Management On Profitability Of Glaxosmithkline

Published Date: 02 Nov 2017

THESIS TOPIC:

IMPACT OF WORKING CAPITAL MANAGEMENT ON GSK’S PROFITABILITY

IMPACT OF WORKING CAPTAL MANAGEMENT ON PROFITABILITY OF GLAXOSMITHKLINE (GSK) PAKISTAN

A

THESIS

PRESENTED TO

THE FACULTY OF

MANAGEMENT SCIENCES

BAHRIA INSTITUTE OF MANAGEMENT AND COMPUTER SCIENCES, KARACHI

IN PARTIAL FULFILLMENT

OF THE REQUIREMENTS FOR THE

DEGREE OF MASTERS IN BUSINESS ADMINISTRATION

BY

HAFSA AGHA SHAH

FEBURARY, 201

BAHRIA UNIVERSITY

KARACHI

RECOMMENDATION FOR ORAL EXAMINATION

This Project/thesis hereto attached, entitled, "IMPACT OF WORKING CAPTAL MANAGEMENT ON PROFITABILITY OF GLAXOSMITHKLINE (GSK) PAKISTAN",

Prepared and submitted by HAFSA AGHA SHAH, in partial fulfillment of the requirements for the degree MASTERS IN BUSINESS ADMINSTRATION, is hereby recommended for appropriate action.

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In partial fulfillment of the requirements for the degree of MASTER IN BUSINESS ADMINSTRATION, this thesis entitled, "IMPACT OF WORKING CAPTAL MANAGEMENT ON PROFITABILITY OF GLAXOSMITHKLINE (GSK) PAKISTAN"

is hereby recommended for Oral Examination.

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This Project/ thesis entitled, "IMPACT OF WORKING CAPTAL MANAGEMENT ON PROFITABILITY OF GLAXOSMITHKLINE (GSK) PAKISTAN"

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AKNOWLEDGEMENT

"At times our own light goes out and is rekindled by a spark from another person. Each of us has cause to think with deep gratitude of those who have lighted the flame within us."

Albert Schweitzer (1875 - 1965)

First of all I am thankful to ALMIGHTY ALLAH the most beneficent and merciful, who gave me courage and strength to complete the task efficiently.

Also I am thankful to my supervisor Ma’am Maryam Masnoon, who lend her continues support, encouragement and guidance throughout the period of making this thesis.

I am indebted to my parents and my entire family, for the love, support and understanding they have given me throughout my life which helped me in achieving my goals.

I would like to thank the management of Bahria University who offered this course to us and facilitated us throughout the entire research.

ABSTRACT

TABLE OFCONTENTS

CHAPTER NO. 1: PROBLEMS AND ITS BACKGROUND

INTRODUCTION

Efficiency of working capital management

Pharmaceutical sector of Pakistan

GlaxoSmithKline

Importance of working capital management

PROBLEM STATEMENT

SIGNIFICANCE OF THE STUDY

SCOPE OF THE RESERCH

LIMITATION OF THE STUDY

DEFINATION OF TERMS

CHAPTER NO.2: RESERCH METHODS AND PROCEDURES

2.1 RESERCH DESIGN AND METHODS

Purpose of the study

Research method adopted

2.2 RESERCH INSTRUMENTS

2.3 SOURCE OF DATA

2.4 TREATMENT OF DATA

2.5 PRESENTATION ANAYLSIS

CHAPTER NO.3: LITERATURE REVIEW

3.1 THEORATICAL REVIEW

3.2 REVIEW OF EMPIRAL STUDIES

CHAPTER NO.4: PRESENTATION ANALYSIS

4.1 DATA COLLECTION

4.2 DATA ANALYSIS

CHAPER NO 1: PROBLEM AND ITS BACKGROUND

1.1 INTRODUCTION:

Working Capital is a financial metric measuring the amount of liquidity available to an organization as a consequence of its daily operational processes. Working Capital seems to be one of the major areas which needs a lot of attention because companies whose ability to manage the working capital is low would be out of the market soon. On the other hand, the secret of leading the market is proper management of working capital.

According to Van Horne (1977), working capital management is the administration of current assets in the name of cash, marketable securities, receivables, and inventories. Osisioma (1997) described working capital management as the regulation, adjustment, and control of the balance of current assets and current liabilities of a firm such that maturing obligations are met, and the fixed assets are properly serviced.

