6 DP Singh 1464 Research Article VSRDIJBMR February 2013

7/27/2019 6 DP Singh 1464 Research Article VSRDIJBMR February 2013

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VSRD International Journal of Business and Management Research, Vol. 3 No. 2 February 2013 / 65

e-ISSN : 2231-248X, p-ISSN : 2319-2194 VSRD International Journals : www.vsrdjournals.com

RESEARCH ARTICLE

INVENTORY MANAGEMENT OF WORKING CAPITAL COMPONENTSIN AUTOMOBILE INDUSTRY IN INDIA EMPIRICAL STUDY

D.P. SinghResearch Scholar, Department of Management Studies, Singhania University, Jhunjhunu, Rajasthan, INDIA.

Corresponding Author : [email protected]

ABSTRACT

Present study made an attempt to investigate the relation between return on capital employed and various components of working capital.

Study investigated various relationships at 01% and 05% significance level between profitability a measure of return on capital employedand all important components of working capital. We have collected the financial data of 12 firms from automobile industry for twelve

years starting from 1999 till 2010. In all we therefore have 144 firm year observations. We have used SPSS and found results for threeanalyses as descriptive, correlation and regression. On interpreting descriptive analysis results it is observed that working capital

components are very well managed in automobile industry. We attributed this fact to be as a result of matured and growing automobileindustry. For investigating various significant relationships we run correlation using SPSS and found that working capital turnover ratio(WCTR), current ratio (CR), days inventory outstanding (DIO) and day's sales outstanding (DSO) are negatively correlated at 1%

significance. Inventory turnover ratio (ITO), sales to turnover ratio (STAR) and SIZE of the firms are positively related to profitability at1% significance. But current ratio (CR), and cash conversion cycle (CCC) is though negative but at 5% significance level. However weobserved no relationship between net working capital ratio (NWCR) and profitability of the firms in automobile industry. Our resultsregarding the relationships of CR and CCC are departing from earlier studies.

Keywords : Return On Capital Employed, Working Capital Components, Descriptive Analysis, Correlation Analysis, Regression

Analysis, Corporate Finance, Significant Relationships.

1. INTRODUCTIONCorporate financial theory is essentially about three areas of

financial management, that is capital budgeting, capital

structure and working capital management. Capital

investment decisions are constant challenge to all levels of

financial mangers. It is a systematic process which broadly

includes classification of capital budgeting proposals

pertain to capital investments, determining the relevant cash

flows from the proposals, assessing economic value of the

proposal, incorporating risk into capital budgeting decision

and finally evaluating whether to leave or borrow-to-buy

(Pamela P. Peterson and Frank J. Fapozzi feb, 2002).

Capital structure plays a crucial role in corporate finance

not only because of its influence on shareholders wealth butalso because it commands sustainability of a firm in a

recession or depression. Capital can be broadly classified

into debt and equity capital. Each of these capitals has its

advantage and disadvantages. A mature corporate

management tries to strike a trade-off to find a capital

structure in terms of risk and return. Equity capital refers to

money put up and owned by shareholders (owners). They

are of two types contributed capital in exchange of shares of

stock and retained earnings. The later represent profit from

past years that have been retained by the company to

finance additional operations for growth. Debt capital in a

companys capital structure is the borrowed money that is

at work in the business. The typical instruments of debt arelong-term bonds and short-term commercial papers issued

am money market to meet day to day capital requirements.

The trade off theory of capital structure means a company

chooses how much debt finance and how much equity

finance to be used to balance the cost and benefits.

Third and last area of corporate finance is working capital

management. Working capital refers to the firmsinvestment in short term assets. Working capital

management is an important component of corporate

finance. It deals with financing short term financial needs of

business organizations. Existing literature characterized

working capital management as an area largely lacking in

theoretical perspective (Van Horne, 1977). Limited general

theories which pertain to working capital management are

the off shoots of the finance literature and rather focuses on

the relationship between risk and profitability (Smith1980).Traditionally in the past finance literature has

focused on the study of long term financial decisions, and

capital structure. Padachi (2006) emphasized that the

management of working capital is important to the financial

health of businesses of all size. There are many reasons for

the importance of working capital management. First, very

high amount of capital invested in working capital in

proportion to total assets. As these net current assets

constitute significant part of capital employed, it is requiredto use these funds in an efficient way. Second the

management of working capital directly affects the liquidity

and profitability of a firm and consequently its net worth

(Smith, 1980). Working capital management therefore aimsat maintaining a trade off balance between liquidity andprofitability while carrying out day to day activities of the


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D.P. Singh VSRDIJBMR, Vol. III (II), 2013 / 66

business.

