The Nexus Between Working Capital Management and Profitability in the Cement Industry of Bangladesh

Md. Yousuf Ahammed1*and Shayla Tazminur 2

1Department of Business Administration, Bangladesh Army International University of Science and Technology, Cumilla, Bangladesh. Email: yousuf.dba@baiust.ac.bd

2Department of Business Administration, Independent University Bangladesh, Bashundhara Residential Area, Dhaka, Bangladesh. Email: shaylashosi@gmail.com

*Corresponding Author

Abstract: Working capital is a financial parameter often considered to be one of the critical financing and investment decisions. An analysis of the relationship between working capital management and profitability can help managers to make better decisions. Therefore, this study intends to analyze the impact of working capital management on profitability. This study is conducted on companies of cement industry listed in the Dhaka Stock Exchange (DSE). The study refers to Days Inventory Outstanding (DIO), Days Sales Outstanding (DSO), and payables outstanding with the current ratio and quick ratio as proxies for working capital. The net profit margin ratio is used as the measure of profitability as well as dependent variable of the study. The analysis is based on five years of financial datafrom the published financial statements of all the cement companies listed by DSE. A regression model is developed and applied to fulfill the intended purpose of the study.  The findings reveal a very significant relationship between independent variables (DIO, DSO, DPO, CR, and QR) and Dependent Variable (NPM). The study indicates a strong negative relationship between the working capital and profitability position over the study period. The study finds that DSO and profitability have a considerable negative relationship whereas DIO has a weak positive relationship with profitability. However, it is evident from the POLS model that all the variables of working capital have a statistically significant impact in explaining profitability as the dependent variable. The study suggests that organizations need to be aware of their management of working capital to boost their earning capacity.

 Keywords: Working capital, days sales outstanding, days inventory outstanding, profitability, current assets

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References

 

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