Impact of working capital on profitability of telecom sector in pakistan final-pdf

IMPACT OF WORKING CAPITAL MANAGEMENT ON PROFITABILITY OF
TELECOM SECTOR IN PAKISTAN
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Impact of Working Capital Management on
Profitability of Telecom Sector in Pakistan
Thesis Submitted to the
National College Of Business Administration & Economics
Lahore
In partial fulfillment of the Requirements for the degree of
MASTERS IN COMMERCE
(Accounting and Finance)
Submitted By:
USMAN NAZIR
MCMSP14-01
Session 2014 – 2016
Project Supervisor
PROF. ABBAS ZAIDI
FACULTY OF COMMERCE
NATIONAL COLLEGE OF BUSINESS ADMINISTRATION & ECONOMICS
178-A, Abu Bakar Block, Garden Town, Lahore, Pakistan

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APPROVAL CERTIFICATE
I Usman Nazir, M.Com (Accounting & Finance) Student, Roll No. MCMSP14-01,
National College of Business Administration and Economics West Canal Campus, hereby
solemnly declare that this thesis titled “Impact of Working Capital Management on
Profitability of Telecom Sector in Pakistan” submitted by me in partial fulfillment of the
requirement for the award of degree M.Com (Accounting & Finance) is my own original research
work.
------------------------------------- -----------------------------------
Prof. Abbas Zaidi Prof. Zaman Haider
Supervisor HOD

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DECLARATION
I Usman Nazir Roll No. MCMSP14-01, Student of Masters of Commerce, hereby declare
that the matter printed in the project titled “Impact of Working Capital Management on
Profitability of Telecom Sector in Pakistan” is my own work and has not been printed, published
and submitted as research work in any form in any University, Research Institute etc., it has been
properly acknowledged to the original author.
Date: Signature of Student: _____________________
Name of Student: Usman Nazir
Registration Number: MCMSP14-01

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DEDICATION
To
My
Family
ACKNOWLEDGEMENTS
In the name of Allah Almighty the most Gracious, the most Merciful, the most Beneficent
and the most Bounteous.
His command is only when He intends a thing that He says to it, “Be,” and it is.
(Surah Ya-Sin Verse # 082)
All praise to Almighty Allah alone, the Omnipresent and the most Merciful and compassionate.
The words are bound, knowledge is limited and time is short to express His dignity.
I am very thankful to ALLAH who gave countless blessing. He is the only Master of whole
universe and the Day of Judgment.
Firstly, I am very thankful to my parents for their continuous support in my whole life and my
friends for guides me.
Secondly, I would like to thanks to all teachers and especially to the most honorable and
knowledgeable teacher and supervisor Prof. Abbas Zaidi who guide me in the right direction and
taught me how to present and write report in best pattern. He always there when I have any question
related to project. He always replies quickly to emails and it saves my time. He is very courteous
and cooperating.
NAME OF STUDENT: -----------------------------------
SIGNATURE: -----------------------------------
DATE: -----------------------------------

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Abstract
A secondary data was conducted to know the Impact of Working Capital Management on
Profitability of Telecom Sector in Pakistan. This study explores the impact of working capital
management on the profitability of the firm in the telecom sector of Pakistan. For the purpose of
testing this relationship data from the annual reports of the sample companies is used from the
period 2011 to 2015. Working capital to the company is like the blood to human body. If it is
carried out effectively, efficiently and consistently, that will assure the health of an organization.
The purpose of this research is to contribute towards a very important aspect of financial
management known as working capital management with reference to Pakistan.
Here the relationship between working capital management Practices and its effects on
profitability of Telecom Sector in Pakistan and reports collected from Lahore stock Exchange for
a period of five years from 2011-2015.The profitability measures are the dependent variables and
working capital management measures are the independent variables.
In Pakistan all telecommunication companies provides standardize telecommunications
services in which include high speed internet with modern technologies like 3g , 4g and land line
telephone services.
For the purpose of analysis the performance of telecom companies, profitability ratio are
used, analysis of five years started from 2011 to 2015 was conducted and data received from
different website, books, research articles, and other sources which are necessary for analysis.
After doing data analysis result were inserted. Conclusion was drowning on the basis of result.
Key words: Working Capital Management, Profitability.

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Tables of Contents
Chapter No. 1 ----------------------------------------------------------------------------------- 8
1.1 What is Working Capital Management--------------------------------------------------- 8
1.2 What is Telecommunication--------------------------------------------------------------- 11
1.3 Brief History of telecommunication in world-------------------------------------------- 11
1.4 Brief History of telecommunication in Pakistan----------------------------------------- 14
1.5 Pakistan Telegraph and Post---------------------------------------------------------------- 14
1.6 Pakistan Telegraph and Telephone--------------------------------------------------------- 14
1.7 Different Companies in Pakistan of Telecom Sector------------------------------------- 15
1.8 Telecom Sector Growth Rate---------------------------------------------------------------- 15
1.9 Objective of the Study------------------------------------------------------------------------ 16
1.9.1 Primary Objective-------------------------------------------------------------------16
1.9.2 Secondary Objectives---------------------------------------------------------------16
2.0 Limitations of the Study---------------------------------------------------------------------- 17
CHAPTER NO.2
2.1 Literature Review------------------------------------------------------------------------------ 18
CHAPTER NO.3
2.2 Methodology ----------------------------------------------------------------------------------- 21
2.2.1 Conceptual Model------------------------------------------------------------------ 21
2.2.2 Data Collection--------------------------------------------------------------------- 21
2.2.3 Research Sample------------------------------------------------------------------- 21
2.2.4 Research Hypothesis-------------------------------------------------------------- 22
2.2.5 Results and Analysis-------------------------------------------------------------- 22

