wcm in textile industry in bangladesh

7/27/2019 Wcm in Textile Industry in Bangladesh

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116 ASA University Review, Vol. 5 No. 1, JanuaryJune, 2011

requirement and realizing maximum possible revenues (Ganesan, 2007). There is a strongrelationship between the firms profitability and its working capital efficiency (Shin, 1998).

The term profitability refers to the ability of a firm to earn profit. Profit is determined by

matching revenue against cost associated with it (Salauddin, 2001). Profit of an enterprise in

absolute figure gives an idea about the result of its operation. Profitability is a widely used

financial measure of performance. The concept of profitability may be used in two senses:

commercial/private profitability and public profitability. Although the use of public profitabilitywhich is based on economists notion of cost and benefits, i.e., the true opportunity cost and the

benefits for the society as a whole, appears to be a more appropriate measure of performance of

public enterprises, the measure of commercial profitability has been used in this study.

This is because of the fact that commercial profitability is widely used to measure theperformance of public enterprises in Bangladesh and even in other countries of the world like

India, the UK, France etc. and also for its general acceptance and ready understandability.

Two major types of profitability ratios are computed: (i) Profitability in relation to sales and (ii)

Profitability in relation to investment. Gross Profit Margins (GPM), Net Operating Margin

(NOM), Return on Total Assets (ROTA), Return on Equity (ROE), and Return on Investment

(ROI) are the main measures of profitability. Therefore, profit is an absolute measure and

profitability is a relative measure of efficiency of the operations of an enterprise.

Publicly traded companies are the economic pulse of a nation. Their birth, prosperity and demisegenerally reflects the financial condition of the country. A fairly reliable index of an economy in

its process of growth and development is the rate of growth and decline of publicly traded

companies. With the rapid growth of trade, commerce and industries, the number of publicly

traded companies is considerably increasing in Bangladesh. These companies play a vital role on

the economy of the country. Textile is an important adjunct of industrialization in the country.

Now a days textile industry is the economic pulse of Bangladesh. Its growth reflects the financial

health of the country. The contribution of Textiles companies to Bangladesh economy is

encouraging. The investment in this sector is increasing which indicates the potentiality of this

sector. There are 39 listed Textile Companies in Dhaka Stock Exchange

(http://dsebd.org/industrylisting.php) and 33 listed in Chittagong Stock Exchange

(http://csebd.org/industrylisting.php). Analyzing the Industrial Life Cycle, it is found that all of

the listed companies just have reached the middle stage. No company could yet reach the maturitystage. In a word, textile industry of the country is just improving. This sector satisfies the demand

of the local market and also exports to international market. Recent evidences show that the

performance of this sector is not satisfactory as compared to the performance of other

manufacturing sectors. Against this backdrop an attempt has been made to examine the reasons of

poor performance of textiles sector and to explore whether the poor performance is the result of

poor Working Capital Management. The researcher has used correlation matrix and regression

analysis to examine the relationship between profitability and working capital management. Some

statistical tools like mean, standard deviation and co-efficient of variance were used to evaluate

the performance.


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Working Capital Management and Profitability 117

Objectives of the study

The major objective of the present study is to examine and evaluate the correlation between

Working Capital Management and Profitability in textile industry over a period of three years

from 2006 to 2008. The specific objectives of the study are as follows

i. To examine the profitability position of the selected textiles industries.ii. To examine the management of cash, inventory and accounts receivable of selected

textiles industries

iii. To assess the current liability positions and the efficiency with which the overall workingcapital is being managed.

iv. To assess the relationship between working capital management and profitability.v. To suggest some measures for improvement in working capital management.

Literature review

Extensive research works on working capital management have been done in both public and

private sectors including multinational companies in Bangladesh. Sayaduzzaman (2006) in his

article on Working Capital Management: A study on British American Tobacco Bangladesh

Company Limited mentions that the efficiency of working capital management of BritishAmerican Tobacco Bangladesh Company Ltd. is highly satisfactory due to the positive cash

inflows and planned approach in managing the major elements of working capital. He found that

working capital management helps to maintain all around efficiency in operations.

In the article Liquidity-Profitability Tradeoff: An Empirical Investigation in an Emerging

Market, Eljelly (2004) examined the relation between profitability and liquidity by using

correlation and regression analyses and found that the cash conversion cycle was of more

importance as a measure of liquidity than the current ratio that affects profitability.

Raheman (2007) studied the effect of different variables of working capital management

including the Average Collection Period, Inventory Turnover in Days, Average Payable Period,

Cash Conversion Cycle and Current Ratio on the Net Operating Profitability of Pakistani Firms.

By using Pearsons correlation and regression analysis he found that there was a strong negative

relationship between variables of Working Capital Management and Profitability. He also findsthat as the cash conversion cycle increases, it leads to decrease in profitability of the firm and

managers can create a positive value for the shareholders by reducing the cash conversion cycle

to a possible minimum level.

Islam & Rahman (1994) conducted a study on working capital trends of enterprises in

Bangladesh. They find that optimum working capital enables a business to have its credit

standing and permits the debts payments on maturity date and helps to keep itself fairly in liquid

position which enables the business to attract borrowing from the banks.

Deloof (2003) surveyed on Belgian Firms to find out whether the working capital management

affects profitability. He found that most firms had a large amount of cash invested in working

capital. It can be expected that the way in which working capital is managed, will have a

significant impact on the profitability of those firms. Using correlation and regression tests he

found a significant negative relationship between corporate profitability and number of days


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reports of the selected Textiles Mills Limited for the study period were considered. Moreoverextensive literature survey was done by searching different libraries. The collected data were

analyzed and interpreted with the help of different financial ratios, statistical tools like Mean,

Standard Deviation (S.D.), Correlation Coefficient etc. With the help of SPSS, Correlation Matrix

and Regression analysis were also forced out for analysis.

Findings and Discussions

There are four parts in this section. The first part shows the profitability position of the Textiles.

In the second part the position of working capital is analyzed. The third part focuses on

correlation between profitability and working capital management and the last part showed the

impact of working capital management on profitability.

