International Journal of Social Sciences and Management Studies.

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1 International Journal of Social Sciences and Management Studies Impact of Working Capital Management on Profitability of Chemical Sector of Pakistan Hamza Aslam Butt COMSATS Institute of Information Technology Lahore, Pakista Abstract Working capital management plays a significant role in any corporation. The survival of any business is only possible if the current portion of its balance sheet is working well. To measure the profitability return on assets is used while current assets to total asset ratio is included to measure the investing policy and current liabilities to total asset ratio is used for financing policy. The other indicators involved in this study are debt to equity ratio as a measure of leverage and log of sales to measure the size of the firm. Five years data of chemical sector from 2006 to 2010 is analyzed. Through regression analysis it is discovered that aggressiveness of the working capital policy is negatively related with the profitability. The chemical sector is one of the vital sectors of Pakistan. So, this study aims to make available some beneficial suggestions for the people who are accountable for the management of this sector. Key Terms: Profitability, Working Capital Management chemical industry I. Introduction Working capital is concerned with the normal business activities and it mainly denoted by the firm s current assets as it is the portion that is related to the financial resources of corporation (Gitman, 2002). The current assets of any firm include the account receivables, cash, inventory, short term investments and other current assets. The firm should have sufficient working capital to cover up the operating expenses of the business and its short term obligations so adequate funds must be available to run the business activities smoothly. Working capital is considered as the utmost part of a business because it is the life blood of any corporate. The subtraction of the current portion of the assets from the current liabilities is its net working capital. The decision making process about the firm s current portion of the balance sheet can be named as working capital management. It is an accounting approach that focuses on keeping the level of current portion properly. A company s cash flow can be judged by its management of working capital. The cash flows must never be excessive or inadequate because if the cash flows are excessive it shows that funds are not using for generating profit and if the cash flows are less it will show that company s do not have the ability to finance the daily needs. The Profitability of a firm is the return on its total investment. If the investment made in a firm is not justifiable then the return on investment will be negatively affected (Vishnani& Shah, 2007). The profitability of any firm is concerned with the associated risk and basically the utmost purpose of a firm is to handle its current financial resources to create the equilibrium among related risk with profitability and its profitability (Ricci & Vito, 2000). It has been observed that according to the previous studies regarding working capital management most factors that are examined by the researchers includes the effect of profitability on working capital management where few studies are engaging the firm s size and leverage to elaborate the efficiency level of working capital management. We cannot deny the fact that efficiently managing of working capital is necessary to make the business successful and to run its operations smoothly (Filbeck and Krueger, 2005). Corresponding Author [email protected]

2 Butt / International Journal of Social Sciences and Management As we know that the WCM is required for the survival of any business because to run the business operations smoothly investment is needed. To sustain the level of solvency, liquidity and working capital is needed (Mukhopadhyay, 2004). It is also found that the desired liquidity level and firm s profitability has an explicitly impact on working capital management (Raheman and Nasr, 2007). A firm will have to face heavy loss if it invests more neglecting the needs in working capital because the profit that a firm can generate by investing those resources in fixed assets will be decreased. Furthermore a firm would also have to bear the cost for controlling the excess amount of inventory and also the cost of storing that inventory for longer period (Arnold, 2008). Harris (2005) stated that working capital management is the ability of a firm to manage the funds if there is any difference among the short term assets and liabilities of the firm. During daily operations working capital management is a crucial factor to determine performance of the firm. The main goals of the firms are to increase wealth of the shareholders and any firm can achieve this goal if it is earning a huge profit. It can be a serious issue if a firm is involving itself in generating profit at the cost of liquidity and vice versa. A risk of imbalance among the current portion of the assets and liabilities exists and it is obvious that the profitability of the firm will be affected if it happens. Due to this the profitability and working capital is in the attentions of the scholars these days. The firm would have to face bankruptcy if it is investing more in its fixed assets because if it is possible that by investing in the fixed portion the firm may not be able to meet its short term obligations due to scarce funds in the current portion of assets. (Kargar and Blumenthal, 1994) stated that a firm might face bankruptcy if unable to maintain accurate level of liquidity and profitability because it is necessary to run the business successfully so proper attention to the working