RELATIONSHIP BETWEEN WORKING CAPITAL MANAGEMENT AND RETURN ON ASSETS: EVIDENCE FROM PAKISTAN

Abstract

This undertaking study investigated the relationship between working capital management as an
independent variable that was operationalized by ITO, DTO, and CTO, and the firms’ profitability by
measuring Return on Assets (ROA) as the dependent variable. Sample of 69 non-financial sector firms
of Pakistan which are listed in the Pakistan Stock Exchange for 11 years (2007-2017) was taken.
PLS-SEM was used for the first time to examine the relationship. The relationship was examined by
descriptive statistics, correlation, path analysis, including path coefficient, P-value, t-value, and path
coefficient confidence interval. The path coefficient shows the existence of the relationship, P-value
shows its significance, the t-value shows the level of relationship, and the confidence interval shows
the significance of the relationship. The results show that without the moderating effect of firm size,
overall working capital management has a positive impact on ROA. Firm size has a significant
moderating effect on the relationship between CTO and ROA. While the effect of firm size as a
moderator on the relationships between ITO and ROA, DTO and ROA, and CCC and ROA are not
significant. This study concluded that to enhance the profitability of the firm, and to get the best
results from ROA, the managers should focus on the efficient management of working capital
components (ITO, DTO, and CTO). The limitation of the study is that the samples used are only from
the non-financial sector firms of one specific country (Pakistan), using only one ratio (in this case,
ROA) for measuring profitability. Future studies should consider other ratios such as ROE, ROCE,
and EVAM by using the same model of PLS-SEM.