Profitability of the selected textiles

Profitability of the textiles can be assessed by gross profit margin ratio, net profit ratio, return on

investment, operating profit ratio, return on capital employed and return on total assets. The table-

01depicts various profitability ratios of the selected textiles for the period under study.

Gross Profit Margin

The earnings in terms of sales can be assessed through the profit margin. The gross profit margin

reflects the effectiveness of pricing policy and of production efficiency. Some authors consider

that a profit margin ratio ranging from 20% to 30% may be considered as the standard norm for

any industrial enterprise. The table-01 shows that the average gross profit ratios range from

highest 34.43% in BL to lowest 9.42% in DGL. From the study it is found that the industry

average gross profit ratio is 17.69% and the average gross profit ratio of all but five samples is

below industry average. Variation of gross profit over the years is negligible except in two samplecompanies (STL and BL), which speaks about the stability of gross profit earning of this sector.

Net Profit Margin

The ratio of net profit margin reveals the overall profitability of the concern, thats why it is very

useful to the shareholders and the prospective investors. It also indicates management efficiency

in manufacturing, administrating and selling of the products. The table-01 shows that the net

profit ratios range from highest 10.75% in STL to lowest 13.36 %( negative) in BL. STL earned

the highest average net profit margin (10.75%) and industry average is 1.35%. The calculated net

profit margin ratios in table-01 are all very low except STL, STML, PTSML and HRTML. Lower

profitability position refers to the companys failure to achieve satisfactory return on owner

equity. It also indicates that the level of efficiency of the samples is low. The position of BL is

negative. The co-efficient of variation of net profit ratios of the samples reveals that the variation

of net profit over the years is negligible except two sample companies (STL and BL) which

speaks about the stability of net profit earning of this sector.


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Table: 01 Profitability Ratios of Selected Textiles Industries

Ratios MDSPL STL STML BL PTSML DGL MSL HRTML AIL Year

Gross Profit

Margin

11.00

13.56

13.51

22.13

22.84

16.87

21.98

21.46

19.89

39.03

29.18

35.08

9.621

10.12

11.82

9.700

9.280

9.270

18.44

19.90

22.57

14.16

14.25

14.32

16.22

16.23

15.00

2005-06

2006-07

207-08

12.69

17.691.464

2.143

20.61

17.693.261

10.64

21.11

17.691.088

1.184

34.43

17.694.957

24.57

10.52

17.691.153

1.330

9.420

17.690.245

0.060

20.30

17.692.094

4.386

14.24

17.690.080

0.006

15.82

17.690.707

0.500

Mean

IndustryAverage

S. D.C. V.

Net Profit

Margin

1.800

2.400

2.530

13.31

11.13

7.830

3.820

4.670

4.780

(4.010)

(23.30)

(12.79)

2.710

3.350

4.500

0.520

0.220

0.300

0.970

0.960

2.280

2.340

2.500

2.260

0.720

0.520

0.200

2005-06

2006-07

207-08

2.240

1.35

0.389

0.152

10.75

1.35

2.759

7.612

4.440

1.35

0.497

0.247

(13.36)

1.35

9.6579

93.275

3.520

1.35

0.907

0.823

0.340

1.35

0.155

0.024

1.400

1.35

0.759

0.576

2.370

1.35

0.122

0.015

0.480

1.35

0.262

0.069

Mean

Industry

Average

S. D.C. V.

Return on

Investment

2.570

2.930

3.090

20.72

32.93

19.48

11.79

15.73

15.64

(1.39)

(6.74)

(3.19)

3.690

4.790

6.200

4.770

2.010

2.210

6.850

8.900

17.72

2.270

2.350

2.450

0.750

0.760

0.700

2005-06

2006-07

207-08

2.8606.670

0.266

0.071

24.386.670

7.433

55.25

14.396.670

2.249

5.059

(3.77)6.670

2.722

7.411

4.8906.670

1.258

1.583

3.0006.670

1.539

2.369

11.166.670

5.776

33.36

2.3606.670

0.090

0.008

0.7406.670

0.032

0.001

MeanIndustry

Average

S. D.C. V.

Operating

Profit Ratio

3.920

5.270

5.320

19.63

20.89

14.78

18.09

16.47

15.18

29.61

23.34

34.11

2.990

4.020

5.550

0.610

0.260

0.350

14.10

16.01

17.87

2.850

3.050

2.350

4.230

3.350

4.780

005-06

2006-07

207-08

4.840

10.72

0.794

0.631

18.43

10.72

3.226

10.41

16.58

10.72

1.458

2.126

29.02

10.72

5.409

29.26

4.190

10.72

1.288

1.659

0.410

10.72

0.182

0.033

15.99

10.72

1.885

3.553

2.750

10.72

0.361

0.130

4.120

10.72

0.722

0.520

Mean

Industry

Average

S. D.C. V

Return on

Capital

Employed

2.030

2.320

2.450

15.02

15.69

10.65

3.70

5.01

5.60

(2.32)

(14.9)

(5.35)

0.35

3.09

4.31

4.77

2.01

2.21

4.06

4.92

13.62

3.70

4.33

5.21

1.53

1.59

1.25

2005-06

2006-07

207-082.270

3.590

0.215

0.046

13.79

3.590

2.7370

7.491

4.77

3.590

0.9725

0.946

(7.52)

3.590

6.5656

43.107

2.58

3.590

2.0280

4.113

3.00

3.590

1.5390

2.369

7.53

3.590

5.2887

27.971

4.41

3.590

0.7584

0.575

1.46

3.590

0.1815

0.033

Mean

Industry

Average

S. D.C. V

Return on

Total Assets

1.61

1.88

2.01

9.00

8.27

5.00

2.31

3.11

3.20

(1.39)

(6.74)

(3.19)

2.23

3.09

4.31

1.04

0.46

0.61

0.82

1.02

2.00

2.12

2.26

2.45

0.75

0.76

0.25

2005-06

2006-07

207-08

1.83

1.83

0.2040

0.042

7.42

1.83

2.1302

4.538

2.87

1.83

0.4899

0.240

(3.77)