Osisioma (1997) demonstrated that good working capital management must ensure an acceptable relationship between the different components of a firm's working capital so as to make an efficient mix, which will guarantee capital adequacy. Thus, working capital management should make sure that the desirable quantities of each component of the working capital are available for management

The major task of the working capital management is to optimize certain processes and thereby reduce the capital tied up. This is especially due to the increase in external liabilities as of the date of (Days Payables Outstanding - DPO) sought and the reduction of the duration of storage (Days Inventory Outstanding - - DIO) and the length of time the receivables outstanding (DSO Days Sales Outstanding). The capital commitment is derived from the duration of the storage is added to the outstanding balance of accounts receivable days sales outstanding minus the days of payables. The individual processes have therefore a direct influence on the capital commitment.

The amount of working capital (current assets) or net working capital (current assets minus current liabilities) is the measurement of the firm's level of liquidity. By taking all current asset items into a single group, however, this conventional definition of corporate liquidity or working capital is inadequate, given the fact that receivables and inventory item are non-cash assets. Moreover, a firm's current assets are only the visible part of liquidity. "Invisible" sources of liquidity, i.e., unused lines of credit or the firm’s financial access to the commercial paper market, are too crucial to be ignored (Forgue, 2010).

Alternatively, the money demand theorists pose the problem of corporate liquidity in the context of the firm's "cash management." From a corporation's point of view, cash which is M, or M2 by the definition of demand-for-money theorists, is too narrow of a definition of corporate liquidity. More importantly, either in finance or economics literature, the interrelationships among the corporate liquidity decision and other key financial management decisions (such as dividend payment and capital expenditure decisions) has been largely neglected.

Efficiency of Working Capital Management

Working capital is an effective tool to lower down the cost of doing business. If companies pay full attention towards managing their working capital they would be less reliant on external funds. Firms which adopt ways to manage its working capital would directly go for extensive growth.

The companies who have positive working capital, indicates that the company has a tendency to continue to fetch its operations having sufficient amount of funds to manage the short term and long term needs. From managing the working capital we mean that managing Inventory, managing cash, managing market receivables etc. the management of all these items would lead the company even in times of financial and economic crises whereas on the other the hand, there mismanagement would pull the company towards the issues of bankruptcy.

The companies who have negative working capital, indicates that a company has borrowed more funds from the financial institutions to fill up the gap created by negative working capital. But on the other hand they had to pay a high rate of (interest) which increases the cost of production and hence lower down the sales volume.

If we analyze the current financial distress in Pakistani Government institutions we would find out the worst examples of managing working capital and Cash. (PSO) and (KESC) are two government organizations that are facing a problem of circular debt, which has become safer and contributing negatively to our economy. This is all due to the improper management of cash and receivables, if these companies would have focused on receivable management and had applied working capital management practices effectively, the economy would not have been suffered.

Working capital management is the functional area under the domain of Finance; it is a part of the company's permanent capital which is used to finance current activity. In the current financial crisis, more efficient management of working capital can provide an additional source of liquidity for the company.

There is no universal recipe to organize the business in order to manage the liquidity issues but it is the working relationship with suppliers and buyers which enhances the flow of capital. Working capital has a direct impact on the company’s liquidity and financial management. Therefore, working capital is a particular dimension in which managers must redouble their efforts to ensure that the company will have sufficient liquidity to meet its various obligations.

Pharmaceutical sector of Pakistan:

The pharmaceutical sector is the fastest growing sector of Pakistan therefore implications of financial concepts can be witnessed clearly in the sector. At the time of Independence, the pharmaceutical sector of Pakistan consisted of only a few companies, but today this sector has more than 400 companies, of which 24 are multinationals. Although in the last few years a significant growth has been witnessed in this sector but still these 400 companies are not capable to fulfil the local and export demands.

The whole industry has increased its production and complies with the international standards. Currently, the pharmaceutical industry of Pakistan is manufacturing a wide range of products, from lifesaving drugs to Biotech medicines. This sector has a huge growth potential.

The last year financial records of this sector show that exports were approximately $2.12 billion, which equates to per capita consumption of less than US$ 10 per year. The value of medicines sold is expected to exceed US$3.3 billion by 2012.

There is no doubt that the pharmaceutical industry is experiencing good growth but at the same time it is facing a great deal of threats. The pharmaceutical sector of Pakistan will face greater competition from established competitors of India and China in the near future. These competitors enjoy economies of scale and have superior technology and human power, whereas Pakistan does not enjoy such advantages.

Apart from this sector is also facing other problems like incompatible policies of government, lack of research and development facilities and devaluation of Pakistani Rupee against major currencies of the world; as a result of which companies incur the high costs of input.

Keeping all these threats in mind, proper management of working capital has become even more important for the pharmaceutical industry of Pakistan.

