Open Access Open Access  Restricted Access Subscription Access
Open Access Open Access Open Access  Restricted Access Restricted Access Subscription Access

Relationship between Inventory Management and Profitability: An Empirical Analysis of Indian Cement Companies


Affiliations
1 Narsee Monjee Institute of Management Studies, NMIMS University, Shirpur
     

   Subscribe/Renew Journal


The importance of efficient working capital management (WCM) is indisputable. Moreover, the adequate and timely flow of inventory is imperative for the success and growth of any company. The present paper is an attempt to study in depth the inventory management practices of Indian cement companies and its impact on working capital efficiency. The purpose of this paper is to examine the relationship between inventory conversion period and firms‟ profitability. The dependent variable, gross operating profit is used as a measure of profitability and the relation between inventory management and profitability is investigated for a sample of five top Indian cement companies over a period of ten years from 2001-2010. This study employs Regression analysis to determine the impact of inventory conversion period over gross operating profit taking current ratio, size of the firm, financial debt ratio as control variables. The results indicate that there is a significant negative linear relationship between inventory conversion period and profitability.

The results of this research are in line with the previous findings. The findings indicate that Inventory conversion period has an inverse relationship with firms‟ profitability i.e. when the ICP days increase the profitability of firm decreases and vice versa. It was found that, the firms‟ profitability as measured by GOP has a negative relationship with financial debt ratio. This implied that profitability increases with decrease in financial debt ratio. Furthermore in this study the relationship between the firm size and GOP was positive which indicates that profitability increases with an increase in firm size. The relationship between current ratio and the GOP was negative.


Keywords

Working Capital, Cement Companies, Inventory Management, Liquidity and Profitability
Subscription Login to verify subscription
User
Notifications
Font Size