1.83

2.7223

7.411

3.21

1.83

1.0452

1.092

0.70

1.83

0.3011

0.091

1.28

1.83

0.6315

0.399

2.28

1.83

0.1656

0.027

0.59

1.83

0.2916

0.085

Mean

Industry

Average

S. D.C. V

Source: Annual Report and Official Records of the selected Textiles Enterprises (2005-06 to 2007-08)


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Return on Investment (ROI)

This ratio measures the profitability of enterprise on total investment. The Planning Commission,

the Government of Bangladesh, has declared that the entire existing project in the public sector

would have to guarantee a fixed return of 7.5% of the investment. The table-01 shows that the

return on investment on an average for the period under study varies from maximum 19.48% in

STL to minimum 0.70% in AIL and the industry average is 6.67% which is lower than thestandard norm of 7.5%. The ratio for BL is negative. It is seen from the table that MDSPL, BL,

PTSML, DGL, HRTML and AIL have a low ratio as compared to the industry average and

standard norm, which is indicative of poor earning in terms of investment, the return on

investment for STL (24.38%), STML (14.39%) and MSL (11.16%) being considered as

extremely satisfactory as compared with industry average ratio as well as the standard norm. The

co-efficient of variation of return on investment ratios of the samples reveals that the variation of

return on investment over the years is negligible except in two sample companies (STL and MSL)

which speaks about the stability of return on investment in this sector.

Operating Profit Ratio

It represents the overall earnings of an enterprise and one can get a clear idea about the efficiencyof an enterprise from its operating profit ratio. The higher the ratio, the better is the overall

efficiency of the enterprise. Operating profit ratio ranging from 4% to 6% is considered the norm

for the purpose of comparison and control by some authors. The table-01 shows that the average

operating profit ratio of the sample textiles ranges from the highest 29.02% in BL to the lowest

0.41% in DGL. The industry average operating profit ratio is 10.72% and most of the companies

(5 out of 9) failed to attain the average but most of the companies(4 out of 9) operating profit

ratio is more than standard. As to variation of operating profit over the years, it is revealed by the

coefficient of variance that the variation ranges from 0.033% in DGL to 29.259% in BL. The

coefficient of variance of 10.407% and 29.259% indicates inconsistency in the overall earnings of

STL and BL. The negligible variation of 0.631% in MDSPL, 2.126% in STML, 1.659% in

PTSML, 0.033% in DGL, 3.553% in MSL, 0.130% in HRTML and 0.520% in AIL, indicate

extremely desirable stability position.

Return on Capital Employed

It reflects the overall efficiency with which capital is used. A rate of return ranging from 11% to

12% on Capital employed may be considered as reasonable for a selected enterprise. The table-01

shows that the average returns on capital employed ranges from 1.46% in AIL to 13.79% in STL

and the average ratio is negative for BL (-7.52%). It appears from the table that the industryaverage return on capital employed is 3.59% which is not satisfactory in terms of the standard

norm. It is seen from the table that only STL has a high ratio as compared with standard norm,

STML, DGL, MSL and HRTML have a high ratio as compared to industry average. MDSPL, BL,

PTSML and AIL have a ratio lower than industry average, which is indicative of poor earning in

terms of capital employed. It appears from the table that BL has the highest variation (43.107%)


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and MSL has the second highest variation (27.971%) as indicated by the coefficient of variationwhich indicates extreme instability in their earnings. The variation of this ratio for MDSPL

(0.046%), STL (7.491%), STML (0.946%), PTSML (4.113%), DGL (2.369%), HRTML

(0.575%) and AIL (0.033%) should be considered satisfactory. The lower ratios dictate that

management should be more efficient in using the long term fund of owners and creditors.

Return on Total Assets

This ratio is calculated to measure the profit after the tax against the amount invested in totalassets to ascertain whether assets are being utilized properly or not. Some authors consider 10%to 12% rate of return on total assets as reasonable norm for profitable firms and this may beconsidered as reasonable norm for the selected enterprises. Table -01 shows that the averagereturn on total assets ranges from 0.59% in AIL to 7.42% in STL and the average return on totalassets for BL is negative (-3.77%). It is seen from the table that the average return on total assetsis 1.83% which is far away from standard norm. The average returns on total assets of all textilesare below the standard norm which cannot be considered as satisfactory and desirable. Theaverage return on total assets of DGL (0.70%), BL (-3.77%), MSL (1.28%) and AIL (0.59%) arebelow the industry average. The calculated ratios show a decreasing trend for most of the textilesduring the period of study and the lower ratios indicate the assets were not being utilized properlyduring the period. In the context of variation of this ratio over the years, it is found that thevariation is almost stable.From the profitability ratios it is clear that the performance of the sample Textiles Enterprises isnot satisfactory.

Working Capital Management position of the selected textiles industries

Working Capital position of textiles can be assessed by current ratio, quick ratio, net working

capital to total assets, net working capital turnover, inventory turnover, debtors turnover andcurrent assets turnover. Table-02 shows the working capital position of the selected textiles.

Current Ratio

This ratio is a measure of the firms short term solvency. It indicates the ability of the company tomeet its current obligations. Some authors consider 2:1 as standard norm for current ratio. Table-02 shows that the industry average current ratio is 0.94:1 which indicates that the industry is notable to meet its current obligations from its current assets. The average current ratio ranges from0.57:1 in MSL to 1.12:1 in STL. The average current ratios of DGL (0.61:1), MSL (0.57:1) andAIL (0.85:1) are below the industry average as well as below the standard norm. The averagecurrent ratios of MDSPL (1.08:1), STL (1.12:1), STML (1.10:1), BL (1.06:1), PTSML (1.08:1)and HRTML (0.98:1) are above the industry average but below the standard norm. It is seen fromthe table that all these ratios are far from standard norm. Therefore it can be said that the liquidityin terms of current ratio had been quite inadequate in all the years under study for all the textiles.From the coefficient of variation it is clear that the variation of current ratio over time isnegligible.