Their top pharmaceutical companies of Pakistan are: Efroze Chemicals Industries (Private) Ltd, Getz Pharma, Marvi pharmaceutical, Wyeth Pakistan Limited, GlaxoSmithKline, and PfizerLaboratoires Ltd etc.

For this thesis I have selected GlaxoSmithKline Pakistan.

GlaxoSmithKline Pakistan:

GlaxoSmithKline PLC (GSK) is a British multinational pharmaceutical , biologics ,vaccines and consumer healthcare company,which is the fourth largest pharmaceutical company. The mission of GlaxoSmithKline is "to improve the quality of life of people, enabling people to do more, feel better and live longer."

This mission is reflected in the development of innovative medicines and products that help millions of people around the world. Among the global leaders in pharmaceutical research, GlaxoSmithKline Inc. (GSK) is committed to discovering and developing medicines and vaccines for Canadians and people around the world. Every day, its employees seek to improve the quality of human life by enabling people to do more, feel better and live longer. GSK is the only pharmaceutical company that is investing in prevention and treatment of the diseases considered by the World Health Organization as a priority. These diseases include malaria and tuberculosis, for which GSK has with the Centre for Research in Developing Countries Diseases "Diseases of the Developing World" (DDW) and AIDS (Gilbert & Reichert, 1995)

GlaxoSmithKline Pakistan is the largest pharmaceutical company in Pakistan which was formed on 1st of January’ 2001 with the merger of Beecham Pakistan (Private Limited) and Glaxo Wellcome (Pakistan) Limited, SmithKline and French of Pakistan Limited.

The company functions in two industry segments within the pharmaceutical sector: 1. Pharmaceuticals, which consists of prescription drugs.

2. Vaccines and Consumer Healthcare, which includes over-the-counter (OTC) medicines, oral care and nutrition. 

The company is managed proactively. From maintaining the international standards for defining policies for effective working capital management techniques the company has not left any stone unturned. The financial records of the company show that the financial position of the company is strong. That’s why GSK is the market leader in the Pakistani pharmaceutical industry.

Financial Highlights of GSK Pakistan:

The financial strength of the company shows that it realized significant growth in the last couple of years and is investing in research and development in order to capitalize each and every opportunity in the near future.

Investors and stakeholders of the company are delighted with the growth prospects and therefore the stock price of GSK stood at Rs. 75/= with a growth rate of 1.29% and a cash dividend of Rs. 3.6/= (Bloomberg, 2012).

Despite of facing challenging macro-economic environment in the country, 1n 2011 GSK Pakistan sales were increased by 15% over the past year and gross margin was 27% which was higher as compare to past year (Annual Report 2011).

Working Capital Management Practices in GSK:

GSK places great importance on managing its working capital. In order to improve its working capital management it took help from Accenture (which is a global management consulting, technology services and outsourcing company) and initiated a comprehensive program that is mainly focused on improving its trade payables, trade receivables and inventory.

With this program company roughly earned £1.5 billion ($2.28 billion) in working capital benefits making it one of the world’s largest working capital programs ever delivered. This plan was initiated by GlaxoSmithKline Inc and now it’s being implemented in all GSK subsidiaries around the world.

Importance of working capital management:

The management of working capital assumes significant importance in the current globalized business market forcing the administrator to more efficiently manage working capital for your business, there is seen to be directly related to the operating cycle and the turnover of the business thereby dictating its market share. Soon after the financial crises of 2007 it becomes hard for the companies to borrow funds from external sources and to pay interest on them.

Therefore in order to finance their future growth companies need to have a cheap and fast source of having funds. Soon companies think that through managing their working capital they can also finance their future operations. Regardless of the sector and size working capital management proves to be a good source of financing its operations. A properly managed working capital helps the company to free up its cash flow which enhances the productivity. Most of the companies purchase assets and machinery from managing their working capital. It helps in fulfilling short term and long term payment obligations. Nowadays the concept has gained significant importance and companies start focusing on maintaining their working capital management. In this regard most of the companies have also developed policies in order to manage their working capital activities

1.2: PROBLEM STATEMENT:

Limited capital resources and shortage of funds for working capital management has caused many businesses to fail. As working capital management has concerned with short term financial decision, that’s why this topic is being relatively neglected in the finance literature. Although, researches have been conducted regarding this topic in different countries buts In spite of its huge importance, this topic fails to attract the attention of Pakistani researchers. Thus while searching regarding this topic on internet researcher was unable to find directly conducted research on related topics.