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2.3 What Is Ratio----------------------------------------------------------------------------------22
2.4 What Is Profitability Ratio-------------------------------------------------------------------23
2.5 Types of Profitability Ratio-------------------------------------------------------------------23
2.5.1 Gross Profit to Sale Ratio -------------------------------------------------------- 24
2.5.2 Net Profit after Tax to Sales ----------------------------------------------------- 24
2.5.3 Earnings before interest and tax and depreciation to sale ratio-------------- 24
2.5.4 Operating leverage ratio---------------------------------------------------------- 25
2.5.5 Return of equity ratio------------------------------------------------------------- 25
2.5.6 Return on capital employed ratio----------------------------------------------- 25
2.6 Impact of Working Capital Management on Profitability of Telecom Sector-------26
2.6.1 Profitability analysis of world call limited------------------------------------27
2.6.2 Profitability analysis of Pakistan Telecommunication Company limited---32
2.6.3 Profitability analysis of water telecom Limited’s----------------------------- 38
CHAPTER NO.4
2.7 Conclusion-------------------------------------------------------------------------------------- 45
CHAPTER NO.5
2.8 Bibliography------------------------------------------------------------------------------------ 47

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1.1 CHAPTER NO. 1
INTRODUCTION
Working Capital Management:-
(Hill, 1993) The goal of working capital management is to ensure that a firm is able to
continue its operations and that it has sufficient ability to satisfy both maturing short-term debt and
upcoming operational expenses. The management of working capital involves managing
inventories, accounts receivable and payable, and cash”.
(Gitman, 1996) Working Capital mainly represents the current assets of a firm which is
the portion of financial resources of business that changes from one type of resources to another
during the day-to-day execution of business. Current assets mainly comprise of cash, prepaid
expenses, short-term investments, accounts receivable, inventory and other current assets. Net
working capital can be measured by deducting current liabilities of a firm from its current assets.
If the value of current assets is less than that of current liabilities then net working capital would
have a negative value showing a deficit working capital. When a business entity takes the decisions
regarding its current assets and current liabilities then it can be termed as working capital
management. The management of working capital can be defined as an accounting approach that
emphasize on maintaining proper levels of both current assets and current liabilities. It provides
enough cash to meet the short-term obligations of a firm.
(Shah, 1998) If there will be an unjustifiable over investment in current assets then this
would negatively affect the rate of return on investment. The basic purpose of managing working
capital is controlling of current financial resources of a firm in such a way that a balance is created
between profitability of the firm and risk associated with that profitability (Vito, 2000).

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Every business requires working capital for its survival. Working capital is a vital part of
business investment which is essential for continuous business operations. It is required by a firm
to maintain its liquidity, solvency and profitability (Mukhody, 2001). The importance of
managing working capital of a business efficiently cannot be denied.
Working Capital management explicitly impacts both the profitability and level of desired
liquidity of a business (Nasr, 2003). If a company will invest heavily in working capital i.e. more
than its needs, then the profits which can be generated by investing these resources in fixed or long
term assets will be diminished. Moreover the company will have to endure the cost of storing
inventory for longer periods as well as the cost of handling excessive inventory (Arnalt, 2005).
On the other hand, if a firm will invest heavily in fixed assets to generate profits by
neglecting its short-term capital needs then it is quite possible that it may have to face bankruptcy
because of insufficient funds. The profitability as well as adequate level of liquidity is required to
be maintained for the survival of business, so if a firm will not pay sufficient attention to its
working capital management, then it is quite possible that the firm would have to face bankruptcy
(Blumenthal, 2007). Shortage of working capital is normally attributed as a major cause of failure
of many small businesses in various developing and developed countries.
(Rafuse, 2007) Effective management of working capital consists of two steps which are
planning for resources and controlling them. Both of these are required to facilitate the firm in
meeting its short term obligations and also to let the firm avoid wastage of resources by over
investment in current assets. (Eljelly, 2009) Effective management of working capital decreases
the need for lending funds to pay back the short term debts of the firm.

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There are different approaches for the management of working capital. Two basic policies
of working capital management are namely aggressive working capital management policy and
conservative working capital management policy. (Krueger, 2012) An aggressive investment
policy with high levels of fixed assets and low investment in current assets may generate more
profits for a firm. On the other hand it also a companies a risk of insufficient funds for daily
operations and for payment of short term debts. A conservative investment policy is opposite to it
with less investment in fixed assets and more in current assets. For financing of working capital
aggressive policy implies that current liabilities are maintained in a greater portion as compared to
long-term debts. High level of current liabilities requires more resources to be in liquid form to
pay back debts earlier. But current payouts bear less rate of interest and hence can cause more
savings. In conservative working capital financing policy a greater portion of long-term debts is
used in contrast to current liabilities.
(Jack, 2014) Working Capital Management is an important component of Corporate
Financial Management. It is the relationship between current assets and current liabilities.
Management of working capital is important to carry the routine activities of a firm. The objective
behind working capital management is to ensure continuity in the operations of a firm and that it
has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses.
It mainly involves management of inventories, accounts receivables, accounts payables and cash.
The basic theme of working capital management is to provide adequate support for smooth
and efficient functioning of day to day business operations by striking a trade between the three
proportions of working capital. They are liquidity, profitability and risk. In the present
environment of cut throat competition, business does not have any other alternative, than cutting
the cost of its operations in order to be competitive as well as financially strong. It is in this
connection that effective management of working capital plays a vital role.