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Liquid (Quick or Acid Test) Ratio

It measures the firms ability to meet short term obligations from its most liquid assets. Table-02shows that the industry average of liquid ratio is 0.57:1 which is very lower than the standard(1:1) ratio. The table reveals that the average liquid ratio ranges from 0.29:1 in STML and inDGL to 1.28:1 in MDSPL. The average liquid ratios of STML (0.29:1), PTSML (0.55:1), DGL

(0.29:1), MSL (0.38:1) and AIL (0.43:1) are below the industry average as well as far away fromthe standard norm. The average ratios of STL (0.64:1), BL (0.59:1), HRTML (0.70:1) are abovethe industry average but below the standard norm. It indicates that all Textiles Enterprises exceptMDSPL are financially very weak and have no ability to pay its most immediate liabilities. It isalso observed that this position is declining for most of the Textile Enterprises and it is adangerous signal for the companies. In the context of variation of this ratio over the years, it isfound that the variation is almost stable.

Table: 02 Working Capital Position of Selected Textiles


Current

Ratio

1.26:1

1.51:1

1.74:1

1.05:1

1.09:1

1.21:1

0.98:1

1.13:1

1.19:1

1.27:1

0.98:1

0.92:1

1.09:1

1.08:1

1.06:1

0.70:1

0.60:1

0.52:1

0.58:1

0.56:1

0.56:1

0.98:1

0.97:1

0.98:1

0.98:1

0.90:1

0.67:1

2005-06

2006-07

207-08

1.08:10.94:1

0.241

0.058

1.12:10.94:1

0.0831

0.0070

1.10:10.94:1

0.1080

0.0120

1.06:10.94:1

0.187

0.035

1.08:10.94:1

0.015

0.001

0.61:10.94:1

0.090

0.008

0.57:10.94:1

0.012

0.001

0.98:10.94:1

0.006

0.001

0.85:10.94:1

0.161

0.026

MeanIndustry

Average

S. D.C.

V.

Quick

Ratio

1.06:1

1.31:1

1.47:1

0.58:1

0.66:1

0.69:1

0.35:1

0.34:1

0.18:1

0.68:1

0.52:1

0.57:1

0.51:1

0.66:1

0.49:1

0.32:1

0.23:1

0.33:1

0.42:1

0.37:1

0.34:1

0.59:1

0.76:1

0.74:1

0.47:1

0.50:1

0.32:1

2005-06

2006-07

207-08

1.28:1

0.57:1

0.207

0.043

0.64:1

0.57:1

0.057

0.003

0.29:1

0.57:1

0.096

0.096

0.59:1

0.57:1

0.082

0.007

0.55:1

0.57:1

0.093

0.009

0.29:1

0.57:1

0.055

0.003

0.34:1

0.57:1

0.040

0.002

0.70:1

0.57:1

0.093

0.009

0.43:1

0.57:1

0.096

0.009

Mean

Industry

Average

S.D.C.V.

Net

WorkingCapital

to Total

Assets

(in time)

(0.005)

0.0400.080

0.019

0.4010.104

(0.007)

0.0470.080

0.108

(0.012)(0.035)

0.026

0.0240.024

(0.233)

(0.307)(0.348)

(0.0003)

(0.0004)(0.0004)

(0.008)

(0.014)(0.012)

(0.008)

(0.05)(0.18)

2005-06

2006-07207-08

0.038

(0.0099)

0.042

0.002

0.174

(0.0099)

0.200

0.040

0.041

(0.0099)

0.044

0.002

0.021

(0.0099)

0.077

0.006

0.025

(0.0099)

0.001

0.000

(0.296)

(0.0099)

0.0583

0.0034

(0.0004)

(0.0099)

0.00001

0.00000

(0.012)

(0.0099)

0.0031

0.0000

(0.079)

(0.0099)

0.0897

0.0081

Mean

Industry

Average

S.D.C.V.

Net

Working

Capital

Turnover

(178.1)

19.11

9.875

35.79

18.52

6.151

(100.2)

14.25

8.375

19.44

(24.17)

(7.14)

22.69

27.92

25.00

(8.54)

(6.94)

(5.75)

(2400)

(2100)

(1850)

(112.5)

(62.14)

(100.82)

(112.5)

(28.0)

7.06

2005-06

2006-07

207-08

(49.71)

(254.9)

111.20

12365

20.15

(254.9)

14.89

221.7

(25.79)

(254.9)

64.332

4138.4

(3.96)

(254.9)

21.98

483.12

25.20

(254.9)

2.620

6.860

(7.08)

(254.9)

1.400

1.962

(2116)

(254.9)

275.4

75834

(91.82)

(254.9)

26.358

694.74

(44.48)

(254.9)

61.46

3777.33

Mean

Industry

Average

S.D.C.V.


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Inventory

Turnover

22.30

21.00

16.67

4.092

4.261

2.763

1.662

2.093

1.561

1.522

1.161

1.742

3.641

5.641

2.793

6.752

7.453

14.36

3.821

5.704

4.143

05.44

08.81

10.15

03.35

05.67

05.55

2005-06

2006-07

207-08

19.99

6.45

2.947

8.689

3.701

6.45

0.821

0.675

1.772

6.45

0.282

0.079

1.473

6.45

0.293

0.086

4.032

6.45

1.463

2.141

9.521

6.45

4.206

17.69

4.552

6.45

1.005

1.012

08.13

6.45

2.431

5.889

04.86

6.45

1.306

1.706

Mean

Industry

Average

S.D.C.V.Debtors

Turnover

12.49

10.78

8.471

3.031

3.322

2.431

15.02

8.271

9.682

1.530

1.241

1.265

4.922

5.243

4.384

21.05

18.36

29.07

3.585

4.876

2.334

3.494

3.765

4.474

11.32

10.62

19.38

2005-06

2006-07

207-08

10.58

8.311

2.017

4.068

2.933

8.311

0.454

0.206

10.99

8.311

3.561

12.680

1.342

8.311

0.162

0.026

4.853

8.311

0.435

0.189

22.83

8.311

5.572

31.04

3.595

8.311

1.270

1.613

3.913

8.311

0.506

0.256

13.77

8.311

4.868

23.70

Mean

Industry

Average

S.D.C.V.

