Abstract

This study investigates the effects of working capital management on firm’s profitability in Pakistan by using average annual cross sectional data from 2004 to 2009. Four different sectors namely textile, chemical, engineering and sugar and allied are considered. Inventory turnover, average payment period, current ratio, firm size, average collection period and debit ratio are used. Regression results indicate that average collection period has insignificant effects on profitability except in sugar and allied sector. At the same time debit ratio also has insignificant effect on profitability except in engineering sector. Furthermore average payment period has insignificant effect only in sugar and allied sector. Inventory turnover, current ratio and firm size has significant effects on profitability in all sectors. Sensitivity analysis confirms that the results are robust.

Key words: Working capital, firm’s profitability, cross section data, sensitivity.