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1.2 What is telecommunication:-
Telecommunication means that transfer information from one place to another place by
different using ways. A proper telecommunication use by two stations one is called receiver and
another is called Transmitter. These such devices are include in telecommunication, telegraph,
radio, microwave, telephone communications consist of internet, and fiber optic satellite internet
are another names of Telecommunication in telecom.
1.3 History of Telecommunication in world:-
The word telecommunication is formed from Greeks word which means exchange of
information at distance by the different nature of signal coming from different apparatuses called
transmitter apparatuses called transmitter and receiver. For the purpose to get done better and good
at producing an effect news then select accurate middle of give property in law signals because the
signal play very important part in getting moved from one position to another information from
one place to another place.
In the past the, the careful way use for producing signal would be light fires sound from
different kind of drums and horns. These signals did not send note and unsafe and not right way
for get moved from one position to another tightly information on a greatly sized scale. The
invention of electricity made telecommunication better. By the use of electromagnetic forces made
an able get moved from one position to another of information in tightly equal to the rate of motion
of light. The of-the-day news starts from the invention of electricity in (1800). The first test on
advance news right start 1809, Thomas summering got ready a telegraphic network keep (self,
thoughts) in order, under control of an apparatus for producing electric current, 35 wire every letter
and every number made a trading group that have a feeling make of gold which were mixed in a
common place. When a signal going from one way to another way, the electrics current would

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broke into bits in common place then the little oxygen liquid balls with air inside would be make
clear to with the sensor.
The next step was taken in 1843 when Samuel Morse got ready a way to give each letter
number form, line, points. This idea gives simple, not hard way in and more cheap summering
views, in the condition to get changed to other form way taken by electric current or light or any
more wire as well as advance technology is able to one who changed beliefs that signal into some
graphic signal both special signs were the Major factor of the Morse good outcome which are using
today. The further forward development of undergoing growth and getting (making) better system
in the supporters year by Hughes, bidet, gray (1879) who undergone growth other Reasonable
codes (is put into signs as today in act industry and barcodes technology). only some few people
after that all the main try to made machine that get moved from one position to another information
and sounds, not only signals.
The first invention was transducers which could change a with sound to an electric one like
receiver and instrument for changing sound to electric and missed some information in 1850. After
seven year Antonio MEUCCI and graham bell both invent a first thing of-the-day telephone sound
machine. At this time MEUCCI have not money to present his invention (which price 250 dollars
at this time) bell has money and he Registers it first. Together network telephone and telegraph,
they have need of moved round and able to be dependent on news system clear quickly. Direction
having experience were new means of man's telecommunication operation which also join
electricity news after that network were discovered which are called PSTN, but network not make
ready the safety of discussion and attempt to make new unbroken bands over wheels for moving
over rough earth of news. ALMON STROWER were discovered a mechanism apparatus called
selector through this apparatus signal going to telephone line of work apparatus, signal got through
different area based. Some other invention in the direction of GUGLIELMO of new telephone

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which used without wired Value amplified got ready his first farm in 1920. Television was started
in 1923. Transistors change the field of telecommunication in 1947. The got mixed together way
taken by electric current was started in1958. The invention of the small computer was made 1969.
After the invention of small computer electronic play important part in the earth of
exchange. After the invention of (ENIAC) electronic and number got mixed together start the age
of information and of-the-day telecommunication. This made possible to give property in law facts
from one place to another place with high rate of motion. In 1938 the inventions of microelectronic
made the telecommunication network more advance and different telecommunication techniques
which did according to the network. This technology, called PCM (blood pumped by heart code
modulation). In this technology by numbers, electronic sending (power and so on) used which give
property in law voice signal and encoding and putting clear in the united states first country in
PCM in 1962.
An us air force Corporation employees working on Issue in news part. They make come
into existence an idea of small parcel electric apparatus system except the old ideas of the electric
news system. In harmony with to this system they made some hard growth which hare 2 part one,
a header has in it information other is a body which take true facts. Then ARPANET uses the for
the purpose of a military part out in 1983. This is the old form of internet. ARPANET uses in
different universities for make observations purpose with the mix of the NSFNET (person science
start net) which complete form of the internet.

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1.4 History of telecom in Pakistan:-
The idea of telecommunication in is Pakistan very old. The history of telecommunication
start before the T division of subcontinent. This divisions of an organization works under the Indian
post and telegraph industry by good
1.5 Pakistan Telegraph and Post:-
Pakistan post and telegraph When Pakistan came into existence there is one divisions of an
organization which provides telecommunication services in Pakistan is named Pakistan post and
telegraph. These departments start their work with 12346 telephone lines and seven telegraph
offices in different area of Pakistan. All telephone facilities work on done with the hands base at
this time. Pakistan post and telegraph start their business in 1962. The government of Pakistan
follows the same roles which are implementing Indian government to act of 188of
telecommunication.
1.6 Pakistan Telegraph and Telephone:-
Pakistan telephone and telegraph the government of Pakistan made some changes in
telecommunication parts in 1962. When head of government AYYUB ruler from middle Asia
comes to a decision telephone and telegraph a separate divisions of an organization's work
according to presidential act. This divisions of an organization did under Civil services and chief
government offices. The (PT&T) part was control of person in control general. All the part decision
made according to Consent of person in control general, some power give to general manager and
chief engineers. These help were given a go to person in authority to person in control general.
Only top level decision making of (PT&T) cause of inefficiency and not right putting into effect
of decision. Then start of PTCL employees work in (PT&T) was 45686 which grip 922, 000.