Current

Assets

Turnover

3.470

2.760

2.530

1.701

1.221

1.292

1.621

1.572

1.311

0.690

0.540

0.660

1.941

2.232

1.511

3.63

4.63

5.32

1.571

1.732

1.471

2.182

1.910

2.420

2.092

2.973

3.422

2005-06

2006-07

207-08

2.920

2.163

0.490

0.241

1.401

2.163

0.257

0.067

1.500

2.163

0.166

0.028

0.630

2.163

0.079

0.006

1.893

2.163

0.362

0.131

4.527

2.163

0.849

0.721

1.591

2.163

0.131

0.017

2.172

2.163

0.255

0.065

2.827

2.163

0.676

0.457

Mean

Industry

Average

S.D.C.V.Source: Annual Report and Official Records of the selected Textiles Enterprises (2005-06 to 2007-08)

Net Working Capital to Total Assets

It is seen from the table-02 that the industry average of net working capital to total assets ratio is -0099:1. The table reveals that the average net working capital to total assets ratios of MDSPL(0.0383), STL (0.0543), STML (0.0403), BL (0.0247), PTSML (0.0247) and AIL (0.0407) arehigher than industry average and the average ratios of DGL (-0.2960), MSL (-0.0004), HRTML (-0.0114), are lower than industry average and the figures are negative. From the calculated ratios itis clearly seen that the net working capital to total assets ratios is very small and for three sampleTextiles the ratio is negative. Such state of affairs indicates the inability and inadequacy of networking capital to the total assets of the selected enterprises for the period under review.

Inventory Turnover Ratio

A low inventory turnover may indicate an excessive investment in inventories, a high ratio oftenmeans that the firm is running short of stock, resulting in poor service to customers. Higher theratio the better it is because it shows that the stock is rapidly turned over. The table-02 shows thatthe industry average inventory turnover is 6.45 times. It is seen from the table that the averageinventory turnover ratio ranges from 1.47 times in BL to 19.99 times in MDSPL. Some authorsconsider 8 to 9 times of inventory turnover ratio as the reasonable norm for an efficient concern.From the study it is seen that the average inventory turnover for all selected textiles except threetextiles, MDSPL(19.99 times), DGL (9.52), HRTML (8.13), is lower than the industry average aswell as standard norm which implies excessive inventory levels or a slow moving or obsoleteinventories. This will adversely affect the working capital and the liquidity position of the firm.The calculated ratios indicate that the sale management of the selected Textiles is not efficient

enough to sell its products.


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Debtors Turnover

Accounts receivable turnover ratio or debtors turnover ratio indicates the number of times thedebtors are turned over in a year. The higher the value of debtors turnover the more efficient isthe management of debtors or more liquid the debtors are. Similarly, low debtors turnover ratioimplies inefficient management of debtors or less liquid debtors. Table-02 shows that the average

debtors turnover ratio ranges from 1.34 times in BL to 22.83 times in DGL. The lower ratio forSTL, BL, PTMSL, MSL and HRTML reveals that the management of debtors is inefficient andthe situation is good for MDSPL, STML, DGL and AIL. From the coefficient of variance it isobserved that the variance is negligible for all the textiles.

Current Assets Turnover

The average Current Assets Turnover ratio varied between 0.63 times in BL and 2.92 times inMDSPL during the study period. This ratio indicates that, on an average, the firm has generatedsales of taka 2.24 with the current assets worth taka 1.00 and this is indeed a very low ratio incomparison with the standard norms of the industry. Moreover current assets worth taka 1.00 hasbeen able to generate only taka 0.63 for BL. This is obviously a frustrating picture of inefficientutilization of current assets of the firm.

Correlation Analysis

The correlation between Working Capital Management and Profitability of the selected textiles

can be assessed through Pearsons Correlation Coefficient.Table: 03: Pearson Correlation Coefficient on Efficiency in Working Capital and Profitability 9 Textiles, 2005-

2008: 27 Firm Year Observations

Current

Ratio

Quick

Ratio

Gross

Profit

Margin

Net Profit

Margin

Return on

Investment

Operating

Profit Ratio

Return on

Capital

Employed

Return

on Total

Assets

Current Ratio 1 0.498 0.242 0.118 0.156 0.272 -0.070 0.278

Quick Ratio 1 -0.122 0.390 -0.168 -0.135 -0.079 0.088

Gross Profit Margin 1 -0.571 0.006 0.954** -0.356 -0.419

Net Profit Margin 1 0.784* -0.386 0.922** 0.964**Return on Investment 1 0.241 0.886** 0.845**

Operating Profit Ratio 1 -0.159 -0.216Return on Capital

Employed 1 0.914**Return on Total Assets 1

*Correlation is significant at the 0.05 level (2-tailed). **Correlation is significant at the 0.01 level (2-tailed)

Table 03 shows the relationship between the efficiency of working capital and profitability ofselected textiles for the study period. The efficiency of working capital has been shown throughthe current and quick ratios of the textiles. It has been found that the current ratio of the selectedtextiles was negatively related with return on capital employed, but positively related with otherprofitability variables considered in this analysis. On the other hand, quick ratio of the selected

textiles was negatively related with gross profit margin, return on investment, operating profit


12/18


ratio and return on capital employed, but positively related with the rest of the profitabilityvariables. Though there are relationship existing within the efficiency of working capital and theprofitability, yet these relationships are not statistically significant.

