Ayaz Defence Presentation -1.pptx

THE IMPACT OF WORKING
CAPITAL MANAGEMENT
ON PROFITABILITY OF
PHARMACEUTICAL
INDUSTRY OF PAKISTAN
AYAZ SAFAR
SUPERVISOR, PROF REHMAT ULLAH,
GOVT. COLLEGE OF COMMERCE QUETTA

INTRODUCTION
Background
of the Study
Problem
Statement
Objective of
the Study
Significance
of the Study

Background of the Study
 The pharmaceutical industry is responsible for the research, production, development, and
distribution of drugs. The market has experienced significant growth over the past two
decades, and worldwide pharma revenues totaled US$1. 42 trillion in 2021. (Mikulic, 2022).
 During the last recent decades, the pharmaceutical industry in Pakistan has developed. At the
time of Pakistan's independence in 1947, there were few production units in the country.
Presently there are more than 800 large-scale pharmaceutical formulation units in Pakistan,
operated by 25 multinational companies in the country. Almost all the raw materials used in
the manufacture of medicines are procured from abroad. (Ikram, 2015)
 About 50 percent of these are imported from India. (Bhatti, 2019)

 Currently, in the business world, working capital management is the most relevant thing that differentiates one
company from another. Cash, one of the most essential components of current assets, is considered the
lifeblood of a business. But, most companies fail to manage cash properly.
 Working capital management deals with the management of current assets (CA) and current liabilities (CL) as
well as measures to finance them efficiently. (Chowdhury et al., 2018)
1. Working Capital Management
2. Profitability
 Profitability shows the company's ability to earn income on its assets. Profitability is defined as the ability of
an enterprise to earn profit from all its business activities. The simple objective of any company is to generate
revenue and beautify the company, so it is imperative to utilize its assets successfully. Profitability is a
measure of a firm's efficiency, which represents the financial institution's ability to generate earnings over its
capital base. Profitability measures the financial success of a company. (Khati, 2020)

Problem Statement
 The Current study discusses the impact of working capital management on the profitability of pharmaceutical
companies in Pakistan
Objective of the Study
 To determine the impact of working capital management on the profitability of pharmaceutical companies in
Pakistan.
Significance of the Study
 The present study is helpful potential customers, creditors of pharmaceutical companies, accountants and
auditors, students researching related issues, bankers working with such companies, and stakeholders.
Limitation of the Study
 The present study covers only the pharmaceutical sector of Pakistan. All the pharmaceutical companies that are
the subject of the research are taken from the Pakistan Stock Exchange.

LITERATURE REVIEW
Definition Associations
Conceptual
Model
Empirical
Model
Hypothesis

DEFINITION
• The time it takes for a company to convert its
investments in inventory and other resources into
cash flows from sales.
• 𝑪𝒂𝒔𝒉 𝑪𝒐𝒏𝒗𝒆𝒓𝒔𝒊𝒐𝒏 𝑪𝒚𝒄𝒍𝒆 = 𝑨𝑪𝑷 + 𝑰𝑪𝑷 − 𝑨𝑷𝑷
Cash Conversion Cycle (CCC)
• The average number of days it takes for a company to
collect payments from its customers.
• 𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑪𝒐𝒍𝒍𝒆𝒄𝒕𝒊𝒐𝒏 𝑷𝒆𝒓𝒊𝒐𝒅 =
𝑨𝒄𝒄𝒐𝒖𝒏𝒕 𝒓𝒆𝒄𝒆𝒊𝒗𝒂𝒃𝒍𝒆
𝑵𝒆𝒕 𝑺𝒂𝒍𝒆𝒔
𝑿 𝟑𝟔𝟓
Average Collection Period (ACP)
• The average number of days it takes for a company to
pay its suppliers or creditors.
• 𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑷𝒂𝒚𝒎𝒆𝒏𝒕 𝑷𝒆𝒓𝒊𝒐𝒅 =
𝑨𝒄𝒄𝒐𝒖𝒏𝒕𝒔 𝑷𝒂𝒚𝒂𝒃𝒍𝒆
𝑷𝒖𝒓𝒄𝒉𝒂𝒔𝒆
𝑿 𝟑𝟔𝟓
Average Payment Period (APP)
• The average time it takes for a company to convert its
inventory into sales.
• 𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚 𝑪𝒐𝒏𝒗𝒆𝒓𝒔𝒊𝒐𝒏 𝑷𝒆𝒓𝒊𝒐𝒅 =
𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚
𝑪𝒐𝒔𝒕 𝒐𝒇 𝑮𝒐𝒐𝒅𝒔 𝑺𝒐𝒍𝒅
× 𝟑𝟔𝟓
Inventory Conversion Period (ICP)
• A financial ratio that measures the profitability of a
company in relation to the equity invested by its
shareholders.
• 𝑹𝑶𝑬 =
𝑵𝒆𝒕 𝑰𝒏𝒄𝒐𝒎𝒆
𝑺𝒉𝒂𝒓𝒆 𝑯𝒐𝒍𝒅𝒆𝒓′𝒔 𝑬𝒒𝒖𝒊𝒕𝒚
× 𝟏𝟎𝟎
Return on Equity (ROE)