Efficiency in working capital is vital (Ganesan

Vedavinayagam, 2007) as almost half of the total assets areemployed in the form of capital employed .In the trading

and manufacturing firms they are even more thereby

affecting profitability and liquidity of the company

(Rahemen and Nasr. 2007). If we ignore optimum working

capital management even in case where profitability keeps

on increasing, inaccurate working capital management

procedure may lead to bankruptcy (Samiloglu and

Demirgunes, 2008). If we exercise no control over the

levels of current assets it will deteriorate profitability and

such situation can easily result in a firms realizing a

substandard return on investment (Rahemen and Nasr.

2007). Success of the firm mainly depends on efficient

management capability of finance director to manage

receivables, inventories, and liabilities (Filbeck and

Krueger, 2005). Efficient working capital management can

strengthen the firms funding capabilities significantly.

The fundamentals of good working capital management are

to provide optimum balance between each element forming

working capital. Efficient management of working capital is

a very important function of and fundamental strategy in

creating shareholders value. Therefore firms try to keep an

optimum level of working capital that maximizes their

value (Afza and Nazir 2007; Dellof 2003).Most of the

efforts of finance director in a firm revolve around

searching for an optimum level of current assets and

liabilities and to bring them at optimum level in case theyare not.(Lamberson, 1995).

All corporate decisions which tend to increase the

profitability also lead to increase the risk. Also

simultaneously corporate decisions taken to reduce the

potential risk will reduce profitability. It is very important

to maintain liquidity in day to day business operations. This

is required to smoothly run the business without any

interruptions. Therefore an important part of managing

working capital is maintaining the liquidity in day-to-day

operations to ensure smooth running and meeting its

obligations (Eljelly, 2004). It is difficult to run a business

efficiently as well as profitably, as running a businessefficiently does not means enhanced profitability. When

business is run efficiently there is always a chance of

mismatching current assets and current liability. This

mismatch affects both growth and profitability of a firm.

One of the main principles of finance is to collect money as

soon as possible and make payment as late as possible It

makes the most important part of working capital

management, to plan and control cash. Management of cash

is usually based on the cash conversion cycle. Cash

conversion cycle is the length of time from the payment for

the purchase of raw materials to manufacture a product

until the collection of accounts receivable associated with

the sale of the product (Besley, Brigham, 2000). Long cash

conversion cycle causes a reduction in the profitability of a

company (Shin and Soenen 1998) as longer cycle leads to

blockage of funds and therefore less profitability. However,

longer cash conversion cycle may also lead to higherprofitability by using credit sales strategy as it will lead to

higher sale. Conversely profitability may decrease with

cash conversion cycle, if the cost of higher investment in

working capital rises faster than the benefits of holding

inventory or granting more credit to customers (Shin and

Soenen 1998). (Shin and Soenen 1998) highlighted the

importance of shortening cash conversion cycle, as

managers can create value for their shareholders by

reducing the cash conversion cycle by minimum

reasonable.

A firm may adopt an aggressive working capital policy with

low level of current assets but if the inventory level is

reduced too much, the firm may risk losing any opportunity

of increased demand (Wang 2000). Also too much

reduction in trade credit may negatively impact sales for the

customer requiring credit. In fact the opportunity cost may

exceed 20%, depending on the discount percentage and

discounted period granted (Ng et al 1999, Wilner, 2000).

Conversely if we maintain high level of current asset

adopting conservative policy, it may lead to higher

profitability. Conservative approach reduces production

interruptions and possible loses for scarcity of products,reduced supply of cost and can protect against price

fluctuations (Gartia-Teruel and Martinez-Solano, 2007).