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1.7 Telecommunications Companies of Pakistan:-
o PTCL
o Wateen telecom Limited
o World call telecom Limited
1.8 Telecom Sector Growth Rate:-
Growth Rate of The company has made monies put into business more than 12 million in
getting ready their network system and different part out according to of money and goods
overview of Pakistan 2011-2012. The monies put into business of telecom part in the readily
moved market is 495.8 million which Major something given is.
In 2011 the something given of telecom part in growth 3.5. Telecom divisions of an
organization is the highest growth rate in 2010, 117 1.000.000.000 in which send in (writing) all
the telecom company of Pakistan. in harmony with two of money and goods overview of Pakistan
the FDI Total an outer covering in the telecom part of Pakistan more than 30% of the Total of FDI
monies put into business in Pakistan last 6 year. In 2011 the Total FDI in Pakistan telecom part 79
million which is only 5% of the FDI Pakistan in 2010 and 2011.the formed of small units industry
of Pakistan makes their growth rate 2 times according to the earlier year. At the meeting of the
complete information of money and goods open meeting place our country get 1 no position in
technology and the internet. The Total readily moved user in Pakistan at the end of 2011-2011 is
118.3 million. After putting into use for first time new technology in Pakistan which name is 3g
technology there is an increase in monies put into business of telecom part of Pakistan and takes
more Capital to the telecom market.

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The telecommunication company of Pakistan provides telephone Services, sending word
and facts and amusement services to their persons getting goods from store. Needing payment to
high rates of profitability and rod of wood in growth in this part has become the integral part of
the interests, money, goods of Pakistan. Its lift many chances for given work person because it
produces income very quickly. Today Pakistan is one of country of earth who most forward
development in the telecom part by making ready best and tightly telecommunication Services. In
harmony with to make observations in 2013 of the Atta telecom part of Pakistan growing by 50%
and next 3 year it will be increased by the opening of 3g technologies.
1.9 Objective of the Study:-
The main objective of this study is to establish the relationship between two objectives of
the liquidity and profitability of the firm and also to investigate the relation between profitability
of the firm and working capital management.
1.9.1 Primary Objective:-
 To identify the impact of working capital management on profitability
1.9.2 Secondary Objectives:-
 To carry adequate level of stocks and continue their activities by the firms.
 To determine the relationship between the current assets and current liabilities.
 To analyze the working capital of each industry organization.
 To identify the impact of the net working capital on firm’s profitability.
 To evaluate liquidity position of selected companies.

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2.0 Limitations of this study:-
The study is limited to five years data only, 2011-2015, based on secondary data and also
based on three companies related of telecom sector in Pakistan, therefore detailed analysis
covering short period. Which may give a little different results has not been made.

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2.1 CHAPTER 2
Literature Review
(Smith, 1980) Conducted a study that how working capital management impact on
profitability of telecom sector in Pakistan. Hence it can be explores that effective working capital
management can increase the financial strength of a business. (Soenen, 1993) Also performed an
analysis of working capital management and its relationship with financial performance. His study
was based on Pakistan telecom sector and after the study he suggested that if the length of net
trade cycle increases then it affects their turn on investment negatively.
The working capital management is regarded as an essential part of financial management
of a firm (Joshi, 1995). (Lamberson, 2000) Observed the impact of economic activity on the
Working Capital Management Policy. (Stevens, 2004) Carried out a detailed analysis on the
association of cash conversion cycle and financial returns. The study of S.M. Amir Shah and
Sana (2006) was based on a period of five years i.e. 2011-2015. They used working capital ratios
to determine the effect of working capital management on financial performance.
(Ganesan, 2007) Conducted a study on Telecommunication sector the time period of this
study was 5 years i.e.2011-2015. He declared that in this industry effective working capital
management and financial performance do not have any significant inverse relationship with each
other. He also indicated that there exists a strong and inverse association between financial
performance and liquidity.
(Ganesan V. &., 2007) Found that the working capital management efficiency is
negatively associated to the profitability and liquidity. When the working capital management
efficiency is improved by decreasing days of working capital, there is improvement in profitability

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of the firms in telecommunication firms in terms of profit margin. Patrick Buchman and Undo
(Jung, 2009) Observed that applying best practices of working capital management also means
applying value-oriented management of tradeoffs between NWC and fixed assets, and between
NWC and costs. The isolated treatment of individual levers has its boundaries and, therefore, all
elements of tied-up capital across the balance sheet (fixed assets, inventories, receivables,
payables, and cash) have to be considered as a whole.
(Asress, 2010) Concluded that firms which have adequate working capital in relation to
their operational size are performed better than those firms which have less than the required
working capital in relation to their operational size. If firms actual working capital is below the
required working capital in relation to their operational size, firms are forced to produce below
their optimal scale and this create problem to run day to day activities smoothly, so this lead firms
to generate low return on their investment.
(Magpayp, 2011) highlighted the importance of working capital management and
financial leverage on the firms’ financial performance is emphasized in this study to bring attention
of business leaders to the obvious but is often neglected. The next step is to look into the best
practices of top performing companies. What working capital management strategies may be
implemented to minimize investment in current assets, at the same time maximize use of financial
leverage at the firm’s acceptable financial risk appetite and concluded that aggressive working
capital management policy reflected in low investments in current asset influences net income
positively.
(Marinez-Solano, 2011) Demonstrated in their study how managers can improve
profitability by shortening the cash conversion cycle through inventory reduction and reduction in
the outstanding number of day’s receivables. (Padachi, 2012)The different analyses have

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identified critical management practices and are expected to assist managers in identifying areas
where they might improve the financial performance of their operation. The results have provided
owner-managers with information regarding the basic financial management practices used by
their peers and their peers attitudes toward these practices.
(Deloof, 2013) Have found a strong significant relationship between the measures of
Working Capital Management and profitability. Their findings suggest that managers can increase
profitability by reducing the number of day’s accounts receivable and inventories. This is
particularly important for small growing firms who need to finance increasing amounts of debtors.
Bodla M.A (2014) the Cash Conversion Cycle and Net Trade Cycle offer easy and useful
way to check working capital management efficiency. For value creation of shareholders, firms
must try to keep these numbers of days to minimum level. (Nazir, 2014)They found a negative
relationship between the profitability measures of firms and degree of aggressiveness of working
capital investment and financing policies.
(Amarjit, 2010) The finding indicates that slow collection of accounts receivables is
correlated with low profitability. Managers can improve profitability by reducing the credit period
granted to their customers. Regarding the average days of accounts payable previous studies
reported negative correlation of this variable and the profitability of the firm. They found no
statistically significant relationship between these variables.(Appuhami, 2015)On the basis of the
findings of the research, it can be concluded that the listed companies in Thailand change their
working capital management policies based on many factors, such as capital expenditure,
operating cash flow, sales growth, etc. that companies manage working capital efficiently when
companies have growth opportunities so that they can meet required capital expenditure to expand
their business.

