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This report is prepared for the working capital management to evaluate the liquidity and profitability of Nepalese Manufacturing industry.

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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

maintaining liquidity, survival, solvency and

profitability of business

2010

Dong and Su

between cash conversion cycle and

profitability.

2004

Eljelly

the relationship

between

profitability, the

cash conversion

cycle and its

component

The

relationship

between liquidity

and

working

capital

management

2006

Atrill

is required maintaining its liquidity in day-today operation to ensure its smooth running

and meets its obligation.

WCM

profitability and growth of a business and is

important to the financial health of

businesses as the amounts invested in

working capital are often high in proportion to

the total assets employed.

Population: 18 manufacturing companies listed in the Nepal

Stock Exchange(NEPSE) market

Sample: 2 sample companies

Observation: 12

Study Period: 2007-2012 (6 years)

Data Extraction: Use of many secondary data, mainly the

Annual Reports

Balance Sheets

Income Statements

Techniques: Descriptive Statistics, Correlation Analysis and

Regression Analysis

Tools: MS - Excel

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)

ICP

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

Debt-equity

Debt-equity

0.58

0.43

0.55

0.37

0.34

0.26

2007

2008

2009

2010

2011

2012

135.79

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

76.75%. This means that 77%

(approx) change in the dependent

variable is explained by the change

in the other 2 independent

variables.

0.8098

Standard Error

0.1826

Observations

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

0.18 which is at a level of 18% is the

adjustment factor for the accuracy

of the data.

In this model, ROE has significantly

positive relationship with ICP where

as insignificantly negative

relationship with CR.

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

implies that 72.31% of the total

variation in the ROE is explained

by the independent variables

that are identified.

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

regression is 0.1994 which

means other factors have very

less effect on the dependent

variable ROE.

ROE has statically significant

positive relation with debtequity ratio whereas significant

but negative relation with RCP.

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

is 0.8267. This means that

82.67% change in the

dependent variables is

explained by the change in

the independent variables.

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

and found significant with

ROE. Liquidity Risk is

negatively related but

found insignificant with

ROE.

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

that Cash Conversion Cycle

and profitability (ROA) are

positively co-related. So,

longer the duration between

making payments and

receiving cash flows, the

profitability of the firm

tends to increase.

Adjusted R2 of

manufacturing firms is

0.7031 which means that

71.31% of the total

variation in the ROE is

explained by the given

independent variables.

Conclusion

There exists a negative relationship between liquidity and

profitability and CCC and profitability.

average DER of 0.42 means that majority of the assets of

manufacturing companies are financed through equity.

ROE is in increasing trend which is a good sign for investors.

ROA seem decelerating from 2010 and main reason behind this may

be the strikes of unions, fire on the factories and so on.

As in 2007 CR is higher than 2, which means manufacturing

companies had problems in managing WC whereas in rest of the

years it less than 2 but greater than 1. This shows that companies

are more likely to meet its liabilities.

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.

Future research with more companies and

detail financial data will be more fruitful.

A broader sample size would have been a

better indicator of the market scenario of

Manufacturing firms in Nepal.

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