Table 04: Pearson Correlation Coefficient on Earnings and Activity Level 9 Textiles, 2005-2008: 27 Firm Year

Observations

Gross

ProfitMargin

Net

ProfitMargin

Return

onInvest-ment

Opera-

tingProfitRatio

Return

onCapitalEmplo-yed

Return

onTotalAssets

Net

workingcapital tototalassets

Net

WorkingCapitalTurno-ver

Invent-

oryTurno-ver

Debtors

Turnov-er

Current

AssetsTurno-ver

Gross Profit Margin 1 0.974 -0.950 0.202 0.326 0.942 -0.344 -0.870 -0.998* 0.442 -0.810Net Profit Margin 1 -0.855 -0.418 0.551 0.993 -0.547 -0.736 -0.980 0.623 -0.657Return on Investment 1 0.113 -0.014 -0.790 0.034 0.980 0.966 -0.140 0.953Operating Profit Ratio 1 0.992 0.519 -0.989 0.308 -0.147 0.968 0.410Return on Capital

Employed 1 0.624 -1.000** 0.184 -0.272 0.992 0.291Return on Total Assets 1 -0.639 -0.654 -0.922 0.717 -0.566Net working capital to

total assets

1 -0.165 0.291 -0.994 -0.272

Net Working Capital

Turnover

1 0.890 0.059 0.994

Inventory Turnover 1 -0.391 0.842

Debtors Turnover 1 0.168

Current Assets

Turnover

1

*Correlation is significant at the 0.05 level (2-tailed). **Correlation is significant at the 0.01 level (2-tailed)

Table 04 shows the relationship between the efficiency ratio and the profitability ratio of theselected textiles for the study period. Current Assets Turnover is negatively related with GrossProfit Margin, Net Profit Margin and Return on Total Assets but positively related with return onInvestment, Operating Profit Ratio and Return on Capital Employed. These relationships are notstatistically significant. Debtors Turnover ratio is positively related with Gross Profit Margin, NetProfit Margin, Operating Profit Ratio and Return on Total Assets but negatively related with

Return on Investment and Return on Capital Employed and these relationships are not statisticallysignificant. Inventory Turnover is positively related with Return on Investment and Return onCapital Employed but negatively related with all other profitability variables. The relationshipbetween Inventory Turnover and Gross profit Margin is statistically significant and the rest arenot statistically significant. Net Working Capital Turnover is positively related with Return onInvestment and Operating Profit but negatively related with the rest profitability variables andthese relationships are not statistically significant. Net Working Capital to Total Assets ratio ispositively related with Return on Investment and Return on Capital Employed but negativelyrelated with the rest profitability variables and these relationships are not statistically significant.

Econometric Modeling

In this section the researcher has constructed a model that indicates the impact of working capitalpolicy on the overall profitability (Return on Total Assets) of the textiles. For this purpose the

secondary time series data have been used. In this model an attempt has been made to trace out


13/18


the impact of overall working capital policy on the textiles ROA. The researcher has selected anumber of variables to construct the model and finally settled with the following best variables onthe basis of their partial correlation coefficient. Thus the model is:ROA=f (ARD, APD, INVD, CCCD, CASA, CLTA)ROAit=0+1ARDit+2CASAit+3CLTAit+itROAit=0+1INVDit+2CASAit+3CLTAit+itROAit=0+1APDit+2CASAit+3CLTAit+it

ROAit=0+1CCCDit+2CASAit+3CLTAit+itHere the subscript i denotes textiles ranging from 1 to 27 and t denotes years (time seriesdimension) ranging from 1 to 3. The variables are ROA= Return on Total Assets, ARD=Accounts Receivable Turnover in Days, APD= Accounts Payable Turnover in Days, INVD=Inventory Turnover in Days, CCCD= Cash Conversion Cycle in Days, CASA= Current Assets toSales, CLTA= Current Liabilities to Total Assets.After applying partial correlation coefficient the model is:ROAit=6.009+0.01ARDit-0.04CASAit-0.04CLTAit+itROAit=5.476-0.02INVDit+0.02CASAit-0.05CLTAit+itROAit=4.683+0.02APDit-0.05CASAit-0.02CLTAit+itROAit=3.481-0.02CCCDit+0.04CASAit-0.02CLTAit+it

Table: 05 Model Summaryb

Model R

R

Square

Adjusted

R Square

Std. Errorof the

Estimate

Change StatisticsDurbin-

Watson

R Square

Change F Change df1 df2

Sig.F

Change

1 0.579a

0.335 0.248 2.6055 0.335 3.864 3 23 0.022 0.968

a. Predictors: (Constant), INVD, CLTA, CASAb. Dependent Variable: ROTA

The adjusted R-square of the model indicates 33.5% variation in ROA of textiles industry that canbe explained by the regression model. The unexplained part of the model is the error term. TheDurbin-Watson test indicates that there exists no auto-correlation in the model in which the valueof D-W statistic is 0.968.

Table:06 Coefficientsa

Model

UnstandardizedCoefficients

StandardizedCoefficients

t Sig.B Std. Error Beta

1 (Constant)

CASA

CLTA

INVD

5.476

0.02

-0.05

-0.02

1.675

0.030

0.020

0.011

0.298

-0.301

-0.784

3.269

0.733

-1.757

-1.922

0.003

0.471

0.092

0.067

a. Dependent Variable: ROAThe above table indicates the coefficient of the regression equation. From the table it can also be

inferred that the variables have a coefficient that are significant at d.f. =8 with 1% level of

significance. Another thing is that the variables in the model are free from Multicollinearity.


14/18


Table:07 Model Summaryb

Model R

R

Square

Adjusted

R Square

Std. Error

of the

Estimate

Change Statistics

Durbin-

Watson

R Square


Sig.F

Change

1 0.481a

0.231 0.131 2.8022 0.231 2.302 3 23 0.104 0.850

a. Predictors: (Constant), ARD, CLTA, CASAb. Dependent Variable: ROTAThe adjusted R-square of the model indicates 23.1% variation in ROA of textiles industry that canbe explained by the regression model. The unexplained part of the model is the error term. TheDurbin-Watson test indicates that there exists no auto-correlation in the model in which the valueof D-W statistic is 0.850.