ASSOCIATION BETWEEN
ACP and ROE
• (Bagh et at., 2016) studied the impact of working capital management on
firm’s financial performance for 50 manufacturing firms listed on the
Karachi Stock Exchange (KSE) using return on equity of profitability
and average collection period measure of working capital management
during 2005 - 2014. They found a positive relation between ACP
measures and ROE.
• (Riaz et at., 2019) used a non-probability convenience sampling model
to analyze data from sampled of five years (2010 - 2014). The findings
from the study reveal a negative relationship between the average
collection period (ACP) and return on equity (ROE).

ASSOCIATION BETWEEN
ICP and ROE
• (Khan et at., 2020) conducted a study in Pakistan. The purpose of the
study was to examine the relationship between the core components of
working capital management with the profitability of the Telecom
Sector. The sample was taken from 5 Telecom companies for the period
2013 to 2017. The firm’s ICP is proven to have a negative relationship
with the ROE.
• (Hossain, 2020) studied 126 companies listed with Dhaka Stock
Exchange (DSE) from 2012 – 2017. They used ICP as the measure of
working capital management and profitability ROE respectively and
concluded that there exists a significant positive relationship between
ICP and ROE.

ASSOCIATION BETWEEN
APP and ROE
• (Riaz et at., 2019) studied the association for 30 companies enlisted
KMI-30 Index for 2010 – 2014 and concluded a negative significant
relationship between the average payment period and profitability ROE.
• (Affoh, 2016) analyzed the association between the average collection
period and return on equity based on 3 Pharmaceutical companies
enlisted Ghana Stock Exchange (GSE) and 7 Pharmaceutical companies
are unlisted for the period of 2005 - 2015. It found a significant positive
relationship between average payment period, and profitability i.e.,
return on equity (ROE).

ASSOCIATION BETWEEN
CCC and ROE
• (Chaudhry et al., 2018) conducted a study on the impact of working
capital management on the profitability of 12 pharmaceutical companies
listed in the Dhaka Stock Exchange (DSE) over 15 years (2001 - 2015)
and found that working capital management proxies CCC were
positively influenced by the proxy of profitability ROE.
• (Bagh et at., 2016) examined the impact of working capital management
on a firm’s financial performance of manufacturing firms listed on the
Karachi Stock Exchange (KSE). The study sampled 50 manufacturing
companies for 10 years period (2005 - 2014). The results showed that the
Cash conversion cycle was negatively related to return on equity.