capital management and sufficient funds are very essential for the business survival. It is also found that the failure of numerous businesses occur because of the shortage of working capital in developing and as well as developed countries (Rafuse, 1996). Two steps are involved in the management of working capital the first is the planning of the resources and second is to control these resources. These resources are needed by the firm to fulfill the obligations in short term and also to avoid resources wastage by doing excess investment in current Assets (Eljelly, 2004). The working capital management effectiveness reduces the need for lending the funds for the purpose of paying back the firm s short term debts. The working capital management has various approaches. There are two basic policies that are used for management of working capital and these policies are conservative and aggressive management policy. The firm s policy is said to be aggressive if it is investing more in its fixed portion of assets and less in its current portion. A firm may generate huge profit by investing more in its fixed asset but it would be risky because a firm cannot be able to cover its short term obligations and it also gives support to the risk of inadequate funds for the daily operating activities. As far as policy of conservative investment is concern, it is contrary to aggressive policy because in this policy a firm invests more in its current portion of assets and less in its fixed portion. The firm which is using the aggressive policy for financing indicates that the firm is maintaining the larger portion of its current liabilities then its long term debts. If the firm has high level of current liabilities then it should maintain a larger portion of its resources in order to pay the debts of the firm earlier. The current payouts endure lesser interest rate therefore can be resulted in more savings. In financing policy of conservative working capital long term debs are used in greater portion as compare to current liabilities. The main purpose of this study is to analyze the impact of the working capital policies on the profitability of the firms related to chemical sector of Pakistan. The chemical sector was not much in consideration before so the aim of this study is to find out the effect of various policies of working capital on the profitability firms related to this sector and to provide suggestions that are

3 Butt / International Journal of Social Sciences and Management useful for the management of this sector. II. Literature Review Working capital management is the difference among the current liabilities and current assets. The most important source for a firm s profitability depends on its working capital management. The management of working capital is concerned with the managing cash, payables and receivables. By using different variables we will explain the working capital and its effect on the profitability. Various researchers have examined the effect of working capital management on profitability. It has been proved by researchers that profitability depends on efficient working capital management. The vital part of a firm is its management of working capital (Joshi, 1995). Meszek and Polewski (2006) have made the thorough analysis of the construction sector. They did not work to evaluate the financial performance and efficiency of working capital management of construction sector. They targeted the strategies which have to be in construction sector for working capital management. Hasan, Halil, Arzu and Salih (2011) have analyzed the five year data of the companies of Istanbul for determining the association between corporate profitability and working capital management efficiency. Their findings showed that return on Assets (ROA) which is consider as a measure of profitability positively affects the cash conversion cycle denoted by CCC which is a measure of working capital management. Adina Elena Dănuleiu (2010) has studied the relationship among profitability and its influence on working capital management through Pearson correlation. Current debt, Inventories, Account payables, financial short term investments and account receivables has been used as the factors for management of working capital. The financial statements of 20 companies have been analyzed and it was found that an inverse and linear correlation exists between profitability and management of working capital. Another researcher Deloof (2003) conducted a research detailed research on the firms located in Belgium. It has been found that average collection period and inventory turnover is negatively related. He suggested that by decreasing average collection period and inventory turnover the financial managers can made improvement in the firm s profitability because working capital management and profitability are positively relates to each other. Amir Shah and Sana (2006) conducted a study for the tenure of five years starting from 2001 to The working capital ratios that they included in their study are average payment period, inventory turnover, quick ratio, current ratio, inventory turnover and average collection period. The OLS method and correlation analysis are used in their study and it has been found that working capital ratios are negatively related with Gross profit but are positively related with number of days payable. Padachi (2006) has examined the relationship of profitability and working capital management of small firms related to manufacturing sector of Mauritius. The variables which he has used as independent are the payable days, inventory turnover, CCC, receivable days has the variable which he has used as a dependent variable is the return on total Assets represented by (ROA) for the year of By using regression analysis he founded that the firm s profitability would be lower if it makes excessive investment in accounts receivables and inventory. Moreover he observed that various working capital elements in paper and printing industry is showing higher scores with respect to other companies related to manufacturing sector and positively affects the industry. Another researcher Soenen (1993) worked to examine the relation among return on investment and working capital. For that he uses net trade cycle as a proxy to measure working capital. He analyzed different industries and through chi square test he observed that there is an inverse relation between net trade cycle and return on asset. He examined that the results vary