Model




1 (Constant)CASACLTA

ARD

6.009-0.04-0.04

0.01

1.9070.0370.029

0.019

-0.542-0.272

0.140

3.151-1.079-1.475

0.278

0.0040.2920.154

0.783a. Dependent Variable: ROA

The above table indicates the coefficient of the regression equation. From the table it can also beinferred that the variables have a coefficient that are significant at d.f. =8 with 1% level ofsignificant. Another thing is that the variables in the model are free from Multicollinearity.


Model R

R

Square

Adjusted

R Square

Std. Error

of the

Estimate

Change Statistics

Durbin-

Watson

R Square


Sig.F

Change

1 0.567a

0.321 0.233 2.6320 0.321 3.633 3 23 0.028 0.762

a. Predictors: (Constant), APD, CLTA, CASA

b. Dependent Variable: ROTAThe adjusted R-square of the model indicates 32.1% variation in ROA of textiles industry can beexplained by the regression model. The unexplained part of the model is the error term. TheDurbin-Watson test indicates that there exists no auto-correlation in the model in which the valueof D-W statistic is 0.762.


Model




1 (Constant)CASACLTAAPD

4.683-0.05-0.020.02

1.8010.0150.0300.010

-0.627-0.1420.397

2.601-2.980-0.7671.777

0.0160.0070.4510.089

a.

Dependent Variable: ROA


15/18


The above table indicates the coefficient of the regression equation. From the table it can also beinferred that the variables have a coefficient that is significant at d.f. =8 with 1% level ofsignificant. Another thing is that the variables in the model are free from Multicollinearity.


Model RRSquare

AdjustedR Square

Std. Error

of theEstimate

Change Statistics

Durbin-Watson

R SquareChange F Change df1 df2

Sig.FChange

1 0.652a

0.425 0.350 2.4225 0.425 5.672 3 23 0.005 0.901

a. Predictors: (Constant), CCCD, CLTA, CASA

b. Dependent Variable: ROTAThe adjusted R-square of the model indicates 42.5% variation in ROA of textiles industry that canbe explained by the regression model. The unexplained part of the model is the error term. TheDurbin-Watson test indicates that there exists no auto-correlation in the model in which the valueof D-W statistic is 0.762.


Model

Unstandardized

Coefficients

Standardized

Coefficients


1 (Constant)

CASA

CLTA

INVD

3.481

0.04

-0.02

-0.02

1.759

0.027

0.026

0.007

0.528

-0.133

-1.041

1.979

1.425

-0.803

-2.807

0.060

0.168

0.430

0.010

a. Dependent Variable: ROAThe above table indicates the coefficient of the regression equation. From the table it can also be

inferred that the variables have a coefficient that are significant at d.f. =8 with 1% level of

significant. Another thing is that the variables in the model are free from Multicollinearity.

Conclusion

Considering the coefficients and their significance level, it can be concluded that in Textiles

Industry, the nature of working capital policy ( CA to Sales), financing of working capital (CL toTA), inventory holding period (Inventory Turnover in Days), Accounts Receivable CollectionPeriod (Accounts Receivable Turnover in Days), Accounts Payable Period ( Accounts PayableTurnover in Days), and Cash Conversion Cycle in Days play an important role in determiningtextiles overall profitability Return on Total Assets (ROTA). From the correlation matrix it isclear that there is positive correlation between working capital efficiency and profitability ratiosof the selected textiles with some exceptions where the correlation is negative. From theprofitability ratios it is clear that the performance of the selected textiles under the study period isnot satisfactory. On the other hand, from the working capital ratios it is clear that the workingcapital position is not also satisfactory. From the regression and correlation analysis it can beconcluded that the poor management of working capital is one of the important causes for poorperformance or poor profitability position of the selected textiles under the study period.


16/18


Textiles play a vital role in the economic development of the country. It is found from the studythat the working capital management of textiles industry in inefficient. This is evident from thestudy that working capital plays an important role in the overall performance of the industry.Findings from the questionnaire indicate that the sample textiles have been inefficient inmanaging cash, accounts receivable, inventories and accounts payables. The liquidity position ofthe selected textiles is not satisfactory due to poor turnover of Current Assets, Inventory, Debtors

and Cash Balances. The collection of receivables is not good due to inefficient credit andcollection policy. The textiles should be cautious in formulating working capital policy.

However, in view of the concluding remarks, the following suggestions are given for increasingefficiency in working capital management as well as profitability on the basis of the analysis aswell as information gathered through questionnaire:

a. Monthly performance evaluation should be done as maximum textiles under the studyevaluate the same.

b. Inventory should be turned out quickly.c. Fund flow statement should be prepared periodically.d. Cost audit should be done continuously.e. For cash management, cash budget, cash flow statement, cost minimizing model like

Baumol Model, Miller-Orr, etc. Model should be used.

f. Lead time should be reduced.g. Account Receivable turnover in days should be reduced.h. Inventory turnover in days should be reduced.i. Cash Conversion Cycle is said to be the heart of working capital management. The study

reveals that the cash conversion cycle should be reduced.j. Investment in Current Assets should be increased.k. Current Liabilities should be reduced.l. For most of the selected textiles the net working capital is negative. It should be

improved.m. Liquidity management should be more organized.


17/18


References

Chowdhury, A. and Amin, M.M (2007). Working Capital Management Practiced in Pharmaceutical

Companies Listed in Dhaka Stock Exchange.Brac University Journal, Vol. iv, No. 2, pp.75-86

Deloof, M. (2003). Does Working Capital Management Affect Profitability of Belgian Firms?,Journal of

Business Finance & Accounting, Vol.30, No. 3 & 4, pp.573-587.

Eljelly,A. (2004). Liquidity-Profitability Tradeoff: An Empirical Investigation in an Emerging Market,International Journal of Commerce and Management, Vol. 14, No. 2, pp. 48-61

Ganesan, V. (2007). An Analysis of Working Capital Management Efficiency in Telecommunication

Equipment Industry,Rivier Academic Journal, Vol. 3, No. 2, pp 1-3.