Conceptual Model
Working Capital Management
ACP
APP
ICP
CCC
Profitability
ROE
Dependent Variables
Independent Variables

Empirical Model
• This research endeavors to understand the correlation between working capital management and the financial performance of pharmaceutical
companies in Pakistan. To achieve this goal, an empirical model is employed that utilizes the following equation:
• ROEit = α𝟎 + α1 (ACPit) + α2 (ICPit) + α3 (APPit) + α4 (CCCit) + 𝜺it
• Where:
• ROEit Represents the return on equity as the dependent variable, which is used as a measure of the profitability of the company.
• α0 Represents the constant of the model.
• ACPit Represents the average collection period as an independent variable.
• ICPit Represents the inventory conversion period as an independent variable.
• APPit Represents the average payment period as an independent variable.
• CCCit Represents the cash conversion cycle as an independent variable.
• α1, α2, α3, α4 Represent the coefficients of the independent variables.
• 𝜺it Represents the error term.
• This model helps us to understand the effect of different aspects of working capital management on the profitability of the firms in the
pharmaceutical sector.

H1 There is a significant negative impact of ACP on the ROE of the Pharmaceutical Industries of Pakistan.
H2 There is a significant negative impact of ICP on the ROE of the Pharmaceutical Industries of Pakistan.
H3 There is a significant positive impact of APP on the ROE of Pharmaceutical Industries of Pakistan.
H4 There is a significant positive impact of CCC on the ROE of the Pharmaceutical Industries of Pakistan.
Hypothesis

METHODOLOGY
Research
Design
Sample
Size
Statistical
Tools
Software

Research Design
This study delved into the correlation between four key aspects of working capital
management, namely, Average Payment Period, Inventory Conversion Period, Average
Collection Period and Cash Conversion Cycle, and their impact on the profitability (Return
on Equity) of Pharmaceutical firms in Pakistan. The research design was quantitative and
aimed to establish a causal relationship between the two variables.
Sample Size
 This study looks at the financial results of 11 pharmaceutical companies that are listed on
the Pakistan Stock Exchange (PSX) over a five-year period from 2017 to 2021.

Statistical Tools
In previous studies, various descriptive statistical techniques such as measures of central tendency and
dispersion were utilized to analyze the data. In this study, however, a Hausman specification test was
conducted to determine the most appropriate model for examining the data. The results of this test led
to the selection of the panel data regression model as the tool for analyzing the data. This model is
used to examine the correlation between working capital management and profitability of
pharmaceutical companies in Pakistan, by taking into account the panel data structure of the sample.
The panel data regression model allows for a more comprehensive analysis of the data by considering
both the within-firm and the between-firm variations..
Software
 In this research thesis Eviews 9 was used.

RESULTS
Result Table 1 Table 2 Table 3 Table 4 Table 5

Result
Dependent
Variable:
ROE
Method: Panel Least Squares
Date: 12/29/22 Time: 05:03
Sample: 2017 2021
R-squared 0.182927 Mean dependent var 0.082909
Adjusted R-squared 0.117561 S.D. dependent var 0.047010
F-statistic 2.798514 Durbin-Watson stat 0.700024
Prob(F-statistic) 0.035696
Variable Coefficient Std. Error t-Statistic Prob.
C 0.060525 0.045415 1.332691 0.1887
ACP -0.019468 0.009067 -2.147063 0.0367
ICP -0.018440 0.009167 -2.011479 0.0497
APP 0.019058 0.009106 2.092996 0.0414
CCC 0.018868 0.009075 2.079046 0.0428
Periods included: 5
Cross-sections included: 11
Total panel (balanced)
observations:
55
• The results of the analysis show that there is a statistically significant relationship
between the dependent variable, profitability as measured by return on equity (ROE),
and the independent variables, which are proxies for working capital management
(ACP, ICP, APP, and CCC). The correlation between ACP and ROE is negative,
meaning that an increase in ACP (average collection period) leads to a decrease in
ROE, while the correlation between ICP (inventory conversion period) and ROE is also
negative. On the other hand, the correlation between APP (accounts payable period)
and ROE is positive, meaning that an increase in APP leads to an increase in ROE. The
same is true for the correlation between CCC (cash conversion cycle) and ROE. The p-
values for all of these correlations are less than 0.05, indicating that they are
statistically significant.
• The R-squared value of the model indicates that the independent variables are able
to explain 18% of the variation in ROE, while the adjusted R-squared value shows that
they cumulatively explain 12% of the variation in ROE. The probability of the F-
statistic is less than 0.05, indicating that the combined effect of the model is significant.
The F-statistic itself has a value of 2.79, indicating that the regression explains a
significant proportion of the variation in ROE.
• The Durbin-Watson statistic shows that the data set is positively correlated,
indicating that there is a positive relationship between the variables.
• These findings are based on a sample of 11 pharmaceutical manufacturing
companies in Pakistan, with 55 observations over a five-year period from 2017 to 2021.

