THE INTER-LINKAGES OF WORKING CAPITAL AND PROFITABILITY IN PAKISTAN (2001-2010)

The purpose of this study is to establish a relationship between working capital and profitability over a period of 2001-2010 for 25 Pakistani manufacturing companies listed on Karachi stock exchange. To check the stationary of the data Augmented Dickey Fuller (ADF) test is used and Johansen’s co-integration test is used for long term relationship. Linear regression model with ordinary least square (OLS) is used to find the coefficients of working capital variables. The result shows that quick ratio (QR), days inventory outstanding (DIO), debt equity ratio (DER) and return on equity (ROE) have a positive association and remaining variables including current ratio (CR), and days sale outstanding (DSO) have a negative association with return on assets (ROA). In the case of return on equity (ROE), current ratio (CR), days inventory outstanding (DIO) and return on assets (ROA) indicates a positive relationship whereas, days sale outstanding (DSO), debt equity ratio (DER) and quick ratio (QR) indicates negative relationship. Based on the finding of the study it is recommended to increase the value of shareholders by reducing the day’s sale outstanding that can result in increase in profits of the sectors under study.