The currently Pakistani pharmaceutical sector is facing many external threats like increasing at the cost of major inputs due to inflation, devaluation of currency, increase in energy crises and absence and delay in announcing a general price increase of medicines by government. Pharmaceutical companies in Pakistan are being affected by all of these threats which are causing company’s profitability.

In such a situation our managers should focus on areas like working capital management, which can have a positive impact on the overall performance of the companies.

1.3 SIGNIFICANCE OF THE STUDY:

The management of GSK will be benefited with this study, as this research will give a clear understanding about the relationship between working capital management and corporate profitability.

Besides, the study will also give benefit to those people who want to conduct research on similar topics.

1.4 SCOPE OF THE RESERCH:

The present study is conducted to investigate whether working capital management has impacted on profitability or not. In order to meet this objective, a pharmaceutical sector company is chosen i.e. GSK Pakistan. This research covers the fiscal year from 2007 – 2011.

1.5 LIMITATION OF THE STUDY:

For conducting research, quantitative data will be collected from financial statements of the company; the researcher is only relying on secondary which may not answer the researcher’s specific research question. Beside this, the company’s profitability is not solely depending on working capital management, there can be several other factors that can lead to profitability like good governance, the strength of demand, the economic condition of the market, any merger resulted in an increase in profit and many more, all these factors that can affect profitability has been ignored.

TERMS

DENOTED BY

EXPLANATION

Net working capital

NWC

The liquaid asset available for company to build its business after paying all its short-term obligations.

Working capital management

WCM

Managerial accounting strategy that focus on achieving efficient levels of current asset and liabilities to ensure that company has enough cash flow for continouing business operations.

Cash Conversion cycle

CCC

The time taken by company,in days to convert its resources input into cashflow.

Days Inventory Oustanding

DIO

The average number of days taken by company to hold inventory before selling.

Days Payable Oustanding

DPO

The average number of days taken by company to pay its suppliers.

Days Sales Oustanding

DSO

The average number of days taken by company to collect its trade receivables from customers.

Return on Asset

ROA

An indicator that shows how efffeciently company is utilizing its assets in order to make profits.

Cost of Goods Sold

COGS

Inventory cost of all those goods sold by company at a particular period.

Current Ratio

CR

A liquidty ratio used by company to check its ability to pay short-term obligations.

Debt Ratio

DR

Indicates portion of assets financed by debt.it tells about leverage condition of company.

DEFINATION OF TERM

CHAPTER NO 2 RESERCH DESIGN AND PROCEDURE

2.1 RESEARCH DESIGN AND METHODS

2.11 Purpose of this Study

The objective of the study is to examine the impacts of working capital management on profitability of GlaxoSmithKline Pakistan.

2.12 Research method adopted

In order to attain the main objective of the research, that is to investigate the cause and effect relationship between working capital management and the company’s profitability. Multiple Linear Regression will be applied to the collected data to check the validity of the given below variables. Data will be taken from the Audited Annual Financial statements of GSK Pakistan (Especially from Income Statement and Balance sheet). In order to define the cause-effect relationship, the following variables are selected:

Dependent variables:

The dependent variable in this research is the profitability which will be measured by Return on Asset (ROA). According to (Melicher & Leach, 2009) this ratio indicates that how much firm is earning on its asset base.This variable is chosen because it explains how proficiently company is using its assets to make profits. Researchers like Sharma & Kumar (2011), Karaduman et.al (2004), Garcia-Teruel & Martinez-Solano(2007 and Padachi(2006) have also used Return on Asset as dependent variables in their researches.

Return on asset will be calculated as: Net Profit

Total Asset

Independent variables:

The independent variable in this research is Cash Conversion Cycle which is a comprehensive measure of working capital management.

According to Garcia-Tereul and Martinez- Solano (2007), "the decision of how much to invest in customer and inventory accounts, and how much credit to accept from suppliers are reflected in the CCC". That’s why it is used as independent variables.

CCC is calculated as:

Cash Conversion Cycle = Number of Days Accounts Receivables + Number of Days Inventory – Number of Days Accounts Payable.

The components of CCC are also considered as Independent variables which are calculated as follows:

Days Sales Outstanding= Accounts Receivables/Sales*365

Days sales outstanding describe how much time company takes to receive its cash from customers.

Days Inventory Outstanding = Inventory/Cost of Goods Sold*365

Days Inventory outstanding indicates the average number of days a company holds inventory before selling.

Days payable Outstanding = Accounts Payables/Cost of Goods Sold*365

It refers to an average number of days taken by the company to pay its suppliers.

