
check for the level the liquidity of the company. The outcome shows that the means of log of
inventory turnover is 4.25 times, and the standard deviation is 3.88 times. The maximum
value of log of inventory Turnover (IT) is 17.85 while the minimum level for this purpose is-
2.01 times.

28
 Table-11
Descriptive Statistics

ROA ART IT CCC SZ

Mean 0.13 54.08 4.26 159.11 8218840702

Standard Error 0.03 20.92 0.48 25.09 1228961673
Median 0.07 6.88 3.05 105.65 6284015000
Standard Deviation 0.24 168.63 3.89 202.27 9908205772
Sample Variance 0.06 28436.90 15.12 40914.10 9.81
Kurtosis 11.90 16.38 1.87 2.10 4.696284531
Skewness 3.50 3.98 1.43 1.43 1.93
Minimum -0.02 0.62 -2.01 -127.79 45069250
Maximum 1.18 972.89 17.85 830.55 49236082736
Count 65 65 65 65 65

4.2.3 Correlation coefficient

Table 12 reports the correlation coefficients among the variables considered in the study. The
return on assets is negatively correlated with the log of cash conversion cycle, log of Account
receivable turnover and Inventory Turnover. The negative correlation between return on
assets indicates that when those stated proxy variables increase it may have adverse effect on
the firm’s profitability. Information from correlation coefficients also indicates that the log
inventory conversion period and firm size is positive associated with the return on asset.

Table-12
Correlation coefficient

ROA ART IT CCC SZ

ROA 1
ART -0.04672 1
IT -0.02649 0.468274 1
CCC -0.18898 -0.21762 -0.44495 1
SZ 0.100411 -0.13415 -0.01743 -0.38209 1

29
4.2.4 Regression analysis results

Table-13
Regression Analysis Result

Coefficients Standard Error t Stat P-value

Intercept 0.216513107 0.077523791 2.792860142 0.007000317
ART -6.66302E-05 0.000201269 -0.331050992 0.741759384
IT -0.007077148 0.00948031 -0.746510241 0.458274425
CCC -0.000294685 0.000182017 -1.618997531 0.110692913
SZ -1.13396E-13 3.36236E-12 -0.033725154 0.973208266
Significance F
Regression Statistics
0.508694835 0.508694835
Multiple R
R Square 0.052695037
Adjusted R Square -0.010458627
Standard Error 0.236645314
Observations 65

Based on the result presented on Table 13 above, it shows that the coefficient determination,
R-square is approximately 0.0526. This indicates that the independent variables explained
about 5.26 percent of the variation in return on assets which represent the profitability of the
firms. The model also points out that the intercept of the equation is 0.216513107 which
shows that the ROA is expected to increase by 0.216513107when the entire variables are
remaining constant and unchanged.

The finding shows that there is a negative relationship exists between the log cash conversion
cycle (LCCC) and return on assets of the company. The null hypothesis which shows that
there is no relationship between the log cash conversion cycle and firm’s profitability is
therefore rejected at 5 percent significant level, indicating a significant alternative hypothesis
of a one percent decrease in log cash conversion cycle would increase profitability by
0.000294685 percent.

The finding shows that there is a negative relationship exists between the log account
Receivable Turnover (LART), log Inventory turnover(LIT), log size of the firm (LSZ) and
return on assets of the company.

30
 Chapter-5

Summary and Conclusion

Findings

1) Although some of the company has high return on asset but their return on equity is
lower like Acme Laboratories Limited. It means that they are taking loan to boost up
their return
2) According to return on equity and cash conversion cycle AFC agro biotech is doing
very well.
3) Most of the companies are not collecting their receivables quickly.
4) Ibne sina and Orion Pharma are the quickest duo to convert inventory into cash.
5) AFC Agro Biotech Beximco Pharma and Renata has been trusted by their supplier to
delay their payment against accounts payable.
6) Cash Conversion cycle as a working capital management has a relationship with the
profitability of the firm.