4 Butt / International Journal of Social Sciences and Management across industry to industry and it depends on the type of the industry. Melita, Stephanou, Charitou (2010) conducted a study on 43 industrial firms registered at Cyprus stock exchange. He uses the data of 10 years i.e and had concluded that profitability is affected by working capital components such as account payable, account receivables and inventories. Through multivariate regression analysis he recommended that profitability would be less if an organization maintains inventory account payable and account receivables at high level. By MelitaCharitou, Halim Budi Santoso (2012) studied the emerging economy firms to check the relationship among working capital management and profitability. They analyzed all the Indonesian firms starting from the year and found positive relationship between net trade cycle and cash conversion cycle. Their findings reveal that risk affects the firm s profitability negatively. These outcomes are beneficial for the firm s stakeholders. Rehman (2006) studied the firms of Pakistan starting from the year and he has studied the working capital management and its impact on the profitability of the listed companies of Islamabad stock Exchange (ISE). The working capital ratios such as average collection and payment period including the inventory days and CCC as independent variables and the dependent variable taken by him is the net operating. He came to the conclusion that profitability is negatively related with firm s profitability and he suggested that shareholder s value can be maximized if a firm decreases its CCC. Mehmet SEN (2009) examined the 49 firms related to production sector from the year 1993 to 2007 to analyze the level of competency among the firms. For that purpose they he took the data of Istanbul Stock Exchange (ISE) listed firms. To analyze the competency level among firms he has taken the cash conversion cycle, current ratio and networking capital as independent variables and return on asset as dependent variable. Through correlation and auto correlation calculations they concluded that profitability has a negative impact on the profitability. II.II Current Asset to Total Asset Ratio and Profitability It is the ratio used to examine the investing policy and to measure the degree of aggressiveness and conservatism. If a firm is investing less in its current asset it would be difficult for them to fulfill its short term obligations. So less investment in the current assets may lead to bankruptcy. Afza and Nazir (2008) examined different policies regarding the financial performance of the firms and its effect on the management of working capital in various sectors that were based on their previous study. The different firms of different sectors have been analyzed by them and they non-financial firms related to different industries which are registered on Karachi stock exchange. The five years secondary data is used by them. Working capital management falls in two categories one is aggressive and the second is conservative. The policy is said to be aggressive if an organization made less investment of capital in their current assets and more in their fixed asset to earn a huge profit. While in conservative policy the organization used to invest the capital more in their current assets as compared to fixed assets. Current assets/total asset ratio has been used to check the degree of aggressiveness. Return on Assets and return on equity are used to find the impact of both policies on their performance. By using regression analysis they have found that the profitability inversely relates to the degree of aggressiveness. Singh and Asress (2011) has analyzed Indian manufacturing companies by taking the sample of 449 firms and in their study they observed the profitability and its effect on working capital solvency level. They have taken Operational breakeven point, total operating cost (TOC), cycles (N) as independent and working capital requirements as dependent variable. Ten years data i.e has been analyzed by them and through multiple means comparison test (Bonferroni), One-way ANOVA test and independent t-test they came to the conclusion that if a firm would have sufficient capital investment in its current portion then its performance would be more excellent in comparison to the companies having lesser investment in their current portion. So,