Lazaridis, I. and Tryfonidis, D. (2006). Relationship between Working Capital Management and

Profitability of Listed Companies in the Athens Stock Exchange, Journal of Financial

Management and Analysis, Vol. 19, No. 1, pp 26-35

Padachi, Kesseven (2006). Trends in Working Capital Management and Its Impact on Firms

Performance: An analysis of Mauritian Small Manufacturing Firms, International Review of

Business Research Papers, Vo. 2 No. 2 (October), pp 45-58.

Raheman, A. and Nasr, M. (2007). Working Capital Management and Profitability- Case of Pakistani

Firms,International Review of Business Research Papers, Vol.3, No. 1, pp. 279-300.

Salauddin, D. A. (2001). Profitability of Pharmaceutical Companies of Bangladesh The ChittagongUniversity Journal of Commerce, Vol.16, pp. 54.

Scherr, F. C. (2007).Modern Working Capital Management, Prentice-Hall International, Inc. pp. 1-3.

Shin, H. H. and Soenen, L. (1998). Efficiency of Working Capital and Corporate Profitability, Financial

Practice and Education, Vol. 8, No. 2, pp. 37-45.

Syaduzzaman, M. (2006). Working Capital Management: A Study on British American Tobacco Bangladesh

Company Limited, The Journal of Nepalese Business Studies, Vol. III, No. 1, pp. 78-84.

Appendix

Table:13 List of the Selected Textiles

Name of the Textiles

Modern Dying and Sceen Printing Ltd. MDSPLSquare Textiles Ltd STL

Saiham Textiles Mills Ltd STML

Bextex Ltd. BL

Prime Textiles and Spinning Mills Ltd. PTSML

Desh Garments Ltd. DGL

Metro Spinning Ltd. MSL

H.R. Textiles Mills Ltd. HRTML

Alltex Industries Ltd. AIL


18/18


Table: 14 Working Capital Position of Selected Textiles


Accounts

ReceivableDays

24.13

39.7846.63

114.36

117.67202.06

42.22

51.7028.34

239.12

295.25288.76

71.31

72.3878.03

17.33

19.880.03

131.28

113.18122.06

78.30

121.5583.90

32.21

34.3618.83

2005-06

2006-072007-08

92.02

36.8411.53

132.95

92.02

144.6949.71

2471.08

92.02

40.7511.75

138.06

92.02

274.3830.71

943.10

92.02

73.913.61

13.03

92.02

12.4110.80

116.64

92.02

122.179.05

81.90

92.02

94.5823.52

553.19

92.02

28.478.42

70.90

Industry Average

MeanS. D.C. V.

Accounts

Payable Days

20.49

21.7717.44

126.96

116.46186.43

7.50

7.066.44

101.12

138.31188.30

114.74

96.19156.68

2.81

3.374.50

25.31

6.0715.83

116.56

158.49120.98

5.08

8.506.95

2005-06

2006-072007-08

65.94

19.92.224.92

65.94

143.2837.73

1423.55

65.94

7.000.530.28

65.94

142.5843.74

1913.19

65.94

122.5330.98

959.76

65.94

3.560.860.73

65.94

15.749.62

92.54

65.94

132.0123.04

530.84

65.94

6.841.712.92

Industry Average

MeanS. D.C. V.

Inventories

Days

32.84

39.1922.64

100.96

113.54130.05

220.28

174.66233.62

393.01

445.48322.82

110.96

71.98148.30

59.88

53.9628.02

81.23

91.98126.51

77.76

46.5440.55

87.58

67.0366.88

2005-06

2006-072007-08

125.49

31.568.35

69.72

125.49

114.8514.59

212.87

125.49

209.5230.92

956.04

125.49

387.1061.54

3787.17

125.49

110.4138.16

1456.18

125.49

47.2916.94

286.96

125.49

99.9123.65

559.32

125.49

54.9519.98

399.20

125.49

73.8311.91

143.78

Industry Average

MeanS. D.C. V.

CashConversionCycle

36.4857.2

51.83

88.36114.75145.68

255219.3

255.52

531.01602.42423.28

67.5348.1769.65

74.470.7423.55

187.2199.09232.74

39.59.6

3.47

114.7192.8978.76

2005-062006-072007-08

151.58

48.5010.75

115.56

151.58

116.2628.69

815.67

151.58

243.2720.76

430.98

151.58

518.9090.18

8132.4

151.58

61.7811.83

139.99

151.58

56.2328.36

804.29

151.58

206.3423.62

557.90

151.58

17.5219.28

371.72

151.58

95.4518.11

327.97

Industry Average

MeanS. D.C. V.

CA to Salesor Gross WCto Sales

28.8436.2539.51

58.9382.06

112.61

61.6763.7476.14

145.59184.71151.90

51.5544.7666.19

27.5221.5818.78

63.5857.7887.73

45.5752.2641.24

47.8533.6129.26

2005-062006-072007-08

64.19

34.87

5.4629.81

64.19

84.53

26.92724.69

64.19

67.18

7.8361.31

64.19

160.73

21.00441.0

64.19

54.17

10.95119.90

64.19

22.62

4.4619.89

64.19

69.70

15.88252.17

64.19

46.36

5.55230.25

64.19

36.91

9.72494.55

Industry Average

Mean

S. D.C. V.

CL to TA 26.1424.4023.63

37.9642.6046.87

37.5037.8142.91

39.8654.6741.43

27.9927.6237.37

78.2176.9272.50

76.6384.0287.94

42.0546.8551.99

50.8152.2356.25

2005-062006-072007-08

49.08

24.721.29

1.664

49.08

42.274.45619.85

49.08

39.413.0389.204

49.08

45.328.13566.17

49.08

30.995.52530.53

49.08

75.872.9948.963

49.08

82.865.74332.98

49.08

46.964.97124.72

49.08

53.092.8227.963

Industry Average

MeanS. D.C. V

Source: Annual Report and Official Records of the selected Textiles Enterprises (2005-06 to 2007-08)

wcm in textile industry in bangladesh

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