Net working capital level is a measure of a companysability to cover its short term financial obligations by

comparing its total current assets to its total assets. This

ratio can provide some insight as to what is the liquidity of

a company. An increasing working capital to total asset

ratio is a positive sign for a company, showing companys

improving liquidity over time. A decreasing ratio indicates

that company may have too many total current liabilities

and therefore reducing working capital which is available to

the company. This ratio actually is represented as net

current asset of a company as a percentage of total assets

(SEN Mehmet and ORUC Eda 2009). This study attempts

to understand how the net working capital ratio varies from

one industry to other.

Working capital turnover ratio is yet another important toolto find useful information on how effectively a company is

using its working capital to generate sales. The working

capital turnover ratio is used to analyze the relationship

between the money used to fund operations and the sales

generated from these operations. Higher working capital

turnover ratio is better because it means that the company is

generating adequate sales compared to the money it uses to

fund the sales (Singh J. P. and Shishir Pandey). However a

very high turnover indicates a sign of overtrading which

may in some case put the firm in financial difficulties. We

will also make an investigation on how working capital

turnover ratio varies across industries for the Indian firms.


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Inventory turnover ratio shows how many times a

companys inventory is sold and replaced over a period of

time. This ratio varies from one industry to other depending

on various factors relating to the industry. This ratio for acompany should be compared with the industry average. A

lower ratio will imply poor sales and for high turnover

otherwise. A high ratio will imply either sales or ineffective

purchasing (Abuzar Eljelly 2004). We will make an

investigation, how inventory turnover ratio makes an

impact on profitability of a firm.

2. LITERATURE REVIEWIn the past many research have been conducted to

investigate the relationship between working capital

management and profitability of the firm in different

environments. Shin and Soenen (1998) used a sample of

58,985 firms years covering the period 1975-1994 in orderto investigate the relationship between net-trade cycle

which was used as a measure of working capital

management efficiency and corporate profitability. He

observed a strong negative relationship between the length

of net-trade cycle and its profitability.

Mehmet Sen and Eda ORUC (2009) examined the

relationship between efficiency level of firms which are

traded on ISE (Istanbul Stock Exchange) and their return on

total assets. The study found that there is a significant

negative relationship between cash conversion cycle, net

working capital level, current ratio, accounts receivable

period, inventory period and return on total assets. Thestudy used fixed effect and random effect model for model

building for five industries undertaken for the study.

Deloof (2003) made an investigation for the relationship

between working capital management and corporate

profitability. He used a sample of 1009 large Belgium non-

financial firms for the period from 1992 to 1996. The

results showed a negative relationship between gross

operating income, a measure of corporate profitability and

cash conversion cycle as well as days account receivable

and inventories.

Lazaridis and Tryfonidis (2006) also investigated

relationship between working capital management andcorporate profitability for the firms listed in Athens Stock

Exchange for a sample of 131 listed companies. Researcher

used the company financials from 2001-2004 for the study.

The results of the study of regression analysis showed that

there was a statistically significant relationship between

gross operating profit, a measure of profitability and the

cash conversion cycle. He suggested that by optimizing the

cash conversion cycle the managers could create value for

the share holders.

M. A Zariyawati, M. N. Annuar, and A. S. Abdul Rahim,

investigated the relationship between working capital

management and profitability of the firm. Researchers haveused cash conversion cycle as a measure of working capital

management. This study has used a panel data of 1628 firm

year for a period of 1996 to 2006. The coefficient results of

pooled OLS regression analysis provide a strong negative

significant relationship between cash conversion cycle andprofitability of the firms. It is revealed that by reducing

cash conversion cycle firms profitability can be increased.

Raheman and Nasr (2007) also investigated relationship

between cash conversion cycle and its components by

taking a sample of 94 firms listed on Karachi Stock

Exchange for a period of six years from 1999-2004. He

investigated that cash conversion cycle is negatively related

to net operating profit which is a measure of profitability.

Similar relationship was observed for average collection

period, inventory turnover in days, and average payment

period.

Lyroudi and Lazaridis (2000) considered cash conversioncycle as a measure of liquidity indicator for the firms in

Greek food industry. He examined the relationship of cash

conversion cycle with current and quick ratio. Researchers

examined the implications of the cash conversion cycle in

terms of profitability, indebtedness, and firm size. The

outcome of the study was a significant positive relationship

between the cash conversion cycle and the traditional

liquidity measures of current and quick ratios.