Control variables:

Other variables that influence profitability is control variance. Firm size,sales growth,debt ratio and current ratio are taken as control variables in this research.The reason for choosing these variables are:

Sales growth: Sales growth is used in this research to measure how much investment growth opportunities are present in the industry. It is calculated as ((this year’s sale minus previous year’s sales) /previous year’s sales). Deloof(2003) use this variable in his research and found a significant relationship between sales growth and profitability.

Debt ratio: Lazaridis & Tryfonidis (2006),Karaduman et.2004) and Deloof(2003) used Debt ratio in their research. This ratio indicates what percentage of firm’s assets is financed by external debt on which interest has to be paid. If financial charges are more than EBIT, a company might face loss. The debt ratio is calculated as Total debt divided by Total Assets.

Current Ratio: Current ratio is used as a measure of firm's liquidity that’s why it is used as a control variable. It is calculated as Current asset divided by current liabilities.

Firm Size: the reason for choosing firm size as a control variable is that: larger firms have good bargaining capability, which provide them favor of getting more extended credit terms from suppliers as compared to smaller firms size of the firm will be calculated with natural logarithm of sales.

The Hypotheses

In order to achieve the objective of the research following hypothesis are made:

H1= There is a negative relationship between length of Cash Conversion cycle and profitability.

(This hypothesis implies that, the company will generate less profit, if the length of the cash conversion cycle is longer because the company is taking more time to convert its resource inputs into cash flows).

H2= There is a negative relation between average collection period and profitability.

(This hypothesis implies that, the company will make less profit, if it provides more credit to the customers because now company has to find alternative source for funding inventory and also increasing its credit risk).

H3= There is a negative relation between inventory collection period and profitability.

(This hypothesis implies that, if company’s investment in inventory is high, it means too much capital is tied up, which will result in lower profitability due to low sales).

H4= There is a positive relation between days payable outstanding and profitability.

(This hypothesis implies that, profitability will increase if the company will take more time to pay its suppliers. Because the company can use its accounts payables as short term financing and can result in increase in working capital).

2.2 RESEARCH INSTRUMNENTS

The data will be collected from the annual Report of Glaxo Smith Kline Pakistan.

Another valuable research instrument which will be used is the Internet.

Microsoft Excel / SPSS Software will be used to conduct multiple linear regressions.

2.3 SOURCES OF DATA

For this research Secondary data will be use from secondary sources like internet, financial statements of GSK and newspaper.

2.4 TREATMENT OF DATA

The conducted research is qualitative as well as quantitative in nature. For example: when it comes to define the efficiency of Working capital management at GSK through financial statement’s that is in numbers it is termed as quantitative study. On the other hand, when it comes to defining the strength, benefits and efficiency of working capital the research seems to be highlighting the qualitative part.

2.5 PRESENTATION ANAYLSIS

Presentation of data will depend on the type of information and the best way for presenting it. Different forms of data presentation are:

Tables

Charts

Graphs

Chapter No 3: LITERATURE REVIEW

Literature review consists of two parts.First is Theoretical review, which will briefly discuss the literature regarding working capital and its components,working capital management and working capital cycle.The second section will discuss Empirical studies regarding the impact of working capital management on profitability.

3.1 Theoretical Review:

The definition of working capital as suggested by L.J. GUTHMANN is that it is "the portion of a firms current asset which are financed by long-term funds." Working capital means those funds which a firm used to meet its day to day operations like purchasing of raw-material, paying for the expenditures incurred in wages, salaries, rent, bills and many more. If the company is unable to meet a certain level of working capital, then it can face shortages and problems with the day to day operations which might have a negative impact on growth and profitability of the organization. (Horne and Wzchowicz, 2000)

The two important components of working capital are gross and net working capital. Firms total current assets are considered as gross working capital. Which included cash and cash equivalents like account receivables, inventories and marketable securities. It indicates the strength of the current position of the business unit.(Paramasivan and Subramanian, 2009).

On the other hand the excess of total current asset over total current liabilities is called net working capital. It may be both positive and negative. When current asset exceeds current liabilities, net working capital will be positive and when current liabilities are greater than current assets net working capital is negative. According to Brigham and Houston (2003) Positive and negative net working capital both provide important indications. Positive net working capital means company has ability to meet its short-term obligations and it focuses the concentration on the optimal investment and financing of the current asset. Negative net working capital indicates that the company’s liquidity is in danger and a company is suggested to finance its working capital needs by permanent sources of funds.

Financial management consists of three areas the capital budgeting , capital structuring and working capital management. The first two deals with long-term investment and return while working capital management emphasis on short-term financing.(Sharma & kumar 2011).The basic objective of working capital management is to assure that the company has enough resources to meet its both maturing short-term debts and upcoming operational expenses.