Suggestions

1) Beacon Pharmaceuticals limited, Central Pharmaceuticals limited and Ambee

Pharmaceuticals limited has very long cash conversion cycle. They should improve their
operational efficiency by improving receivable collection time.

2) ACI Limited and Ambee Pharmaceuticals limited should renegotiate with their
supplier to improve their payment differed period.

31
 Conclusion

According to the tradeoff theory, firms have to keep a balance between profitability and
liquidity. Liquidity is a precondition to ensure that firms are able to meet its short-term
obligations and its continued flow can be guaranteed from a profitable venture. The
importance of cash as an indicator of continuing financial health should not be surprising
in view of its crucial role within the business. This requires that business must be run both
efficiently and profitably. On the other hand, too much focus on liquidity will be at the
expense of profitability. Thus, the manager of a business entity is in a dilemma of
achieving desired tradeoff between liquidity and profitability in order to maximize the
value of a firm. Previous studies argue that more efficient liquidity management
stimulates more profitability. While large number of studies examined this relation most
of which focused on more developed firms. In this report, we examined the relationship
between firms’ working capital management measured by the cash conversion cycle in
addition to its components and profitability. Using data from 5 firms listed on the Dhaka
Stock Exchange for the period from 2011 to 2015. Firms’ profitability proved to have
negative relation with the length of cash conversion cycle. This indicates that firms will
be more profitable if they are able to shorten the length of their cash Conversion cycle.
Finally, firms have to be concerned with working capital management because they can
also create value by reducing their cash conversion cycle to a minimum, as far as that is
reasonable.

32
References

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corporate profitability: A survey on Kenyan listed firms. Research Journal of Business
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2. Deloof M (2003) Does working capital management affect profitability of Belgian

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3. Falope OI, Ajilore OT (2009) Working capital management and corporate profitability:
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4. Filbeck G, Krueger T (2005) Industry related differences in working capital

management. Journal of Business 20: 11-18.

7. Raheman A, Nasr M (2007) Working capital management and profitability – case of

Pakistani firms. International Review of Business Research Papers 3: 279-300.

5. Gill A, Biger N, Mathur N (2010) The relationship between working capital

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33
Appendix

List of the selected 13 companies

ACI Ltd
The ACME Ltd
AFC Agro Biotech ltd.
Ambee Pharma Ltd.
Beacon Pharma Ltd.
BEXIMCO Pharma
Central Pharma
Glaxo SmithKline PLC
Ibn SIna
Orion Pharma Ltd.
Pharma Aids Ltd.
Renata Limited
Square Pharma Ltd.
industry

34
 regression data

Year ROA ART IT CCC SZ

0.01157 5.52048238 3.38101294
2012 4 3 8 166.383 1.75E+10
- 6.39785470 3.67981227
2013 0.01554 6 6 160.321 2.2E+10
0.00514 5.92357512 2.88937382 182.981
ACI Limited
2014 9 9 5 5 2.22E+10
0.02176 2.87682734 171.942
2015 9 6.37054271 9 3 2.58E+10
0.08613 8.34621924 4.01479720 99.6464
2016 1 6 2 3 4.92E+10
1.18378 19.6634180 3.19892820 100.761
2012 8 5 5 2 8.84E+09
0.07065 16.4019399 3.03298560 108.822
2013 5 8 3 2 8.97E+09
The ACME
1.10375 14.2035424 2.80602020 102.052
Laboratories
2014 6 6 6 5 1.02E+10
Limited
14.9231138 102.325
2015 0.85205 4 2.89552317 6 1.15E+10
14.1784068 2.82614983 101.752
2016 0.89414 8 1 5 1.26E+10
3.69053146 3.36400147 63.9844 4506925
2012 0.02885 3 2 6 0
0.01078 5.84920298 3.05009887 67.2288
2013 5 8 2 6 3.6E+08
AFC Agro Biotech 0.18336 11.2352878 6.61841321 -
Limited 2014 1 4 1 46.3083 6E+08
0.19622 4.33101690 -
2015 1 6.4717591 5 38.0485 7.08E+08
0.26306 10.2058227 7.17847191 -
2016 3 8 2 74.3845 1.18E+09
0.02822 6.53802706 1.10410642 359.710
Ambee 2012 6 9 5 5 2.81E+08
Pharmaceuticals 0.02323 4.68146449 353.370
Limited 2013 9 1 1.2249666 5 3.43E+08
2014 0.01803 4.21401702 0.88177077 476.960 3.44E+08