Wang (2002) made a study for the firms in Japan and

Taiwan to find a relationship between liquidity

management and operating performance. He also

investigated the relationship between liquidity managementand corporate value of firms. The empirical findings for

both countries show a negative relationship between CCC

and ROA and CCC and ROE. These results were in line

with Jose et al. (1996) and Shin and Soenen (1998) that

lower cash conversion cycle corresponds with better

operating performance. Further in case of both countries it

was investigated that aggressive liquidity management is

associated with higher corporate value.

Eljelly (2004) empirically investigated the relationship

between profitability and liquidity for a sample firms in

Saudi Arabia. Researcher took cash gap and current ratio as

a measure of liquidity. Using correlation and regression

analysis a negative relationship was investigated between

liquidity and profitability, where current ratio was taken as

measure of liquidity. At company level it was observed that

cash gap (cash conversion cycle) is more important as

measure of liquidity than the current ratio as measure of

liquidity that affects profitability. At industry level it was

observed that size have significant effect on profitability.

Padachi (2006) investigated the working capitalmanagement practices for the manufacturing firms in

Mauritius by taking a sample of 58 small firms. Researcher

examined the trends in working capital management and itsimpact on performance. Regression results observed

negative relationship between inventories and receivables


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with profitability. The study has also shown a positive

relationship between various working capital components

and profitability. An increasing trend was observed in the

short-term component of working capital financing.

Garcia-Teruel and Martinez-Solano (2007) examined effect

of working capital management on profitability for small

and medium size Spanish firms first time. Using panel data

authors revealed that there is a negative relationship

between inventories and days account outstanding and

profitability. The authors further concluded that by

managing working capital such that the cash conversion

cycle is reasonably, minimum, the managers can create

value for SMEs.

Samiloglu and Demirgunes (2008) examined the effect of

working capital management on the profitability of the

firms listed at Istanbul Stock Exchange (ISE). By usingmultiple regressions the study shows that there exist

negative relationship between account receivable period,

inventory period and leverage and profitability of the firms.

However growth (in sales) affects firms positively.

(SEN Mehemet, KOKSAL Can Deniz and ORUC Eda)

investigated the change in working capital as a result of

change in working capital management efficiency is

compared by company size and sectors. With the data

available the researchers calculated the effect of change in

working capital management efficiency on to the effect of

working capital change. It is observed that efficiency

change in management of the short term commercialreceivables and short term commercial liabilities by a

company size and sectors makes a positive effect in to the

change in working capital

3. OBJECTIVE AND HYPOTHESES OF THESTUDY

Based on the study we formulated following hypotheses for

the firms in automobile industry in India.

Net working capital ratio is positively related toprofitability.

Working capital turnover ratio is positively related toprofitability.

Inventory turnover ratio is positively related toprofitability.

Current ratio is positively related to profitability. Days inventory outstanding is negatively related to

profitability.

Days sales outstanding are negatively related toprofitability.

Days payable outstanding is positively related toprofitability.

Cash conversion cycle is negatively related toprofitability.

Sales to total asset ratio is positively related toprofitability.

Size of the firms is positively related to profitability.

4. VARIABLES AND RESEARCHMETHODOLOGY

We have considered return on capital employed as a

measure of profitability which is a dependent variable. Networking capital ratio, working capital turnover, current

ratio, inventory turnover, days inventory outstanding,days payable outstanding, days sales outstanding, cash

conversion cycle and sales to total asset ratio. We have

selected 12 companies randomly belonging to automobile

sector. All companies selected are listed on National Stock

Exchange in India and the financial data is available

authentically. We have collected data from EMIS

(emerging market information service) for twelve years

from 1999-2010.

5. RESULTS AND INTERPRETATIONSDescriptive Analysis : In the study there are statistics thatdescribes the companies in a particular industry on the basis

of investigated variables. Descriptive statistics shows the

average and standard deviation of different variables of

interest in the study for the firm in a particular industry. It

also presents the minimum and maximum values of a

variable a firm can take. This will give fairly good idea of

what can go wrong with a company in extreme situations.

This also set benchmarks for companies to achieve.

Standard deviation explains the spread of data from the

mean.

