Working Capital Management and Firm Profitability: Evidence from Non-Financial Firms Listed on the Pakistan Stock Exchange

Abstract

Non-financial listed entities on the Pakistan Stock Exchange (PSX) have a situation where working capital falls between liquidity and profit and this study tries to investigate the relationship between working capital and accounting profitability within non-financial listed entities on the PSX. The design is a firm year panel of non-financial companies from 2015 to 2024, but excludes banks, insurance companies, and other financial intermediaries, since these companies' current assets are operating assets of other types. Return on assets and return on equity are measures of profitability. Cash conversion cycle and its three components, day’s sales outstanding, day’s inventory outstanding, day’s payable outstanding are measures of working capital management. The following are included as controls: firm size, leverage, sales growth, and the current ratio. The potential effects of time-invariant sector and governance differences are captured by firm fixed effects, while year effects capture common macroeconomic shocks. The findings indicate that there exists a negative relationship between the Cash conversion cycle and ROA and ROE. Most of that association is due to slower collection and slower inventory turnover. The longer the payable period, the better, but not very. More profitable companies tend to be larger and less profitable companies are more leveraged. There is evidence in support of a practical claim. The managers of non-financial firms on the Pakistan Stock Exchange can safeguard the profitability by reducing the operating cycle i.e. by reducing the time lag between the receipt of the investment and the payment of the payables without treating the payables as a costless source of finance.

Keyword: Working Capital Management, Cash Conversion Cycle, Profitability, Pakistan Stock Exchange, Non-Financial Firms