5 Butt / International Journal of Social Sciences and Management they have given a suggestion that a firm s profitability would be higher if they manage to invest more capital in their current operating activities because working capital has a positive impact on the profitability of firm. Mahmood and Qayyum, (2010) observed that working capital management has two core purposes. The first one is to upturn the profitability and the second is to maintain adequate liquidity to fulfill the short term obligations of the firm. The acceptable return can be gained if a firm does investment in its current assets and profitability is concerned with maximization of wealth and shareholder s goal. However to continue the business a firm require liquidity and a firm may also need more cash in order to satisfy its transactional as well as its operational needs. IkramulHaq, Sohail, Zaman, and Alam (2011) studied the Pakistani firm s related to cement sector. For that purpose they used the data of six years starting from the period They examined the impact of current asset to total asset ratio on return on investment. Through techniques of correlation and regression analysis they have found that they both are positively related to each other. II.III Current Liabilities to Total Asset Ratio and Profitability By using this ratio we determine the financing policy of a firm. A firm s policy is said to be aggressive if it uses current liabilities than long term debt and conservative if uses long term debts instead of current liabilities. BintiMohamad and MohdSaad (2010) conducted a study on 172 Malaysian firms. A time period of 2003 to 2007 has been covered in their study. The components of working capital that are used by them are Cash Conversion Cycle (CCC), CLTAR and current ratio (CR). They have used the return on assets and return on invested capital as a financial performance measurement to see their effect with the above mentioned working capital components. Through multiple regression analysis and through correlation analysis they came to the conclusion that components of working capital and financial performance of the firm are related inversely to each other. Raheman, Afza, Qayyum, and Bodla (2010) further studied the Pakistani firms related to manufacturing sector starting from the year 1998 to They have examined the financial performance of the firm and its impact on working capital management. Different variables that have been taken by them are natural logarithm of sales, current liabilities to total asset ratio, debt ratio, age of inventory, gross working capital turnover ratio, average payment period, age of inventory as independent and net operating profit as dependent variable. It has been analyzed by them that firms that are operating in Pakistan usually used to follow conservative policy i.e. For the funding of their daily operations they adopt riskless policy because they invest more capital in the form of liquid assets to avoid shortage of funds. In their study they have given the suggestions that firm s need suitable financing and effective management. Sumaira (2013) has studied the 117 companies of Pakistan operating in textile industry. The period of six years from 2005 to 2010 is used in the study. The dependent variable that has been used by her is return on asset as a measure of profitability. The independent variables included in her study are CATAR and CLTAR whereas CATAR to determine the investing and financing policy of the firms. Through regression analysis it has been found that a firm profit will be negative if the firm s adopt aggressive working capital policy. She gave the recommendations that textile is the leading sector of Pakistan so it needs much consideration for the management of its assets and liabilities. II.IV Size and Profitability Another researcher Mona Al-Mwalla (2012) studied the firm s listed at Amman stock exchange and has thoroughly examined the relationship of firm s profitability and its effect on working capital management. The data of 57 firms has been taken and they have concluded that profitability and conservative policy for management of working capital are positively related and vice versa. They also concluded that by keeping the leverage same profitability will positively

6 Butt / International Journal of Social Sciences and Management affect the size of the firm its growth rate and GDP also. Another researchers Moss and Stine (1993) has taken the retail companies as a sample. They have analyzed the relationship between the corporate size and for that they have measured the size of the corporate by its total assets, net sales and they found that the firms with large size have shorter CCC as compared to the firms who are smaller in size. So they came to the conclusion that firms having large size will have better working capital management as compare to firms having small size. They have given the recommendations that by taking control on inventories and receivables the firms of small size can make improvement in their working capital management. Rimo and Panbunyuen (2010) have examined the relationship among CCC and size of the corporate and for that they measured the size through total assets. It has been found by them that these two variables are negatively related to each other. They also came to the conclusion that firm s size effects the working capital management more. Another researcher Uyar (2010) analyzed the registered organizations of Istanbul Stock Exchange. He deeply examined the relationship of the size of the firms and its impact on WCM and for analyzing working capital management, CCC is used as its proxy. A negative significant relation has been found by him among size of the firm and working capital management. Pandey and Parera (1997) collected the data from private sector companies of Sri Lanka and studied the practices and the policies of working capital management. The data has been collected by questionnaires and through the interviews of chief financial officers and all that are done by taking the samples of firms concerned with manufacturing sector listed on Colombo Stock Exchange. It has been analyzed by them that Sri Lankan companies are using informal policies of working capital and examined that strategies of the working capital has a great affect on the firm s size. It also affects the working capital approaches such as moderate approach, conservative approach and aggressive approach. However, Jeng-Ren (2006) stated the positives relation between net liquid balance and corporate size. His study suggested that companies having large size produce more net