Table 1 presents descriptive statistics of 12 Indian firms

belonging to automobile industry for a period of twelveyears from 1999 to 2010 and for a total of 12*12=144 firm

year observations. The mean value of return on capital

employed (ROCE) is 16.60 % of the capital employed, and

standard deviation is 25 %. It means that the value of return

on capital employed can deviate from mean to both sides by

25%. This also explains that a company in automobileindustry can achieve ROCE as high as 20.75%. Also if a

company is operating on a ROCE lesser than 12.45%, it

actually is under performing. The extreme values of ROCE

are 98.61% to -103.24% for the companies in a year for

automobile industry.

Net current asset which is the measure of working capital

efficiency for the particular industry is on average Rs.

255.24 crores. This can be said to be industry average for

automobile. Standard deviation is 771.89. The variation in

the net working capital can be minimum -5672.92 and

maximum as 2784.05. This explains variations because of

seasonal fluctuations and necessary inventory build-ups for

imports and factor financing. The minimum and maximum

is the function of company size also.

Industry average for the working capital turnover is 7.43

which mean that the working capital is turned 7.43 times

for achieving the company sales in automobile industry.

Maximum for the industry is 100 and minimum is -100.

This means that working capital turnover for the automobile


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industry varies between -100 to +100. Standard deviation

for working capital turnover for the industry is 27.71. This

explains as to how much working capital turnover varies

from the mean as standard deviation is actually the squareroot of variance. Actually for calculating standard deviation

we subtract mean 7.43 from each firms working capital

turnover, square them add them and take under root and this

explains the variance under root which is standard

deviation. While minimum and maximum explains what the

extreme values working capital turnover may take.

Industry average of inventory turnover for auto industry is

10.70. This means that inventory is sold 10.7 times and

replenished in a year in automobile industry. Minimum is

2.15 and maximum is 44 times. 2.15 belong to HMT

Limited which is a PSU and inefficient one while 44

belongs to Hero Honda for which ROCE is more than 50.

Standard deviation is 8.32 which mean the value of

inventory turnover can vary by 8.32 from the mean for

automobile industry.

Average current ratio for automobile industry is 2.08. The

minimum is .51 and maximum is 8.02. The standard

deviation is 1.32. This value of standard deviation explains

that the industry is a matured industry where all working

capital management systems are in place. There is efficient

inventory management and vendors are able to feed all

materials in time.

The cash conversion cycle is used to check the efficiency in

managing working capital. Average value of CashConversion Cycle for automobile industry is 9.50 days and

standard deviation is 53 days. Firms in automobile sector

receive payment against sales after an average of 49 days

and standard deviation is 59 days. Minimum time taken for

a firm to collect payment in automobile sector is 3 days

which is as good as delivery against payments to the

dealers. Maximum time taken by a firm in automobile

sector is 356 days. It takes an average 53 days to sale

inventory with standard deviation 35 days. Here maximum

time taken by a firm in automobile industry to convert

inventory into sales is 235 while minimum is 5 days. Firms

in automobile industry wait an average 92 days before

paying their purchases with standard deviation of 54 days.Here minimum time taken for a company to pay their

supplier is 18 days and maximum time is 287 days.

Sales to total asset ratio is used as proxy to see the return on

total assets and average value of this is 2.44 and standard

deviation is 1.27. Minimum is .12 and maximum is 6.37.

To check the size of the firm and its relationship with

profitability in a particular industry natural logarithm of

sales is used as a variable. The mean value of log of sales is

3.09 while the standard deviation is 0.77. The maximum

value of log of sales in a particular year for automobileindustry is 4.55 and the minimum is 1.77.

Pearsons Correlation Coefficient Analysis : For

quantitative analysis we used two methods. At first

correlation is used to measure the degree of association

between different variables used in the study. Pearson and

Spearman correlations are calculated for all variables usedin the study starting with Pearsons correlation results.

Table 2 presents the correlation matrix for different

variables considered for the present study for automobile

industry. Total observations are 144 for 12 Indian

automobile firms for 12 years from 1999 to 2010. We will

start our analysis of correlation results between working

capital turnover and return on capital employed. There is a

negative relationship between working capital turnover and

return on capital employed. The result of correlation

analysis shows a negative coefficient -0.214, with p-value

of (0.010). This indicates that the result is highly significant

at alpha=1%. This means that there is only 1% chance that

working capital turnover is negatively correlated to return

on capital employed by chance. That means that 99 times in

100 the relationship holds true. Therefore we accepted

alternative hypotheses that working capital turnover is

negatively related with profitability.

