Impact of Working Capital on Performance of Textile Firms Listed on PSX

Abstract

This paper investigates the impact of different measures of working capital (i.e. current asset ratio, net working capital, average age of inventory, average collection period, average payment period and cash conversion cycle) on performance of textile firms listed on Pakistan Stock Exchange Limited during 2008-2015. Both book-based (e.g. gross profit margin, net profit margin, basic earning power and return on assets) and market-based (i.e. Tobin’s Q) measures used to understand the impact of working capital on performance. For a meaningful analysis textile companies were divided into three sectors namely textile composite, textile spinning and textile weaving. Results indicate that current asset ratio and cash conversion cycle are positively linked to market-based and book-based measures of performance in all sectors. Net working capital and average age of inventory are positively linked to performance in all sectors except textile weaving. Average collection period and average payment period are negatively linked to performance in all sectors. In sum, working capital measures significantly affect the performance of textile firms however the observed relationships are partially consistent to the explanations given in finance literature which suggest the need for theoretical development.