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2.2 CHAPTER No. 3
Methodology
What is Working Capital Management:-
“(Robert Alan Hill 1993) the goal of working capital management is to ensure that a firm
is able to continue its operations and that it has sufficient ability to satisfy both maturing short-
term debt and upcoming operational expenses. The management of working capital involves
managing inventories, accounts receivable and payable, and cash”.
Working Capital = Current Assets - Current Liabilities
2.2.1 Conceptual Model:-
2.2.2 Data Collection Method:-
Data Collection Method is important for every research and there are two types of data one is
primary data and second is secondary data. This study is carried out on secondary data and this
secondary data was collected on annual published reports, books and different articles.
2.2.3 Research Sample:-
According to this research, the companies are selected in Telecom sector,
1. PTCL
2. Wateen Limited
3. World Call Limited.

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2.2.4 Research Hypotheses:-
For this study, the following hypotheses were formulated.
H1:- There is a negative relationship between working capital management and profitability.
H2:- Working capital management has significant impact on profitability of the sectors.
2.2.5 Results and Analysis:-
Correlation and Regression Analysis
Here correlation analysis is made between net working capital and net profit.
Sector Correlation Regression
Telecommunication 0.768** 0.59
The telecommunication sector’s correlation is 0.768**. So, there is a strong positive
relationship between networking capital and net profit. So, we can say that this sector has adequate
working capital. It leads to higher profitability than other sectors, because there is a strong positive
relationship between networking capital and net profit.
2.3 What is Ratio?
In Ratio the quantitate relationship between two different amounts that means also the
divided the quantity and get result from one to another quantities and the ratio is simple formula
and method in accounting in which data are remain hidden but we getting the result by comparison
of values.
Profitability ratio
Liquidity ratio
Solvency ratio
Efficiency ratio

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2.4 What is Profitability Ratio?
In profitability measure we can calculate and measure the company’s profit and also
performance. Profitability is simple to make a profit of the company that a profit is what earned
and deducting by its all expenses and costs from its revenue in a specific period of time.
Profitability:-
(Pandey, 1997)In profitability analysis measures the company’s performance that
company currently and also in previous years doing in profit or loss by subtracting to all costs and
expenses which are used for generating profit from revenues. We can measure the company ability
that how’s the company generating profit to use expenses.
2.5 Types of Profitability Ratio:-
Gross profit to sale ratio
Net profit after tax to sale
Earnings before interest and tax and depreciation to sale
Operating leverage ratio
Return on equity after tax
Return on capital employed

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2.5.1 Gross Profit to Sale Ratio:-
In Gross profit to compute by divided the company gross profit to net sales. We can
calculate the profit of the regarding company in a specific period of time and also we can checked
the current year sales of the company.
Formula of gross profit to sales = × 100
2.5.2 Net Profit after Tax to Sales:-
In net profit after tax to sales is a percentage of net profit after tax to sales in which reals
the reaming profit of the company after deducting all expenses like cost of production financing
and administrating expenses from sale and net income tax recognize. Net profit after tax is might
be suitable for investors for their investment point of view, because it’s divining us actual earning
every year.
Formula of net profit after tax to sales = ×100
2.5.3 Earnings before interest and tax and depreciation to sale ratio:-
In EBITAD (Earnings before interest and tax and deprecation) is calculated to as revenue
subtracting from expenses, excluding tax, interest and depreciation, EBITAD to sales means that
calculate the profitability tools and financial tools are used in profit of the company against their
assets and also compare with company earnings. This tools showing the % of revenue of the
company after deducting from their operation expenses.
Formula of EBITDA to sales = ×100

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2.5.4 Operating leverage ratio:-
In Operating leverage is type of profitability ratio which shows the percentage
changes in EBIT over percentage changes in sales during financial year of the company and if a
company making few sales and high margin on it is said to be highly leverage. If a company have
their variable cost at higher level than its fixed cost then the company is said to be using less
operating leverage.
Formula of operating leverage= ×100
2.5.5 Return of equity ratio
In Return on equity ratio measures a company profit that how much profit
generates by the money of shareholder’s in a specific period of time and if the return of equity
ratio is less in existing year then it’s showing the less investment
Formula of the return to equity ratio = ×100
2.5.6 Return on capital employed ratio
In Return on capital employ emend indelicate that how much company using their
funds efficiently and effectively and it’s also measure earning per share or earning per investing
capital in current year and this ratio showing that the liabilities and assets their company according
to investors decisions. ROCE should be higher than the company earns more otherwise the
company not using efficiently and effectively to capital.
Formula of return of capital employed = ×100

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2.6 Impact of Working Capital Management on Profitability of Telecom Sector in Pakistan
Profitability analysis of world call limited
Profitability analysis of Pakistan telecommunication company limited
Profitability analysis of water telecom Limited’s