Net working capital ratios are positively correlated with

return on capital employed. Correlation coefficient is 0.015

and p-value is (.857). The result shows that the positive

relationship is not significant and is very poor. Therefore

we accept null hypotheses that there is no relation between

net working capital ratio and profitability.

There is positive relationship between inventory turnoverand return on capital employed. The results show a positive

coefficient +0.595, with p-value of (000). This also show

that results are highly significant at alpha=1%. This means

that 99 times out of 100 the observed relationship holds

true. And this relationship occurs only 1 time by chance

otherwise 99 times it holds true. This means if we turn

inventory more times to achieve the sale it results to more

return on capital employed in automobile industry in India.

Current ratio is a traditional measure of liquidity of the

firm. In this analysis current ratio has a significant negative

relationship with return on capital employed. The

correlation coefficient in this case is -0.199. The result is

significant at alpha=5%. This indicates that the two

variables liquidity and return on capital employed have

inverse relationship. Therefore we accept alternative

hypotheses that current ratio is negatively related to

profitability. It establishes the fact that Indian firms need to

maintain a trade-off between current ratio and return on

capital employed.

Correlation result between inventory in days and return oncapital employed is negative at significance level of 1%.

The correlation coefficient is -0.448, and the p-value is

(000). Since there is strong negative relationship it showsthat firms in automobile industry in India takes more time

to sale their inventory which adversely affects the return on


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capital employed.

Correlation results between days sale outstanding and

return on capital employed shows negative relationship.Correlation coefficient is -214 and the p-value is (.010).

The result is significant at 1%. Therefore we accept

alternative hypothesis that if we give more credit to

customer the return on capital employed decreases.

Correlation results between payable in days and return on

capital employed shows the same relationship. Here the

coefficient is again negative and highly significant.

Correlation coefficient is -0.364 and the p-value are (000).

Therefore we accept alternative hypothesis that if we pay

our supplier early return on capital employed increases. It

means that less profitable firms take longer to pay their

suppliers.

Cash conversion cycle is the company management

capability of how fast the company cash is converted to

further cash for operations. There exist a negative

relationship between cash conversion cycle and return on

capital employed. Correlation coefficient is -0.169 and the

p-value is .043. But it is significant at alpha=5%. Therefore

we accept alternative hypothesis that current ratio is

negatively related to profitability. It means that if the firm is

able to decrease the cash conversion cycle, it can increase

the firms profitability in automobile industry in India.

There is a positive relationship between sales to total asset

ratio of a firm and return on capital employed. Correlation

coefficient is .263 and the p-value is (.001). This means that

the result is significant at alpha=1%.

Positive relationship between log of sales of a firm which is

a measure of companys size and return on capital

employed is another important observation of the study.

The correlation coefficient is positive .380 and the p-value

is (000). The result is highly significant at 1%. It shows that

as the size of the firm increases, the return on capital

increases.

Regression Analysis : From the table 3 above the slopes of

the ROCE equation associated with WCTR, ITO, CR, DIO,

DSO and DPO witnessed both positive and negative

influences of variations in the independent variables on the

profitability of the company. Of the six regressioncoefficients of the ROCE line four coefficients which were

associated with WCTR, CR, DIO and DPO shoed negative

influence on the profitability. For a unit increase in the

value of ITO and DSO, there was significant improvement

in the profitability of the company. The coefficient of

multiple determinations (R Square) makes it clear that 0.39

percent of the total variation in the profitability of the

company was explained by six independent variables

WCTR, ITO, CR, DIO, DSO and DPO.