liquid balance than companies having small.sumaira (2013) analyzed the Pakistani firms and she concluded that size of the firm is positively related to firm s size and profitability. She also founded that size of the firm has a negatively correlation with CLTAR which is a financing ratio for working capital but has a positive correlation with CATAR which is a ratio used to estimate the investment policy of working capital. II.V Leverage and Profitability The ratio of leverage is the firm s asset percentage that is backed by liabilities. If the ratio of the leverage is less it indicates that to finance upcoming expansion company is generating high cash flows and the expansion can be done by issuing the additional shares. While if a company s cash flows are high it shows that less cash flow are generated by the company for upcoming expansion. Jeng-Ren et al. (2006) further analyzed the debt ratio and its influence on working capital management measure by balance of net liquid and concluded they are oppositely related to each other. Their results refer that a firm would use external sources for financing if their net working capital is low. This will be done if the leverage ratio is high.. Another researcher Rimo and Panbunyuen (2010) studied the relationship among the CCC and ratio of debt. Their results showed that debt ratio and CCC are positively related with each other because an increase in one results in increase of other. Lyroudi and Lazaridis (2000) has examined the industry of Greece related to food sector and for that they have used cash conversion cycle as an indicator of liquidity and efforts to analyze the relationship with quick and current ratio and they also used to explore the inference of CCC in profitability terms. They found that ROA which is a measure of profitability have a positive impact on cash conversion cycle while have no linear relation with the ratio of leverage. Their findings have also revealed that the relationship between leverage and

7 Butt / International Journal of Social Sciences and Management current ratio is negative. But has positive relationship with the times interest earned ratio. Amarjit Gill (2010) also investigated the relation among debt and profitability ratio. Their finding shows that the relation between the leverage and profitability is negative.sumaira (2013) has examined the Pakistani textile industries and she came to the conclusion that if the debt ratio is high then it will negatively affect the profitability of the firm. III. Data and Methodology The secondary data of firms related to chemical sector has been used to determine the relationship of working capital management and profitability. The data used in this study is collect from SBP publications and also from the KSE publications. The official websites of the firms are also used in this study to gather the required data. The data taken in this study is collected from the balance sheet of the firms of chemical sector. A random sample of 15 firms related to chemical sector is used in this study. Random sampling has an advantage that it provides equal chance of selection to each company and thus it avoids any type of sampling error (Castillo, 2009). The study of five years is included in this study from The regression analysis is used in this study as this analysis has been used by many researchers such as Zubair and Yasir (2013). The Persons correlation is also used in this study to determine the correlation between the variables. The regression equation is given below. III.I Model ROA = β0+ β1 (CATAR) + β2 (CLTAR) + β3(los) + β4(der) + ε (1) III.II Variables The study is used to explain the impact of numerous policies that are used for working capital management on the financial performance of firms. Through analysis of the previous studies the variables are selected for the testing and the developing of the hypothesis. The study includes the dependent, independent and control variables. III.II.I Dependent Variable Return on assets (ROA) is used in this study as dependent variable. This variable is used for the purpose to determine that how a firm maximizes its profit by using the current resources. The profitability of a firm is shown by increase in its ROA (Gitman, 2002). ROA= (Net Income/Total Assets) 100 This ratio has been used by various researchers as a proxy of profitability such as Afza and Nazir (2008) and Danuletiu (2010). III.II.II Independent Variables This ratio have been used as an independent variable. The firms use this ratio to determine the investment policy. The investment policy can be aggressive or conservative. If the firm invests less in its current portion of assets as compare to fixed portion then the policy is said to be aggressive. In contrast if a firm invests more in its current portion of assets as compare to the fixed then the policy is said to be conservative. CATAR= Total current assets/ Total assets This ratio has been used as an independent variable to analyze the effect of this ratio on profitability by Afza and Nazir (2008). They found that there is a positive relation between this ratio and profitability. So, a positive relation is also expected in this study. For the purpose of