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2.6.1 Profitability analysis of world call limited
Gross Profit to Sale Ratio= ×100
Gross profit to sales ratio
Interpretation
the current year sales of the company. In 2011 gross profit of the company is 26.66% and in next
year 2012 company have less ratio 16.31 as compared to previous year and ahead in 2013 with
11.58 and in 2014 with 24.81 is high ratio but in 2015 ratio is 70.40 lowest from last year it means
that the company not using accurately their capital and not performing well.
-25
-20
-15
-10
-5
0
5
10
2011 2012 2013 2014 2015
Gross profit to sales
gross profit to sale
Year 2015 2014 2013 2012 2011
Ratio 7.40 24.84 11.58 16.31 26.66

Page | 28
Net Profit after Tax to Sales= ×100
Net profit after tax to sales
Year 2015 2014 2013 2012 2011
Ratio -23.17 3.62 -15.36 -5.21 -9.87
Interpretation
and administrating expenses from sale and net income tax recognize. By this data reals that
Telecom not performing well and also increasing their expenses like in 2011company no earn any
profit hence going to in loss with -9.87 and further in 2012 -5.21 and 2013 -15.21 but in 2014
company gets profit with 3.62 ratio and in next year 2015Telecomageing was going to loss with -
23.17 ratio.
-25
-20
-15
-10
-5
0
5
2011 2012 2013 2014 2015
Net Profit After Tax to Sale

Page | 29
Earnings before interest and tax and depreciation to sale ratio = ×100
EBITDA to sales
Year 2015 2014 2013 2012 2011
Ratio -20.14 6.59 -1.02 0.18 -10.12
Interpretation
subtracting from expenses, excluding tax, interest and depreciation, in 2011 company going to loss
-10.12 but in next year 2012 and 2014 company come better perform with 0.18 and 6.59 profit and
in 2015 again in loss -20.14 its mean that company not perform well their resources.
2011 2012 2013 2014 2015
EBITDA To Sales

Page | 30
Operating leverage ratio= ×100
Operating leverage
Year 2015 2014 2013 2012 2011
ratio 5.09 6.60 -7.75 30.71 8.35
Interpretation
In Operating leverage is type of profitability ratio which shows the percentage changes in
EBITover percentage changes in sales during financial year of the company and if a company
making few sales and high margin on it is said to be highly leverage. If a company have their
variable cost at higher level than its fixed cost then the company is said to be using less operating
leverage. In 2011operating profit 8.35%. In 2012 operating leverage is 30.17% which is highest in
last five year. there is loss in the company and operating leverage going to be in negative which is
-7.75% in 2013 there is loss in the company and operating leverage going in negative which is -
7.75% In 2015 the ratio operating leverage is 5.9% as compare to 2014 operating leverage is6.60
which is better than 2015.
-10
-5
0
5
10
15
20
25
30
35
2011 2012 2013 2014 2015
Operating leverage
operating leverage

Page | 31
Return of equity ratio= ×100
Return of equity ratio
Year 2015 2014 2013 2012 2011
Ratio -18.41 2.80 -11.22 -3.85 -2.61
Interpretation
In Return on equity ratio measures a company profit that how much profit generates
by the money of shareholder’s in a specific period of time and if the return of equity ratio
is less in existing year then it’s showing the less investment. In 2011, 2012, 2013 and 2015
is going to be in loss but the company just was making profit in 2014 with 2.80 ratio.
-20
-15
-10
-5
0
5
2011 2012 2013 2014 2015
Retun on equity after tax
retun on equity after tax

Page | 32
Return on capital employed ratio= ×100
Year 2015 2014 2013 2012 2011
Ratio -26.80 15.70 -15.81 1.31 -74.14
Interpretation
In Return on capital employ emend indelicate that how much company using their funds
efficiently and effectively and this ratio showing that the liabilities and assets their company
according to investors decisions. ROCE should be higher than the company earns more otherwise
the company not using efficiently and effectively to capital. In 2011 company bear a loss with -
74.14 and in 2012 company earns a profit some better as compare to previous year with 1.31 but
again in 2013 and 2015 company having facing loss.
-80
-70
-60
-50
-40
-30
-20
-10
0
10
20
30
2011 2012 2013 2014 2015
Retun on capital employed
retun on capital employed

Page | 33
2.6.2 Profitability analysis of PTCL
Year 2015 2014 2013 2012 2011
Ratio 34.82 34.75 33.08 36.30 43.70
Interpretation
the current year sales of the company.GP of the companywas with 43.70 in 2011 which increases
as compare to other years and in 2011 PTCL earn more profit.
0
10
20
30
40
50
2011 2012 2013 2014 2015
Gross profit to sales

Page | 34
Year 2015 2014 2013 2012 2011
ratio 10.6 8.22 16.25 15.44 4.25
Interpretation
and administrating expenses from sale and net income tax recognize. 2011 net profits which is
4.25%. The company profits in 2012 15.44% the maximum net profit after tax in five year of PTCL
in 2013 which is 16.25%. Net profit after tax of PTCL 2015 with 10.6% higher than 2014 net
profits with 8.22%.
0
2
4
6
8
10
12
14
16
18
2011 2012 2013 2014 2015
net profit after tax to sale

Page | 35
Earnings before interest and tax and depreciation to sale ratio= ×100
EBITDA to sales
Year 2015 2014 2013 2012 2011
ratio 18.24 18.09 25.68 25.35 24.67
Interpretation
subtracting from expenses, excluding tax, interest and depreciation, PTCL EBITDA in 2012was
with highest 25.35% that is more then 2011 with 24.67 and in 2013 with 25.68 to decreasing till
2015 with 18.24 ratio of PTCL company.
0
5
10
15
20
25
30
2011 2012 2013 2014 2015
EBITDA to sales
ebitda to sales

