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PROFITABILITY: A CASE OF
NEPALESE MANUFACTURING
FIRMS
Antovna Gyawali
Roll Number: 11450241
P.U. Registration Number: 2010-02-45-0005
Introduction
Liquidity and profitability management are crucial
aspects of a business.
Working capital requirement decides the liquidity and
profitability of a firm
WCM is a managerial accounting strategy focusing on
maintaining efficient levels of both components of
working capital, current assets and current liabilities,
in respect to each other
Problem Statement
Issues raised
The outcome of the research clearly pinpoint a
negative relationship of profitability with
liquidity and receivable conversion period.
Positive relationship was established between
profitability and inventory conversion period,
payment deferral period and cash conversion
period which expresses the efficiency of
working capital.
The financial leverage correlated positively
with profitability.
Objectives
To analyze the relationship between Working
Capital Efficiency and Profitability of
manufacturing companies of Nepal.
To analyze the relationship between Liquidity
and Profitability
To examine the relationship between leverage
and profitability
Literature Review
Topic/Issue
Findings
S.N
Year Author
2004
Mukhopadhya
y
Working Capital
2010
Dong and Su
2004
Eljelly
the relationship
between
profitability, the
cash conversion
cycle and its
component
The
relationship
between liquidity
and
working
capital
management
2006
Atrill
Variables
Return on Assets (ROA) = Net Profit/ Total Assets
Return on Equity (ROE) = Net Profit/ Total Equity
Current Ratio = Current Assets / Current Liabilities
Quick Ratio = (Current Assets Inventories) / Current
Liabilities
Receivable Conversion Period (RCP)= Account Receivables
*365/ Sales
Inventories Turnover Period (ITP) = (Inventories x 365) /
Cost of sales
Payment Deferral Period (PDP) = Accounts Payable*365/ Cost
of sales
Cash Conversion Cycle (CCC) = ICP+RCP-PDP
Debt Ratio (DER) = Total Debt/ Total equity
Size of the Firm = ln (Total Sales)
DER
ROE
ROE
Current
Ratio
Model I
LR
Model II
Size of
the
Firm
ROE
PDP
RCP
ROE
Model III
CCC
Model IV
Performance of
Nepalese
Manufacturing Firms
Return on Equity
ROE
53.48%
60.00%
53.00%
50.00%
47.96%
40.00%
32.07%
30.00%
20.00%
18.95%
23.38%
ROE
10.00%
0.00%
2007
2008
2009
2010
2011
2012
Return on Assets
ROA
22.08%
25.00%
21.49%
20.00%
17.31%
15.94%
15.00%
13.23%
10.00%
ROA
12.23%
5.00%
0.00%
2007
2008
2009
2010
2011
2012
Current Ratio
Current Ratio
Current Ratio
2.57
1.95
1.86
1.53
1.25
1.12
2007
2008
2009
2010
2011
2012
Size
Size
17.2
17
16.8
16.6
Size
16.4
16.2
16
15.8
2007
2008
2009
2010
2011
2012
0.58
0.43
0.55
0.37
0.34
0.26
2007
2008
2009
2010
2011
2012
127.89
140.00
130.73
112.76
107.39
117.43
120.00
100.00
80.00
60.00
40.00
20.00
0.00
2007
2008
2009
2010
2011
2012
Liquidity risk
Liquidity Risk
0.25
0.2
0.15
0.1
0.05
0
Liquidity Risk
2007
2008
2009
2010
2011
2012
Descriptive Analysis
Correlation
MODEL I
ROE is dependent variable. ICP and
CR are independent variables.
Regression Statistics
Multiple R
R Square
0.8999
0.8098
12
Coefficie Standard
nts
Error
Intercept
ICP
Current
Ratio
t Stat
P-value
-0.51
0.29
-1.75
0.11
0.01
0.00
5.42
0.00
-0.08
0.09
-0.84
0.42
MODEL II
ROE is again taken as
dependent variable and leverage
ratio (debt-equity) and RCP are
dependent variables in this
model.
Regression Statistics
Multiple R
0.8795
R Square
0.7734
Adjusted R
Square
Standard Error
0.7231
0.1994
Observations
12
Coeffici
ents
Standard
Error
Intercept
0.49
0.22
2.19
0.06
Debtequity
0.60
0.44
1.36
0.21
-0.02
0.00
-4.86
0.00
RCP
t Stat
P-value
MODEL III
ROE is the dependent
variable and the other
independent variables are
PDP and Liquidity Risk.
Regression Statistics
Multiple R
R Square
Adjusted R
Square
Standard
Error
Observations
0.9264
0.8582
0.8267
0.1577
12
Coefficie Standard
nts
Error
t Stat
P-value
Intercept
-0.29
0.10
-2.79
0.02
PDP
Liquidity
risk
0.01
0.00
7.16
0.00
-0.30
0.36
-0.85
0.42
MODEL IV
ROE is the dependent
variable and the other
independent variables are
CCC and Size(log of sales).
Regression Statistics
Multiple R
0.8701
R Square
0.7570
Adjusted R
Square
Standard Error
0.7031
Observations
Coefficie Standard
nts
Error
0.2064
12
t Stat
P-value
Intercept -0.3188
0.4913
-0.6489
0.5326
Size
0.0530
0.0101
5.2582
0.0005
CCC
-0.0015
0.0037
-0.4049
0.6950
Conclusion
There exists a negative relationship between liquidity and
profitability and CCC and profitability.
Quick Ratio has an average of 0.94 which is minutely less than one.
So manufacturing firms have very less difficulties in paying their
short term obligations.
Average NWPS of 933.90 shows that manufacturing companies in
Nepal are good investment areas.
RCP[23.6] is less than PDP[61.52] and manufacturing companies have
CCC of days in an average.
The longer ICP is due to the bulk purchase of inventory and large
quantity of inventory.
The study found out positive relationship between CCC, PDP and ICP
with profitability but negative with RCP.
Manufacturing firms in Nepal have a high scope so the investment
in these may be fruitful.