International Journal of Pure and Applied Mathematics

Volume 116 No. 24 2017, 13-21

ISSN: 1311-8080 (printed version); ISSN: 1314-3395 (on-line version)
url: http://www.ijpam.eu
Special Issue
ijpam.eu

Impact of Working Capital Management on

Profitability of the Select Car Manufacturing
Companies in India
1
P. Kalaivani and 2Dr.K. Jothi
1
Department of Commerce,
Karpagam Academy of Higher Education,
Coimbatore.
2
Department of Commerce,
Karpagam Academy of Higher Education,
Coimbatore.

Abstract
The working capital management has an important role in the firm’s
success or failure because of its effect on firm’s performance and liquidity.
The study is based on the secondary data collected from prowess database
for the period 2007 to 2016 with an attempt to investigate the relationship
between working capital management components and performance of the
firms by using dynamic panel data analysis. The Indian Automobile
Industry is one of the largest firms in the world with an annual production
of 29.36 million vehicles in Financial Year 2015- 2016. Indian Automobile
Industry and plays a pivotal role in the growth of Indian Economy. The
Automobile Industry accounts for 22 per cent of the country are
manufacturing Gross Domestic Product (GDP). For the purpose of the
study Eight Indian Automobile Companies are taken for analysis. Return
on Asset is introduced as a dependent variable for measuring profitability
of the company. Debtor Turnover Ratio, Inventory Turnover Ratio,
Working Capital Turnover Ratio, Current Asset Turnover Ratio, Fixed
Asset turnover Ratio are introduced as independent variables. The result of
the analysis reveals that the efficiency of working capital management of
the companies covered in the study are influenced by the Debtor Turnover
Ratio, Inventory Turnover Ratio and Current Asset Turnover Ratio.
Keywords:Working capital management, profitability, working capital
ratios.

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International Journal of Pure and Applied Mathematics Special Issue

1. Introduction
Each and every business has to plenty liquid resources in the short term to
continue everyday cash flow required for operations. However, this does not
mean working capital is only significant in the short run because sufficient
liquidity asset is also desirable to safeguard the survival of the professional in
the long run. The total capital of company is divided into fixed capital and
working capital. The board of working capital has regularly abandoned resulting
in sub finest consumption of not only working capital but also fixed capital
management of working capital. These efforts would simultaneously activate
the flow of funds by focusing attention on strangles. This working capital offers
in common firm of profitability and liquidity management.

2. Review of Literature
1. L.Moorthy and R.Rajavathana (2013) they found that both the
companies had insignificant relationship with profitability. Although
cash conversion cycle of both the company had positive relationship
with profitability but average collection period and average payment
period of both the companies proved to be in negative relationship with
the profitability.
2. Bhagchi, Kamrui (2012) they studied that the impact of working capital
management on profitability. After conduct familiarity tests, Pearson’s
Correlation and panel data regression, it revealed that there is a
significant negative relation between the working capital management
and firm profitability.
3. Kulkanya napompech(2012) he shows a negative relationship between
the gross operating profits and inventory conversion period and
receivable collection period by limitations of the cash conversion cycle.
4. Shin and Soenen (1998) they highlight the efficient Working Capital
Management. They identifies that there is a tough pessimistic
relationship between extent of the firm's net trading cycle and its
profitability.
5. Vijaykumar and Venkatachalam (1995) they conclude over
correlation and regression analysis that liquid ratio inventory turnover
ratio, receivables turnover ratio and cash turnover ratio influence the
profitability.

3. Objectives of the Study

The following are the objectives of the study
1. To analyze the development of Indian Automobile Industry.
2. To assess the impact of working capital on profitability of the selected
Automobile Companies in India.
Scope of the Study

The present study includes an empirical analysis of working capital

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International Journal of Pure and Applied Mathematics Special Issue

management of Indian automobile companies in India. The scope of working

capital is very wide and broad-based for theoretical understanding, the meaning
and definition of working capital and various concepts have come under the
purview of this study. The second part is confined to the various approaches to
the study of the working capital management.

4. Research Methodology
Sample Size

The present study is descriptive and analytical and the data used for the study is
secondary data, by selecting all the eight Automobile Companies which were
before liberalization. All the eight manufacturing units among the large
commercial car manufacturing companies are selected for the study.

The most essential source of data analyzed and interpret in this study narrate to
all those data which is collected from “PROWESS” database. This is the most
reliable on the empower corporate record of CMIE.
Sample

The samples are,

1. Maruti Suzuki.
2. Fiat India.
3. Ford India.
4. Hindustan Motors.
5. Honda Cars India Ltd.
6. Hyundai Motor.
7. Mahindra & Mahindra.
8. Toyota.
Data Analysis Technique

Data are analyzed with the help of statistical tool like average, Percentage,
CAGR (Compound Annual Growth Rate), AAGR (Average Annual Growth
Rate), trend, Correlation coefficient and Regression analysis.
Data Collection

The data used in this study are acquired from “PROWESS” database for a
period of last ten years from 2007-2016
India’s Automobile Production

The automobile industry chains wide variety of business segments, together

upstream and downstream, along with flanking industries. This leads to support
various effects for the expansion and economic development. Automobile
Industry contributes to quite a few important dimensions of nations building:
generating government income, creating economic development, encouraging
society development and promotion R&D and innovation.