8 Butt / International Journal of Social Sciences and Management analyzing the financing policy of working capital another independent variable CLTAR is used. This financing policy can be aggressive or conservative as well. The policy is said to be aggressive if current part of the liabilities are used more than long term debts. While on conservative policy long term debts are used more than current liabilities. CLTAR = Current liabilities / Total Assets ratio Mohamad and Saad (2010) found a negative relation among this ration and profitability. In this study a negative relation among this ratio and profitability is expected. Natural logarithm of sales is used in this study as a control variable to determine the firm s size. Natural log of sales has been used by Padachi (2006) in their study. A positive relationship between sales and profitability has been founded by them. For the purpose of analyzing the leverage DER which is representing the debt to equity ratio is also included as a control variable in this study. This ratio is used to find out that how much firm s total asset portion is financed by the creditors. If the leverage ratio is high the cost of financing working capital will be high. Debt ratio = (Total Liabilities / Total equity) (Gitman, 2002) Mohamad and Saad (2010) and Gill et al. (2010) have found an inverse relationship of this ratio with the financial performance. So in this study an inverse relation among profitability and this ratio is also expected. III.III Hypotheses Statements The following hypotheses are developed for the purpose of exploring the relationship of working capital management and its effect on the profitability. H1:Significant relationship among aggressive/conservative working capital investment policy and profitability exists. H2: Negative relationship among aggressive/conservative working capital financing policy and profitability exists. H3: Positive relationship among the size of the firm and profitability exists. H4:Negative relationship among leverage and profitability exists. IV. Results and discussion In this section a discussion about the results and the analysis of the regression model is presented. Table-1 discusses the descriptive statistics of all the variables included in this study. It is showing the number of observations, its average value and standard deviation. It also includes the minimum and maximum value of all the variables. Return on assets (ROA) is included in this study as a proxy to measure the profitability of the firm. It is the dependent variable and its average value and standard deviation is and The minimum and maximum value of this ratio is and The independent variable current to total asset ratio is included in this study to determine the investment policy of the firm. The average value of this ratio is and the standard deviation is The minimum and maximum value of this ratio is and Current liabilities to total asset ratio (CLTAR) is the ratio of working capital to determine the financing activity. Its average value is and standard deviation is The minimum and maximum value is and For leverage debt to equity ratio has been used. The ratio contains an average value of and standard deviation of and it also has a minimum value of and is the maximum value. The last variable log of sales that we have used in this study is to determine the size of the firm. It contains an average value of

9 Butt / International Journal of Social Sciences and Management and a standard deviation of The minimum and maximum value for this ratio is and Table-1: Descriptive statistics Variables Observations Average Std.dev Min Max ROA CATAR CLTAR DER LOS IV.II Pearson s Coefficient Correlation Analysis Correlation coefficient is the technique to measure the relationship among two variables and it illustrates the change in one variable due to another variable (Kohler, 1994). Through correlation analysis the occurrence of multi-colinearity among variables can be determined. It is recommended for a good model that multi-colinearity should not exist among the predictors. First of all in the correlation matrix the relationship among dependent variable (ROA) and independent variable CATAR is investigated. There exists a positive and significant relation among them because the p-value in the parenthesis showing significant relationship having value less than 5 percent and has positive relation with each other as the correlation value is The dependent variable ROA is inversely correlated CLTAR but is significant at 5 percent. The correlation value among them is The correlation among CATAR and CLTAR is and the p-value is which means that they both do not have significant relation but a positive relationship with each other. They are not significantly related to each other because the p-value is greater than 5 percent level of significance. Moving forward the debt to equity ratio represented by DER has a positive relation with independent variable and the other two independent variables i.e. current asset to total asset ratio represented by CATAR and the other current liabilities to total asset ratio represented by CLTAR. But the DER is only having a significant relationship with current assets to total asset ratio and it do not have the significant relationship with dependent variable ROA and independent variable CLTAR. They are not significantly related to each other because the p-values of those variables are greater than 5 % level of significance. The P-value of ROA is and CLTAR is Table-2: Pearson Coefficient Correlation Matrix Variables ROA CATAR CLTAR DER CATAR (0.016) CLTAR (0.012) DER (0.143) LOS (0.001) (0.083) (0.037) (0.000) (0.910) (0.000) (0.095)