• Table 1 illustrates that the mean value, which reflects the central tendency of the data, is .0130000. The range of the data, or the difference
between the highest and lowest values, is .060000 to .210000, and the standard deviation, a measure of how spread out the data is, is .031798.
The skewness of the data, or the degree to which it is asymmetrical, is .275531, which is greater than zero, indicating that the data is positively
skewed. The kurtosis, or the degree to which the data is peaked, is 3.04310, meaning that the distribution of the data is leptokurtic, or more
peaked than a normal distribution.
Table 1
0
2
4
6
8
10
12
14
0.06 0.08 0.10 0.12 0.14 0.16 0.18 0.20 0.22
Series: ROE
Sample 2017 2021
Observations 55
Mean 0.130000
Median 0.120000
Maximum 0.210000
Minimum 0.060000
Std. Dev. 0.031798
Skewness 0.275531
Kurtosis 3.043010
Jarque-Bera 0.700149
Probability 0.704636

• Table 2 indicates that, on average, it takes approximately 39 days for companies in the sample to collect cash from their customers for sales.
The standard deviation in the average collection period (ACP) is approximately 20 days, and the maximum number of days taken by any
company in the sample to collect its receivables is 86 days. The skewness of the data, or the degree to which it is asymmetrical, is .404273,
which is greater than zero, indicating that the data is positively skewed. The kurtosis, or the degree to which the data is peaked, is 2.123151,
meaning that the distribution of the data is platykurtic , or less than a normal distribution.
Table 2
0
2
4
6
8
10
12
10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90
Series: ACP
Sample 2017 2021
Observations 55
Mean 39.25455
Median 37.00000
Maximum 86.00000
Minimum 12.00000
Std. Dev. 20.22578
Skewness 0.404273
Kurtosis 2.123151

• Table 3 shows that, on average, it takes approximately 70 days for the companies in the sample to sell their inventory. The standard deviation
in the inventory conversion period (ICP) is approximately 14 days, and the maximum number of days taken to sell inventory is 99 days. The
skewness of the data, or the degree to which it is asymmetrical, is -0.047052, which is less than zero, indicating that the data is negatively
skewed. The kurtosis, or the degree to which the data is peaked, is 2.234602, meaning that the distribution of the data is platykurtic , or less than
a normal distribution.
Table 3
0
1
2
3
4
5
6
7
50 60 70 80 90 100
Series: ICP
Sample 2017 2021
Observations 55
Mean 69.72727
Median 68.00000
Maximum 99.00000
Minimum 45.00000
Std. Dev. 13.89038
Skewness -0.047052
Kurtosis 2.234602

• Therefore, the mean number of days to pay bills (or the accounts payable period) would be approximately 75 days, as indicated by the mean
of the data in Table 4. The standard deviation would still be approximately 11 days, and the maximum number of days it takes the company to
pay its bills would be 96 days.
• The skewness of the data would still be negative, as indicated by a value less than zero (-0.376310). This indicates that the distribution of the
data is skewed to the right, with a long right tail.
• The kurtosis of the data would still be platykurtic , with a value of 2.622061. This indicates that the distribution is more peaked than a
normal distribution, with a higher concentration of values near the mean.
• Overall, this information suggests that it takes the company approximately 75 days, on average, to pay its bills, with a standard deviation of
11 days. The company has a maximum payment period of 96 days, and the distribution of payment periods is skewed to the right and less than a
normal distribution.
Table 4
0
1
2
3
4
5
6
7
8
9
45 50 55 60 65 70 75 80 85 90 95
Series: APP
Sample 2017 2021
Observations 55
Mean 75.47273
Median 78.00000
Maximum 96.00000
Minimum 46.00000
Std. Dev. 10.91865
Skewness -0.376310
Kurtosis 2.622061