The ultimate goal of a company is to maximize the value of its shareholders, which can only be possible if the company is efficiently managing a trade off between profitability and liquidity. In order to achieve this goal, the company has to care about profits but at the same time should maintain a certain level of liquidity to avoid bankruptcy which calls for efficient working capital management (Raheman and Nasr, 2007).

The three important components of working capital management are: Receivable management, Inventory management and Accounts payable management.For proper understanding of working capital management and its components,working management cycle should be review as it include all major magnitude of business operations and if any one account management is not done properly it might affect company’s overall survival.Each component of Working Capital management should be regulate for smooth running of business. Following Chart can be useful to understand the framework of the working capital cycle.

Sales

Finished good

working In progress Figure 1: working capital cycle

Debtors

Raw material

Cash

Creditors

Source: Arnold (2008,p.530)

The time taken by company to convert its outflows into inflows (cash) is known as a working capital cycle. The above table reveals that working capital cycle starts when inventory is purchased in the form of raw material which is further processed and converted into finished goods. According to Fabozzi and Peterson (2003, p658) company need to maintain optimal level of inventory which refer to inventory management.Investment in inventories should not be higher which can result in blockage of funds and it should not be too lower which can negatively impact on production.

When raw material is converted into finished goods, theses inventories are stored in the warehouse until they are sold. If sales are made in cash, that cash is used for the payment to the suppliers for the purchase of raw material but if sales are made on credit, then the company has to wait for its receivables. Account receivables or trade credits are created when the company allows customers to pay for good in future dates (Fabozzi & Peterson , 2003). The opportunity cost of foregoing the alternative investment option and risk of occurring bad debts is associated with credit sales. Therefore, proper receivable management should be done by managing optimal level of sales and controlling associated cost.

The company also purchases goods on credit and create accounts of accounts payable. Accounts payable is considered as the easiest and cheapest way to finance an organization (Arnold 2008 p479-482). Proper management of accounts payable is necessary, if a company wants to maintain its goodwill. Companies who are unable to manage their accounts payable display negative sign to the market, which can affect their relationship with suppliers and can decrease their share price. The cycle continues when the company received its receivables which it use for paying off its liabilities and further injected in the cycle, to start the circle again.

Therefore, Working capital management is the process of planning , organizing and controlling all the components at such a level that it eliminate the risk of not able to meet short term obligations on one side and minimize the change of excessive levels of working capital on the other side.(Eljelly,2004).

Review of Empirical studies:

The working capital literature mainly focuses on studying the relationship between working capital management and profitability. That's why this section reviews the impact of working capital management on firms’ profitability.

Authors such as Deloof (2003), Wang (2002), Padachi (2006), Alipour (2011), Nasir & Rehman (2007), Garcia-Teruel and Mastinez-Solana (2007), Falope &Ajilore (2009), Shin & Soenen (1998), Laziridis and Tryfonidis (2006) who did research in countries like Taiwan and Japan, Pakistan, Spain, USA, Belgium, Greece conduct researches to find the impact of working capital management on profitability. All these researchers used cash conversion cycle as a measure of working capital management and for profitability Net operating profit, Gross operating profit and Return on asset were taken individually. All these researchers concluded that No.of days inventory and No.of days receivables are indirectly related to profitability and that profitability will increase if the firm will shorten its cash conversion cycle. If we summarize all these researchers finding we come to this conclusion that efficient working capital management is very important to increase the value of shareholders.

There are also many researches conducted, which uses the aggressive and the conventional approach of working capital to describe the relationship between working capital management and profitability. Two contradicting evidences were found while conducting research on these two approaches. Authors like Nazir and Afza (2009), Maccini and Blindes(1991) found a negative relationship between the aggressiveness of working capital policies and a firm’s profitability.They suggested that conventional approach that is to invest highly in working capital increase profitability. On the other hand Weinraub and Vissches (1998), Jose et. Al. (1996), Gardner et.al. (1986) , (Pinches (1991), Brigham and Ehrhardt (2004), Gitman (2005), and Moyer et al.(2005) suggested that aggressive style of working capital management leads to high profitability and risk while conservative working capital policies are associated with lower risk and return.