35
 8 1 5
0.01512 4.59567916 0.96974722 435.083
2015 1 3 9 5 3.39E+08
0.01938 7.21235162 1.48231849 280.749
2016 1 3 2 4 5.12E+08
0.01668 7.79326021 0.45364919 779.893
2012 2 4 9 3 9.79E+08
0.00214 7.77213816 584.185
2013 8 9 0.6626721 5 1.23E+09
Beacon
0.00527 0.83958991 475.422
Pharmaceuticals
2014 9 6.38334618 8 5 1.69E+09
Limited
0.00813 6.72657463 0.87447335 452.120
2015 6 5 1 9 2.05E+09
0.01224 7.71429397 1.08750686 360.597
2016 5 8 4 9 2.49E+09
0.05567 8.06588193 133.184
2012 7 1 1.79057034 9 7.89E+09
-
0.05365 7.99129118 2.01303946 -
2013 6 2 2 36.8446 9.29E+09
BEXIMCO
0.05113 8.39635646 2.34335631 107.024
Pharma
2014 7 4 3 6 1.05E+10
0.05269 8.01924616 2.44728665 101.838
2015 9 7 4 9 1.12E+10
0.09461 11.9209934
2016 1 4 3.89856473 24.3087 2E+10
0.04448 4.70240908 1.06521329 322.466
2012 3 5 2 6 2.55E+08
0.01070 1.04041247 299.067
2013 6 4.38833046 5 7 4.24E+08
0.08301 3.64347318 1.09947042 259.486
Central Pharma
2014 4 4 8 2 6.54E+08
0.07171 2.61572474 0.97841385 352.143
2015 5 3 8 6 6.61E+08
0.04593 1.07575540 0.54354760 830.554
2016 1 1 7 3 4.17E+08
Glaxo SmithKline 0.07961 11.3948190 3.74208149
PLC 2012 8 2 9 105.645 5.55E+09

36
 0.13664 13.3874876 3.72544941 80.4153
2013 3 5 1 5 6.77E+09
0.16442 6.87833282 5.15650649 55.6598
2014 4 9 3 7 7.19E+09
5.47136992 4.76874564 67.6747
2015 0.14941 8 4 8 6.7E+09
6.53359166 4.87898211 68.3647
2016 0.12078 8 6 3 6.28E+09
0.06373 11.7124658 11.5490
2012 1 972.894093 8 4 2.01E+09
624.246960 9.80451622 13.8701
2013 0.07951 9 6 9 2.21E+09
0.10649 560.013430 10.7285984 5.73466
Ibn SIna
2014 3 5 7 8 2.68E+09
0.11019 408.829846 10.4922436 1.39727
2015 5 4 3 5 3.16E+09
430.898115 11.3331229 12.0120
2016 0.06879 5 6 7 3.49E+09
0.04120 4.18510047 13.4439526 42.3391
2012 6 9 7 2 7.03E+09
0.04220 5.42740666 14.2643003
2013 8 8 4 32.3544 9.55E+09
Orion Pharma 0.03808 5.67574363 17.8529910 40.0888
Limited 2014 2 8 9 7 1.1E+10
0.04023 2.08842779 1.64297888 -
2015 1 4 1 127.788 1.07E+10
0.05671 1.59823215 -
2016 1 2.17416685 9 113.513 1.48E+10
8.57873363 131.949
2012 0.11577 2.14031856 8 1 1.08E+08
2.15533108 8.77131617 187.129 9761597
2013 0.02837 3 5 5 5
Pharma Aids 0.10067 1.94493829 8.49285366 151.131
Limited 2014 4 1 2 9 1.26E+08
0.14287 1.92278775 6.04344167
2015 5 6 2 139.999 1.47E+08
0.11302 1.65514845 9.23263087 170.600
2016 4 4 8 5 1.52E+08