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International Journal of Pure and Applied Mathematics Special Issue

Table 1: Year wise Sales of Automobiles industries in India

Year Ford Fiat India Hindustan Honda Hyundai Mahindra & Maruti Toyota
Annual Annual Motor Cars Motors Mahindra Suzuki Annual
Growth Growth Annual Annual Annual Annual Annual Growth
Rate % Rate % Growth Growth Growth Growth Rate Growth Rate %
Rate % Rate % Rate % % Rate %
2006- 17.99 32.96 28.01 10.98 11.25 22.57 87.16 20.65
07
2007- 15.06 5.57 -9.97 -4.94 15.34 18.54 -1.85 32.38
08
2008- 3.43 -24.06 -0.72 4.89 53.72 -27.74 4.84 22.5
09
2009- 28.21 36.14 24.58 24.85 32.88 5.59 16.98 13.53
10
2010- 26.52 34.03 29.12 26.98 -0.4 64.5 55.85 34.34
11
2011- 5.47 22.13 9.97 15.56 14.17 25.14 34.41 27.13
12
2012- 2.7 -10.38 -4.49 2.052 10.26 -13.63 -16.47 0.47
13
2013- -4.42 -16.04 -1.14 7.23 6.094 -3.71 75.98 6.52
14
2014- 10.03 11.82 -22.58 16.92 10.03 12.82 -23.58 17.92
15
9.02 11.03 59.45 12.54 9.02 11.03 59.45 12.54
2015-
16

AAGR 10.78% 9.99% 10.84% 11.50% 15.89% 14.99% 25.84% 22.50%

CAGR 10.32% 7.03% 9.82% 10.96% 15.10% 12.34% 20.82% 23.96%
Nature of relation on working capital and profitability

The study uses correlation co-efficient to check linear relationship between the
variables of working capital on profitability, whereas regression analysis is used
to assess the impact of various variables of working capital on Return on Asset
of the selected automobile companies. The independent variables taken are
Debtor Turnover Ratio, Inventory Turnover Ratio, Working Capital Turnover
Ratio, Current Asset Turnover Ratio and Fixed Asset turnover Ratio. Whereas
ratio of Return on Asset is taken as a dependent variable for checking
profitability of the companies SPSS Software is used to analyze the data.
Table 2: Impact of Working Capital Management on Profitability Auto Cars
Correlation
Variables r r2
Debtor Turnover Ratio 0.848** 0.719
Inventory Turnover Ratio 0.736** 0.542
WCR -0.306 0.094
FTR 0.203 0.041
CTR -0.293 0.086
Source: Result obtained by using SPSS software
* Significant at five per cent level **Significant at one per cent level

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International Journal of Pure and Applied Mathematics Special Issue

Out of five variables selected for analysis, working capital turnover ratio and
current asset turnover ratios are found to be negatively correlated whereas
debtor turnover ratio, inventory turnover ratio and fixed asset turnover ratio are
found to be positively correlated with profitability.
Table 3: Impact of Working Capital Management on Profitability Auto Cars
Regression
Variables Regression coefficient Standard error t
Debtor Turnover Ratio 0.019** 0.004 4.532
Inventory Turnover Ratio 0.151* 0.056 2.693
WCR 0.000* 0.000 -2.106
FTR 0.017 0.072 0.243
CTR 0.000** 0.000 -3.236
Source: Result obtained by using SPSS software
* Significant at five per cent level **Significant at one per cent level
Constant: 1.399, Std. Error of Estimate: 0.697, R2: 0.797, R2: 0.823 **

The regression co efficient indicates that Debtor Turnover Ratio positively

influences the level of profit. The value of regression co-efficient indicates that
a unit of increase in Debtor Turnover Ratio shall increase the profit by 0.019
units. High level of Debtor Turnover Ratio leads to quantify a firm’s
effectiveness in extending credit as well as collecting debts. Inventory turnover
ratio and working capital turnover ratios are positively influences the level of
profit. The value of regression co-efficient indicates that a unit of increase in
Inventory Turnover Ratio shall increase 0.151 units. High level of Inventory
Turnover Ratio indicates managerial efficiency. Current Asset Turnover Ratio
positively influences the level of profit.

The R2 value is found to be significant at one percent level. This shows that the
regression equation outlined is a worthy suitable. About 82.30 per cent of
variation in level of profit is due to the selected variables.

5. Findings
Out of five independent variables introduced, only two variables are significant
at five per cent level. This displays that the regression equation framed is a
worthy suitable. About 82.30 per cent of variation in profit level due to the
select variables.

Return on Asset is introduced as dependent variable for measuring profitability

of the company. Debtor Turnover Ratio, Inventory Turnover Ratio, Working
Capital Turnover Ratio, Current Asset Turnover Ratio, Fixed Asset Turnover
Ratio are introduced as independent variables. Out of five independent variables
introduced two variables are to be significant. Debtor Turnover Ratio,
Inventory Turnover Ratio are to be found at five per cent level.

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International Journal of Pure and Applied Mathematics Special Issue

6. Suggestion
Working Turnover Ratio is found to be low among Hindustan Motor and Fiat
India. These companies have to utilize current assets to an optimum extent, in
order to the firm's capacity to emolument its current liabilities with its current
assets. And Current Asset Turnover Ratio is found to be low in Maruti Suzuki.
These companies have to increase current assets to an optimum extent, in order
to reduce the investment level. Higher this ratio is better because it will tell that
more products can be sold with less investment in current assets. Profitability of
Ford and Fiat India are found to be low. Hence in order to increase their
profitability, the companies may produce and sell wide range of products up to
the expectation of customers.

7. Conclusion
The automobile company plays a vital role of India’s economy. That is to be
found to become one of the worlds the majority striking automobile markets for
both producers and consumers. The outcome assistance of the companies to
have economic stability, better employment, and permanency of families hired
by the automobile industry. In addition, Automobile Companies may adopt
better marketing strategies to attract new customer and to retain their existing
customer by offering attractive discounts, prices, more number of sales services
at the door step of the customers.

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