• Table 5 reveals that, on average, it takes approximately 34 days for the companies in the sample to complete the cash conversion cycle,
which includes the time it takes to collect cash from customers for sales, sell inventory, and pay off debts. The standard deviation in the cash
conversion cycle (CCC) is approximately 20 days, and the maximum number of days taken to complete the cycle is 85 days. The skewness of
the data, or the degree to which it is asymmetrical, is 0.304348, which is greater than zero, indicating that the data is positively skewed. The
kurtosis, or the degree to which the data is peaked, is 2.864222, meaning that the distribution of the data is platykurtic , or less than a normal
distribution.
Table 5
0
2
4
6
8
10
0 10 20 30 40 50 60 70 80 90
Series: CCC
Sample 2017 2021
Observations 55
Mean 33.60000
Median 36.00000
Maximum 85.00000
Minimum -2.000000
Std. Dev. 19.93285
Skewness 0.304348
Kurtosis 2.864222

CONCLUSION AND RECOMMENDATION
Conclusion Recommendation Future Gap

• The aim of the current study is to provide empirical evidence regarding the impact of working capital management on the profitability of
pharmaceutical firms in Pakistan. The study included a sample of 11 pharmaceutical firms listed on the Pakistan Stock Exchange for a five-year
period (2017-2021). The proxies used for working capital management were the average collection period, average payment period, inventory
conversion period, and cash conversion cycle. Return on equity was used as a measure of profitability. The results of the study revealed an
significant negative relationship between the average collection period and inventory conversion period on return on equity, indicating that
profitability increases when these periods decrease. These findings are consistent with previous studies by Riaz et al. (2019), Affoh (2016),
Asiedu et al. (2018), and Khan et al. (2020), but inconsistent with studies by Bagh et al. (2016), Shah et al. (2018), and Hossain (2020).
Conversely, a positive and significant relationship was observed between the average payment period and cash conversion cycle on return on
equity, suggesting that profitability increases with an increase in these periods. These findings are consistent with previous studies by Chaudhry
et al. (2018), Shah et al. (2018), and Le et al. (2018), but inconsistent with studies by Hossain (2020), Riaz et al. (2019), Hussain et al. (2019),
Bagh et al. (2016), and Khan et al. (2020).
Conclusion
HYPOTHESIS RESULTS
H1 There is a significant negative impact of ACP on the ROE. ACCEPT
H2 There is a significant negative impact of ICP on the ROE . ACCEPT
H3 There is a significant positive impact of APP on the ROE ACCEPT
H4 There is a significant positive impact of CCC on the ROE. ACCEPT

• Based on the findings of this study, it is suggested that managers of the pharmaceutical firms in Pakistan should focus on improving their
average payment period and cash conversion cycle in order to enhance profitability. Additionally, it is suggested that future research should be
conducted to further examine the relationship between working capital management and profitability in the pharmaceutical industry in Pakistan
and to explore other potential drivers of profitability in this sector.
Future Gap
Recommendation
• In Pakistan, there is ample room for improvement in the realm of working capital management and its impact on firms' profitability. Future
studies may delve deeper into this topic by expanding the sample size of firms, increasing the number of years studied, and incorporating a
wider range of variables to yield more comprehensive results. Furthermore, for the effective management of working capital, it may be
beneficial for manufacturing firms to seek the expertise of experienced and proficient professionals to provide valuable guidance.

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