10 Butt / International Journal of Social Sciences and Management In the last the log of sales is included in this study in order to determine the size of the firm. The log of sales is represented by LOS. The table shows that the Log of sales has positive significant relation with the dependent variable (ROA) and other explanatory variables CATAR and negative significant relationship with CLTAR. The p-value of ROA and CATAR is and while coefficient correlation value is and The LOS has not any significant relationship with debt to equity ratio which is representing the leverage. The p-value i.e is greater at 5% level of significance. All the explanatory variables in the table have the value of correlation coefficient less than 1. The correlation coefficients of the explanatory variables are less than 0.6, so it is clear that there exists no multi-colinearity. IV.III Regression results The results in this study are analyzed through linear regression. The model shows that the current assets to total assets ratio represented by CATAR has a positive relation with the independent variable Return on assets represented by ROA. It is significantly related with the dependent variable at 5 percent level of significance. The value of β-coefficient is These findings are somewhat according to the findings of Afza and Nazir (2008). The CLTAR is another independent variable used in this study to determine the investing policy. It is showing the significant negative relation with the independent variable. The β-coefficient of this variable is The results we have received here are somewhat same to the findings of Mohamad and Saad (2010). The other two independent variables included in this study are DER and LOS. DER is the debt to equity ratio and it is showing a negative relation with the dependent variable. The β-coefficient of this ratio is This ratio is included to find out the leverage. An increase in the leverage negatively affects the profitability. The former researchers have conveyed the similar results such as Raheman and Nasr (2007) and Mohamad and Saad (2010). The last variable LOS has been included to measure the size of the firm. The LOS is the natural log of sales and has the β-coefficient value It is positively to the dependent variable. Raheman and Nasr (2007) have also reported the same results. Model Table-3. Regression Results Unstandardized Standardized coefficients coefficients B Std. Error Beta T Sig. (Constant) CATAR CLTAR DER LOS Dependent Variable: ROA V. Conclusion and Recommendations Working capital management is considered as one of the key part of the financial decisions of any firm. In order to run the business smoothly the working capital of the firm should be

11 Butt / International Journal of Social Sciences and Management well-organized. The study concludes that proper level of working capital of firms should be maintained either it is related to chemical sector or other sectors as well. In this study 15 chemical firms are included covering a tenure of five years from 2006 to It is analyzed that to generate the profitability working capital management plays an important role. The two leading policies of working capital management are financing policy and investing policy. If the firms invest more in its current assets rather than fixed assets the policy is said to be conservative. The aggressive policy for investment is opposite to it. While in conservative financing policy the firms use its long term liabilities rather than current liabilities. A financing aggressive policy is opposite to it. The result in this study says that both financing policy and investing policy of the firm should be conservative because the conservative policy leads to more profitability. Furthermore a positive correlation has also been found among the financing and positive policy which means that if a firm is following aggressive investing policy than its financing policy will be aggressive as well. In the same way if a firm is using conservative financing policy than a conservative investing policy would be preferred by them. Regarding the hypothesis the first alternative hypothesis that there is a significant relationship between aggressive/conservative investing policies is accepted. So, the null hypothesis is not supported. A positive and significant relationship has been found between degree of conservatism of investing policy and profitability. The second hypothesis (H2) is also accepted because the finding shows an inverse relationship between the aggressive/conservative financing policy and the profitability. So the null hypothesis (H02) is not supported. The findings in this study show that there exists a negative relationship among the degree of aggressiveness of investing policy and profitability. In the same way the third alternative hypothesis (H3) is accepted as well. The finding shows a positive and significant relationship among the size of the firm and its profitability. The last hypothesis (H4) that there is a considerable negative relationship between the profitability and the firm size is also accepted. These findings are according to the previous researcher such as Raheman and Nasr (2007) and Afza and Nazir (2008). In this study it is concluded that aggressive policy either for investment or financing purpose negatively affects the profitability of the firm. So, investment in current assets is more attractive to earn more profit than in fixed assets and usage of long term debts generates more profit than current liabilities. References Afza, T., & Nazir, M.S. (2007). Working Capital Management Policies of Firms: Empirical Evidence from Pakistan. Afza, T., & Nazir, M. S. (2008).Working Capital Approaches and Firm s Returns in Pakistan. Pakistan Journal of Commerce and Social Sciences, 1(1), Al-Mwalla, M. (2012). The Impact of Working Capital Management Policies on Firm's Profitability and Value: The Case of Jordan. International Research Journal of Finance and Economics, 85: Arnold, G. (2008). corporate financial management. Pearson education limited,4th edition. Binti Mohamad, N. E. A., &MohdSaad, N. B. (2010). Working capital management: The effect of market valuation and profitability in Malaysia. International Journal of Business and Management, 5(11), p140. Charitou, M.S., Elfani, M., Lois, P. (2010). The Effect of Working Capital Management on Firm s Profitability: Empirical Evidence from an Emerging Market. J. Bus.Econ. Res., 8(12): Charitou, M., Lois, P., Santoso, H.B. (2012). The Relationship Between Working Capital Management And Firm s Profitability: An Empirical Investigation For An

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