37
 0.12692 9.09782713 1.82188144
2012 7 6 8 114.046 7.67E+09
0.10036 6.67907211 1.35567492 191.265
2013 8 6 6 3 7.63E+09
0.11804 8.19613362 1.96285105 113.671
Renata Limited
2014 3 8 2 6 1.11E+10
0.12434 7.35680612 1.87767880 126.643
2015 4 8 3 1 1.29E+10
0.13124 0.62008393 2.07347773 642.691
2016 9 9 8 9 1.48E+09
0.12722 24.1734046 3.74614640 16.5144
2012 9 9 1 4 1.98E+10
0.13204 24.8566335 3.65832836 -
2013 3 4 1 2.92137 2.02E+10
Square
0.13691 30.3513587 4.73523291 -
Pharmaceuticals
2014 2 1 9 30.1781 2.33E+10
Limited
0.14737 29.8303872 -
2015 9 2 4.51434408 33.1363 2.67E+10
0.22219 5.67223383 -
2016 5 30.2613068 7 93.7366 4.04E+10

38
 Regression in excel Format

SUMMARY
OUTPUT
Regression Statistics
0.22955
Multiple R 3996
0.05269
R Square 5037
-
Adjusted R 0.01045
Square 8627
Standard 0.23664
Error 5314
Observation
s 65
ANOVA
Significa
df SS MS F nce F
0.18690 0.04672 0.83439 0.50869
Regression 4 7604 6901 3978 4835
3.36006 0.05600
Residual 60 0266 1004
3.54696
Total 64 787
Coefficie Standard Lower Upper Lower Upper
nts Error t Stat P-value 95% 95% 95.0% 95.0%
0.21651 0.07752 2.79286 0.00700 0.06144 0.37158 0.06144 0.37158
Intercept 3107 3791 0142 0317 2436 3778 2436 3778
- - - -
6.66302 0.00020 0.33105 0.74175 0.00046 0.00033 0.00046 0.00033
ART E-05 1269 0992 9384 9227 5967 9227 5967
- - - -
0.00707 0.00948 0.74651 0.45827 0.02604 0.01188 0.02604 0.01188
IT 7148 031 0241 4425 0591 6295 0591 6295
- - - -
0.00029 0.00018 1.61899 0.11069 0.00065 6.94031 0.00065 6.94031
CCC 4685 2017 7531 2913 8773 E-05 8773 E-05
- - - -
1.13396 3.36236 0.03372 0.97320 6.83911 6.61232 6.83911 6.61232
SZ E-13 E-12 5154 8266 E-12 E-12 E-12 E-12

39
 Return on asset

Return on Asset (ROA) = Net Income/ Total Asset

2012 2013 2014 2015 2016
ACI Ltd 0.01 -0.02 0.01 0.02 0.09
The ACME Ltd 1.18 0.07 1.10 0.85 0.89
AFC Agro Biotech ltd. 0.03 0.01 0.18 0.20 0.26
Ambee Pharma Ltd. 0.03 0.02 0.02 0.02 0.02
Beacon Pharma Ltd. 0.02 0.00 0.01 0.01 0.01
BEXIMCO Pharma 0.06 0.05 0.05 0.05 0.09
Central Pharma 0.04 0.01 0.08 0.07 0.05
Glaxo SmithKline PLC 0.08 0.14 0.16 0.15 0.12
Ibn SIna 0.06 0.08 0.11 0.11 0.07
Orion Pharma Ltd. 0.04 0.04 0.04 0.04 0.06
Pharma Aids Ltd. 0.12 0.03 0.10 0.14 0.11
Renata Limited 0.13 0.10 0.12 0.12 0.13
Square Pharma Ltd. 0.13 0.13 0.14 0.15 0.22
industry 0.07 0.06 0.08 0.09 0.13

40