Page | 36
Operating leverage
Year 2015 2014 2013 2012 2011
ratio 1.09 0.47 0.63 0.74 0.81
Interpretation
leverage. The OLR of PTCL company was in 2015with 1.09% is highest in last five years and the
PTCL increases sale in 2015. As compare to last five years
0
0.2
0.4
0.6
0.8
1
1.2
2011 2012 2013 2014 2015
Operating leverage
operating leverage

Page | 37
Year 2015 2014 2013 2012 2011
Ratio 9.63 7.84 9.31 9.20 -2.88
Interpretation
In Return on equity ratio measures a company profit that how much profit generates
by the money of shareholder’s in a specific period of time and if the return of equity ratio
is less in existing year then it’s showing the less investment. PTCL was going in loss in
2011 with negative ratio -2.88 but in next year’s PTCL doing efforts to generate maximum
return and PTCL gain higher return in 2015 with 9.93 ratio.
-4
-2
0
2
4
6
8
10
12
2011 2012 2013 2014 2015
Return on equity afet tax
return on equity afet tax

Page | 38
Return of capital employed
Year 2015 2014 2013 2012 2011
ratio 10.96 11.61 12.17 12.73 92.51
Interpretation
In Return on capital employment indicate that how much company using their funds
efficiently and effectively. PTCL Company going on maximum level in 2011 with 92.51% but
then ahead 4 years PTCL trend constantly decreasing with lowest ration in 2015 with 10.96.It’s
showing that the PTCL might be not using their funds accurately.
0
10
20
30
40
50
60
70
80
90
100
2011 2012 2013 2014 2015
return on capital employed

Page | 39
2.6.3 Profitability analysis of Wateen Telecom Limited
Year 2015 2014 2013 2012 2011
ratio 6.66 16.31 25.12 31.85 48.60
Interpretation
the current year sales of the company. GP in 2011 with 48.60% and in 2012 with GP is 31.85
which result of huge sales in both years. Then company constantly facing till 2015 decreasing
trend and not increases their sales and also not controlled their costs. The GP of 2014 was less than
the GP of 2013 which with 25.12%. The GP Company in 2015 with 6.66% as compared to previous
years.
0
10
20
30
40
50
60
2011 2012 2013 2014 2015
Gross profit to sale

Page | 40
Year 2015 2014 2013 2012 2011
Ratio -24.36 -73.49 -23.15 6.29 8.70
Interpretation
and administrating expenses from sale and net income tax recognize. Wateen performing well in
2011 and 2012 with earning profits. Wateen going into loss in 2013 with -23.15%. The wateen
was can’t control their operating expenses and also not controlled their fixed and variable costs.
The current year net income of the company is in negative 2015 with -24.36 and 2014 is -73.49
bear loss.
-80
-70
-60
-50
-40
-30
-20
-10
0
10
20
2011 2012 2013 2014 2015
Net profit after taxto sales
net profit after taxto sales

Page | 41
Earnings before interest and tax and depreciation to sale ratio= ×100
EBITDA to sale
Year 2015 2014 2013 2012 2011
Ratio -26.59 -37.12 4.75 19.49 14.07
Interpretation
subtracting from expenses, excluding tax, interest and depreciation, The current performance of
Wateen Company is not well and going to losses as compare 2011 to 2012 profit. But in 2013
PTCL profit EBITAD (Earnings before interest and tax and deprecation 4.75%. company EBITDA
not good and going was in loss in both years 2015with -26.59 and 2014with -37.12%.
-40
-30
-20
-10
0
10
20
30
2011 2012 2013 2014 2015
EBITDA to sales
ebitda to sales

Page | 42
Operating leverage
Year 2015 2014 2013 2012 2011
Ratio 27.19 3.10 0.076 1.29 0.57
Interpretation
leverage. Company in 5 years was going in profit and its showing that company using their
resources defiantly. And in 2015 company gain higher profit with 27.19.
0
5
10
15
20
25
30
2011 2012 2013 2014 2015
Operating leverage
operating leverage

Page | 43
Year 2015 2014 2013 2012 2011
Ratio 9.6 -6.45 -
42.21
21.36 2.41
Interpretation
In Return on equity ratio measures a company profit that how much profit generates by the
money of shareholder’s in a specific period of time and if the return of equity ratio is less in existing
year then its showing the less investment. Return on equity of 2012 is in profit 21.39% and 2.41%
in 2011. ROC of Wateen Company 2013 with 42.21it’s bad for company and their investor. ROE
Wateen in 2015 with 9.6% which is better as compare to last year returns going in to loss.
-50
-40
-30
-20
-10
0
10
20
30
2011 2012 2013 2014 2015
RETURN ON EQUITY AFTER TAX

Page | 44
Return of capital employed
Year 2015 2014 2013 2012 2011
Ratio -26.47 -47.04 68.82 39.53 21.55
Interpretation
In Return on capital employment indicate that how much company using their funds efficiently
and effectively and this ratio showing that the liabilities and assets their company according to
investors decisions. ROCE should be higher than the company earns more otherwise the company
not using efficiently and effectively to capital. In 2011 and 2013 company showing that properly
uses their funds. But in 2014 and 2015 the return on capital employed is unfavorable and company
going to loss.
-60
-40
-20
0
20
40
60
80
2011 2012 2013 2014 2015
RETURN ON CAPITAL EMPLOYED