Table 1 Descriptive Statistics

N Minimum Maximum Mean Std. Deviation

ROCE 144 -103.24 98.61 16.6060 25.00084

DPO 144 18.29 296.93 91.8642 53.53471

WCT 144 -100.00 100.00 7.4394 27.71387

ITO 144 2.15 44.52 10.7035 8.32211

CR 144 .51 8.02 2.0874 1.32395

DIO 144 5.40 234.81 52.7431 35.15196

DSO 144 2.83 355.77 48.6280 59.06837

CCC 144 -75.89 219.43 9.5069 52.79530

STAR 144 .12 6.37 2.4457 1.27725SIZE 144 1.77 4.55 3.0939 .77686

NCWR 144 -.49 104.00 .9946 8.64978

Valid N (listwise) 144

Table 2 : Correlation analysis

Table : Pearson Correlations Coefficients (Automobile Industry)

ROCE NWCR WCT ITO CR DIO DSO DPO CCC STAR SIZE

ROCE

Pearson Correlation 1

Sig. (2-tailed)

N 144

NWCR Pearson Correlation -.015 1


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Sig. (2-tailed) .857

N 144 144

WCT

Pearson Correlation -.214**

.163 1

Sig. (2-tailed) .010 .051

N 144 144 144

ITO

Pearson Correlation .595 -.191 -.145 1

Sig. (2-tailed) .000 .022 .083

N 144 144 144 144

CR

Pearson Correlation -.199*

.327**

-.024 -.371**

1

Sig. (2-tailed) .017 .000 .778 .000

N 144 144 144 144 144

DIO

Pearson Correlation-

.448**.050 -.030 -.674

**.382

**1

Sig. (2-tailed) .000 .550 .718 .000 .000

N 144 144 144 144 144 144

DSO


.214**

.192

*-.044 -.377

**.712

**.546

**1

Sig. (2-tailed) .010 .021 .597 .000 .000 .000

N 144 144 144 144 144 144 144

DPO


.364**

.028 .077 -.484

**.332

**.633

**.741

**1

Sig. (2-tailed) .000 .740 .360 .000 .000 .000 .000

N 144 144 144 144 144 144 144 144

CCC

Pearson Correlation -.169 .220 -.148 -.381 .714 .635 .731 .237 1

Sig. (2-tailed) .043 .008 .077 .000 .000 .000 .000 .004

N 144 144 144 144 144 144 144 144 144

STAR

Pearson Correlation .263**

-.216**

-.049 .448**

-.596**

-.394**

-.634**

-.489**

-.476**

1

Sig. (2-tailed) .001 .009 .559 .000 .000 .000 .000 .000 .000

N 144 144 144 144 144 144 144 144 144 144

SIZE

Pearson Correlation .380 .094 -.049 .540 -.400 -.598 -.419 -.425 -.436 .248 1

Sig. (2-tailed) .000 .263 .560 .000 .000 .000 .000 .000 .000 .003

N 144 144 144 144 144 144 144 144 144 144 144

**. Correlation is significant at the 0.01 level (2-tailed).

*. Correlation is significant at the 0.05 level (2-tailed).

Multiple regression analysis

Regression model equation

ROCE=b0+b1(WTR)+b2(ITO)+b3(CR)+b4(DIO)+b5(DSO)+b6(DPO)

R=0.625, R Square=0.390, Adj. R Square=0.363, F=16.620, Sig. F=7.4E-13

Table 3

Variables B Standard error of B t-values p-levels

Intercept (ROCE) 13.355 8.647 1.544 0.013

WCTR -0.114 0.063 -1.833 0.069

ITO 1.397 0.291 4.810 3.92E-06

CR -1.440 2.099 -0.686 0.494

DIO -0.070 0.075 -0.936 0.351


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DSO 0.088 0.064 1.373 0.172

DPO -0.092 0.059 -1.552 0.123

6. CONCLUSION OF THE STUDYThe out put of multiple regression is model which explain

the contribution of different working capital components

towards roce and the model is ROCE = b0 + b1(WTR) +

b2(ITO) + b3(CR) + b4(DIO) + b5(DSO) + b6(DPO)

7. LIMITATIONS OF THE STUDYThe study solely depends on the published financial data, so

it is subject to all limitations that are inherent in the

condensed published financial statements. We have

considered some operational firms in our study sample and

not considered the entire operating unit as sample, which

may leave some grounds for error.

8. FUTURE STUDYThe study can be further taken up to investigate the

relationship for other important industries in India and other

countries. Also the study can be extended to develop a

model which will explain how working capital management

impact profitability.

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6 DP Singh 1464 Research Article VSRDIJBMR February 2013