  • Ashish K. Bhattacharya, “Financial Accounting for business managers,” Prentice Hall of India Private Limited. Cannaughtcircus, New Delhi, 2007.
  • Appuhami B. A Rajnith, 2008, “The impact of firms capital expenditure on working capital management: an empirical studies across industries in Malaysia.” International management review, Vol. 4 No. 1.
  • Charles T. Horngren, Gary L Sudem, John A Elliot, “Introduction to financial accounting,” Eighth edition Pearson Education (Singapore) Pte. Limited.
  • Uyar Ali (2009) “The Relationship of cash conversion cycle with firm size and profitability: An empirical investigation in Turkey” International research Journal of finance and economics. ISSN 1450-2887 Issue 24. Euro Journal Publishing Inc.
  • Dong Huynh Phuong and Su Jyh-Tay, “The relationship between working capital management and profitability: A Vietnam case” International research journal of finance and economics, ISSN-1450-2887Issue 49 (2010), Euro journals Publishing Inc. 2010.
  • E W Walker, “Essentials of fundamental management”, Prentice Hall Inc. New Delhi 1935.
  • Eljelly Abuzar M. A. 2004, “Liquidity-profitability tradeoff: An empirical investigation in an emerging market” IJCM VOL 14, NO. 2 2004, 48
  • Falope OI, Ajilore OT, 2009. “Working capital management and corporate profitability: Evidence from panel data analysis of selected quoted companies in Nigeria.” Research journal of business management, 3: 73-84.
  • Ghosh Kumar Santanu and Maji Santi Gopal, “Working capital management efficiency: A study on Indian Cement Industry.”
  • Ganesan Vedavinayagam (2007) “An analysis of working capital management efficiency in telecommunication industry” River academic journal, volume 3, number 2.
  • Gill Amarjit, Biger Nahum, Mathur Neil (2010) “The relationship between working capital management and profitability: Evidence from the United States” Business and Economic Journal, Volume 2010:BEJ-10.
  • J E L classification: G30, G31, G32., “How does working capital management affect SMEs profitability?”
  • James C Van Horne Horne and John M. Wachowicz, Jr., “Fundamentals of financial management”, Pearson Education (Singapore) Pvt Ltd., Indian Branch, 2005.
  • Lazaridis Ioannis and Tryfondis Dimitrios “the relationship between working capital management and profitability of listed companies in Athens Stock Exchange” University of Macedonia, Department of Accounting and Finance, 156 N. Egnatia Str. 54006 Thessaloniki, Greece
  • Mukhopadhyay D., “Working capital management in heavy engineering firms-A case study.” Finance.
  • M Y Khan and P K Jain, Financial management text and problems” Tata McGraw Hill publishing company Limited. New Delhi 2003.
  • Madishetti, S and Kibona, D 2013, “Impact of Inventory Management on the Profitability of SMES in Tanzania” IJRCM, Vol 4, Issue 2, Feb. 2013.
  • Narvare P. C. “Working capital and profitability-an empirical analysis” finance [19] Nasr Mohamed and Rehman Abdul, 2007, “Working capital management and profitability-case of Pakistani firms” International Review of Business review papers, Vol 3 No. 1. March 2007, Pp. 279-300.
  • I. M. Pandey, “Financial management” 2002, Vikash Publishig House Pvt Limited New Delhi. [21] Oruc Eda and Sen Mehmet, (2009), “Relationship between Efficiency level of Working Capital Management and Return on Total Assets in ISE” International Journal of Business and Management, Vol. 4, No. 10, October 2009.
  • Poule, Roy A “Practical financial statement analysis”, Tata McGraw Hill Publishing company Limited, New Delhi Edition 1972.
  • Prassana Chandra, “Financial management theory and practice”, Tata McGraw Hill Publishing company Limited, New Delhi 2002.
  • Padachi Kesseven, “Trends in working capital management and its impact on firms? performance: An analysis of Mauritius small manufacturing firms.” International Review of business research papers. Vol. 2 No. 2 October 2006 pp 45-58.
  • Ramachadran Azhagaiah and Janakiraman Murlidharan, “The relationship between working capital management efficiency and EBIT.” JEL classification : G30, G32. Volume -7 Number-1 Spring 2009.
  • S. C. Kuchhal, Financial management-An Analytical and Conceptual approach”, Chaitanya publishing house, house, Allahabad, 1993.
  • Dr. S.N. Maheshwari, “Principle of management accounting,” Sultan Chand 7 Sons, New Delhi. 2001. [28] Singh J. P. Pandey Sishir. (2008), “Impact of working capital management in the profitability of Hindalco Industries Limited.” The ICFAI University press.
  • Sayaduzzaman Md., “working capital management: A study on British American Tobacco Bangladesh company Ltd.”

Abstract Views: 1451

PDF Views: 0




  • Relationship between Inventory Management and Profitability: An Empirical Analysis of Indian Cement Companies

Abstract Views: 1451  |  PDF Views: 0

Authors

Ashok Kumar Panigrahi
Narsee Monjee Institute of Management Studies, NMIMS University, Shirpur

Abstract


The importance of efficient working capital management (WCM) is indisputable. Moreover, the adequate and timely flow of inventory is imperative for the success and growth of any company. The present paper is an attempt to study in depth the inventory management practices of Indian cement companies and its impact on working capital efficiency. The purpose of this paper is to examine the relationship between inventory conversion period and firms‟ profitability. The dependent variable, gross operating profit is used as a measure of profitability and the relation between inventory management and profitability is investigated for a sample of five top Indian cement companies over a period of ten years from 2001-2010. This study employs Regression analysis to determine the impact of inventory conversion period over gross operating profit taking current ratio, size of the firm, financial debt ratio as control variables. The results indicate that there is a significant negative linear relationship between inventory conversion period and profitability.

The results of this research are in line with the previous findings. The findings indicate that Inventory conversion period has an inverse relationship with firms‟ profitability i.e. when the ICP days increase the profitability of firm decreases and vice versa. It was found that, the firms‟ profitability as measured by GOP has a negative relationship with financial debt ratio. This implied that profitability increases with decrease in financial debt ratio. Furthermore in this study the relationship between the firm size and GOP was positive which indicates that profitability increases with an increase in firm size. The relationship between current ratio and the GOP was negative.


Keywords


Working Capital, Cement Companies, Inventory Management, Liquidity and Profitability

References