Though researches are being conducted on the impact of working capital management on profitability refer to Pakistan but it is not enough.The relationship between these two components are not much applied in the pharmaceutical sector of Pakistan.Currently Pakistani Pharmaceutical sector is facing many problems which have negatively impacted profitability.This reason has been a motivational force for me to conduct research on the pharmaceutical sector. This research is conducted to find the impact of working capital management on GSK profitability. The researcher has used Return of Asset a measure of profitability and the cash conversion cycle, No.of days inventory held, average collection days and No.of account payable as a measure of working capital management. The researcher has also taken current ratio, debt ratio, sales growth and size of the firm as a control variable. The basic objective of the researcher is to analyze the relationship of working capital management and profitability of GSK .

Chapter No 4: Presentation Analysis:

4.1: Data collection:

The quantitative data which are used in this chapter is taken from the Annual reports of GSK. The data consist of Income statement and balance sheet items like sales, cost of goods sold, net profit, account receivable, accounts payable, inventory, total current asset and liabilities. These data will be used to calculate all the Dependent, Independent and Control variables which will be used in this research. The data consist of 5 years time frame (2007-2011), the financial year of GSK ended in December; therefore the audited Annual Report of 2012 is not issued to the general public due to which research is limited to 2011.

Below given table display all the calculated variables which will use in calculating Descriptive statistic, correlation analysis and regression analysis from Spss software.

Table 1: Data calculated for analysis

2011

2010

2009

2008

2007

Dependent variable

Return on Asset

7.39

7.10

8.48

18.40

16.43

Independent variables

Days sales outstanding (days)

5.4

15.7

25.5

15.4

3.5

Days Inventory outstanding (days)

67

68

66

56

69

Days payable outstanding (days)

30

34

33

17

25

Cash conversion cycle (days)

42.4

49.7

58.5

54.4

47.5

Control variables

Current ratio (times)

2.4

2.7

2.8

4.1

4.3

Debt ratio %

28

27

26

21

20

Sales growth %

15

29

25

26

5

Firm size

17

17

17

16

16

Among these variables, some variable data were directly taken from the annual report such as: Current Ratio, Days Inventory Outstanding, Days Accounts Payable and Days Accounts Receivables. They were taken from "5 years at glance section" of annual report 2011.while other variables like Debt Ratio, Sales Growth, Return on Asset, Cash Conversion Cycle and Firm Size was calculated with the help of formulas.

GRAPHICAL PRESENTATION OF IMPORTANT DATA

For clear understanding of GSK’S profitability and working capital condition. Charts of important data are presented below.

As graph shows that company’s return on asset has decreased from 16.43% to 7.39% but this does not means company’s performance has decline. This decline in profits resulted from operating in Pakistani market. In Pakistan, pharmaceutical sector facing two major problems on one side the cost of imported raw material is continuously increasing and on other side prices of medicines are frozen by ministry of finance. Due to which returns have decline. In spite of these problems,GSK is still able to generate good amount of profit.

This chart presents all three components of Cash Conversion Cycle. Company is taking more time to sell its inventory; it means company is holding large inventory in stock which is causing additional cost. Present law and order situation of Pakistan can be the major reason for holding high inventory in stock.

Company’s days sales outstanding is very less which means company credit policy is very good and company cash is not suck for long time. This may be the reason of low day’s payable outstanding. Company cash is not stuck for long time that’s why company pays its suppliers on time.

The formula used to calculate variables are:

ROA = NET INCOME/ TOTAL ASSET

SALES GROWTH = (CURRENT SALES – PREVIOUS SALES/ PREVIOUS SALES)

FIRM SIZE = NATURAL LOGARITM OF SALES

CCC = (NO.OF DAYS ACCOUTS RECEIVABLES + NO.OF DAYS INVENTORY – NO.OF

DAYS ACCOUNTS PAYABLE)

4.2: DATA ANAYLSIS

After collecting all the, data analysis is carried out. Data analysis will consist of following steps.

Descriptive Statistic

The descriptive statistic of data provides the main features about data. In the descriptive statistic Mean, Standard deviation, minimum and maximum values are calculated.

Correlation Analysis:

Correlation analysis is used to determine the relationship between different variables. Pearson correlation will be used in this research to identify the relationship between working capital management and profitability.

Regression Analysis:

Multiple regression analysis will be conducted to find the impact of working capital management on GSK’S profitability. With the help of regression, the researcher will be able to test the hypothesis of the research. The researchers like Kesseven Padachi (2006), Deloof (2003), Karaduman et. Al (2004) and Mathuva (2009) use regression method to analysis the relationship between Working capital management and profitability in their studies.

4.21 The Descriptive Statistics:

With the help of descriptive statistic, the researcher will be able to evaluate and analysis Company’s working capital management, liquidity, leverage and growth position. This will help researcher in further continuing her research and for testing hypothesis.

Table.2: Descriptive Statistic.