Page | 45
2.7 Conclusion
According to the analysis and findings of the research study, working capital has significant
impact on profitability. In future through conducting a detailed research in this field further
obvious findings can be obtained. Working capital management is important part in firm
financial management decision. The ability of the firm to continuously operate in longer period
is depends on how they deal with investment in working capital management. The optimal of
working capital management is could be achieve by firm that manage the tradeoff between
profitability and liquidity. The purpose of this study is to investigate the relationship between
working capital management and firm profitability. Cash conversion cycle is used as measure
of working capital management. Results of this study found that cash conversion cycle are
significantly negative associated to the firm profitability. Thus, firm manger should concern on
reduction of cash conversion period in purpose of creation shareholder wealth.
We use different profitability ratios for the purpose of calculating the profitability analysis
of the overall telecom sector of Pakistan in which include 3 top telecom companies of Pakistan.
We use different profitability ratios in which include the gross profit ratio this ratio tells us the
sales and cost of goods sold combination of the companies. The second profitability ratio is to
net profit after tax to sale the actual profit of the company which earns a year. The third ratio
which we are used to calculate different companies profit is EBITDA to sales means to operating
income of the company. The fourth profitability ratio which we are used to calculate the
profitability of telecom company is operating leverage ratio which is tell us how the increase
their %sales and % change in %EBITDA The fifth ratio which are we use in our project for
calculating the profit of telecom sector is return on equity means how a shareholder earning
return to his investment.

Page | 46
The last profitability ratio is return on capital employed show the asset is or liabilities of
the company are more. The gross profit margin of world call is well indicating that company made
good sales in pervious 5 year. The net profit after tax to sale not in profit and company generate
the net loss which describes the world call telecom limited does not control operating expense.
The EBITDA to sale in loss indicate company costs high to the sales. Operating loss of world call
show the high level of operating expenses and not control fixed and variable cost. The return on
equity goes in loss describe the not proper use of company fund. The ptcl crates standardize
operating profit every year. The return on equity of ptcl high in overall telecom sector of Pakistan.
The company asset more than to its liabilities. The last company of telecom sector is wateen
telecom limited. Company made reasonable gross profit in previous five year. The net profit of the
company going into loss which shows the company not controls his operating expenses. The return
on equity of company not well shows losses.

Page | 47
2.8 Bibliography
2007, V. G. (2007). found that the working capital management efficiency is negatively associated
to the profitability and liquidity.
Amarjit, N. B. (2010). the finding indicates that slow collection of accounts receivables is
correlated with low profitability. 39-40.
Appuhami, B. R. (2015). the basis of the findings of the research, it can be concluded that the listed
companies in Thailand change their working capital management policies based on many
factors.
Arnalt. (2005). Moreover the company will have to endure the cost of storing inventory for longer
periods as well as the cost of handling excessive inventory .
Asress, K. S. (2010). If firms actual working capital is below the required working capital in
relation to their operational size.
Blumenthal, K. &. (2007). if a firm will not pay sufficient attention to its working capital
management, then it is quite possible that the firm would have to face bankruptcy.
Deloof. (2013). have found a strong significant relationship between the measures of Working
Capital Management and profitability. Vol.2, p45-46.
Eljelly. (2009). Effective management of working capital decreases the need for lending funds to
pay back the short term debts of the firm.
Ganesan. (2007). He also indicated that there exists a strong and inverse association between
financial performance and liquidity.

Page | 48
Ganesan, V. &. (2007). found that the working capital management efficiency is negatively
associated to the profitability and liquidity.
Gitman. (1996). Working Capital mainly represents the current assets of a firm which is the portion
of financial resources of business that changes from one type of resources to another during
the day-to-day execution of business.
Hill, R. A. (1993). the goal of working capital management is to ensure that a firm is able to
continue its operations and that it has sufficient ability to satisfy both maturing short-term
debt and upcoming operational expenses.
Jack, G. (2014). Working Capital Management is an important component of Corporate Financial
Management. It is the relationship between current assets and current liabilities. 25-26.
Joshi. (1995). The Working Capital management is regarded as an essential part of financial
management of a firm. 23-24.
Jung. (2009). observed that applying best practices of working capital management.
Krueger, F. &. (2012). aggressive investment policy with high levels of fixed assets and low
investment in current assets may generate more profits for a firm.
Lamberson. (2000). observed the impact of economic activity on the Working Capital
Management Policy.
Magpayp, C. L. (2011). highlighted the importance of working capital management and financial
leverage on the firms’ financial performance is emphasized.

Page | 49
Marinez-Solano, G.-T. &. (2011). demonstrated in their study how managers can improve
profitability by shortening the cash conversion cycle through inventory reduction and
reduction in the outstanding number of day’s receivables. 36-37.
Mukhody. (2001). It is required by a firm to maintain its liquidity, solvency and profitability. Vol.5,
26-27.
Nasr, R. &. (2003). Working Capital management explicitly impacts both the profitability and
level of desired liquidity of a business.
Nazir, A. &. (2014). they found a negative relationship between the profitability measures of firms
and degree of aggressiveness of working capital investment and financing policies.
Padachi, K. (2012). ) the different analyses have identified critical management practices and are
expected to assist managers in identifying areas where they might improve the financial
performance of their operation.
Pandey, I. (1997). In profitability analysis measures the company’s performance that company
currently and also in previous years doing in profit or loss by subtracting to all costs and
expenses which are used for generating profit from revenues.
Rafuse. (2007). Effective management of working capital consists of two steps which are planning
for resources and controlling them. 19-20.
Shah, V. &. (1998). Profitability can also be termed as the rate of return on investment.
Smith. (1980). conducted a study that how working capital management impact on profitability of
telecom sector in Pakistan. Vol. 4, 35-36.

Page | 50
Soenen. (1993). analysis of working capital management and its relationship with financial
performance.
Stevens, J. a. (2004). carried out a detailed analysis on the association of cash conversion cycle
and financial returns. 31-32.
Vito, R. &. (2000). The basic purpose of managing working capital is controlling of current
financial resources of a firm in such a way that a balance is created between profitability
of the firm and risk associated with that profitability .

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