Descriptive Statistic

Variables

Mean

Standard Deviation

Minimum

Maximum

ROA

.115600

.0541455

.0710

.1840

DSO

13.100

8.9059

3.5

25.5

DIO

65.20

5.263

56

69

DIP

27.80

6.979

17

34

CCC

50.60

6.387

42

59

CR

3.26

.873

2.4

4.3

DR

.244000

.0364692

.2000

.2800

SG

.200000

.0989949

.0500

.2900

Size

16.60

.548

16

17

ROA = Return on Asset; DSO = Days sales outstanding; DIO = Days Inventory outstanding; DIP = Days payable outstanding; CR = Current Ratio; CCC = Cash conversion cycle; DR = Debt ratio; SG = Sales growth; SIZE = Firm's size.

The interpretation of table 4 is as follows:

Table 2 displays Descriptive Statistic for GlaxoSmithKline for a period of 5 years (2007-2011.The average return company earns on its assets is 11.56%.the minimum Return on Asset is 7.1% while maximum return is 18.4%.This ratio indicates that company is efficiently utilizing its assets to make profit.

The credit period given by firms to its customers is 13 days with having standard deviation of 9 days. The minimum time took by a company to receive its receivables is 4 days while maximum time period is 26 days. This show company’s credit policy is very good and company is able to receive cash in short span of time without affecting its sales.

On the other hand, company took an average of 28 days to pay its suppliers, having standard deviation of 7 days. The minimum time taken by company to pay its suppliers is 17 days whereas the maximum time taken by company to pay its suppliers is 34 days. This shows company is not taking much time in paying its supplies, which will resulted in positive impression for company and will help in developing positive relations with suppliers.

The mean value of Days Inventory Outstanding is 65, having standard deviation of 5.2 days. The minimum time taken by company to sell its inventories is 56 days and the maximum time taken by company is 69days.

In order to check efficiency of working capital management, Cash conversion cycle is used.

The companies Cash conversion cycle is 51which means, company takes 51 days to convert its resource input into cash flows. The minimum time taken by company is 42 while maximum time is 59 which is good. This shows Company is managing its working capital in an efficient manner while keeping balance of each working capital components.

For checking debt financing and its relationship with profitability, debt ratio is used as control variable. Company's mean debt ratio is 24.4%, having standard deviation of 4%.The minimum debt taken by the company is 20% while the maximum debt taken by the company is 28%. This indicates that, company’s major parts of assets are financed by equity and company has to pay less fixed financial cost.

In order to check firm size relationship with profitability natural logarithm of sales is used as a control variable. The mean value of log of sales is 16.60 while standard deviation is .548. The minimum value of log of sale is 16 and maximum value is 17.

In order to check sales growth impact on profitability, Sales growth is used as a control variable. By looking at the table, we find that average sales growth is 20% having standard deviation of 9.89%.The minimum sales growth is 5% while maximum growth is 29%.This shows in spite of facing many external threats while doing business in Pakistan, GlaxoSmithKline is able to maintain a minimal sales growth.

For checking company’s liquidity position current ratio is as a control variable.

The company's average current ratio is 3.26.for paying of every 1 liability company has 3.26 current assets. This indicates that company has a good liquidity condition can easily pay off its short term obligations. The minimum CR is 2.4 and maximum is 4.3.

4.22: Correlation Analysis

Table 3: The correlation matrix

ROA

DSO

DIO

DIP

CCC

CR

DR

SIZE

SG

ROA

1

DSO

-.146

1

DIO

.444

-.290

1

DIP

.641

.264

.777

1

CCC

-.551

.886

-.384

-.047

1

CR

-.776

-.276

-.395

-.810

.180

1

DR

.809

.256

.386

.800

-.206

-.998

1

SIZE

.727

.374

.468

.890

-.057

-.982

.976

1

SG

.269

.799

-.441

.174

.550

-.393

.409

.415

1

Correlation is significant at a 0.05 level

ROA = Return on Asset; DSO = Days sales outstanding; DIO = Days Inventory outstanding; DIP = Days payable outstanding; CR = Current Ratio; CCC = Cash conversion cycle; DR = Debt ratio; SG = Sales growth; SIZE = Firm's size.

In table.3 Pearson correlation coefficient of all the variables are presented. There is a negative relationship between ROA and DSO, CCC and CR while other variables have positive relationship with ROA.

The result shows there is significant negative relationship between ROA and CR (-.776) which means if company increases is current ratio, companies profitability will be decline. Result also shows that there is a significant negative relationship (-.551) between CCC and ROA. This means if company is able to reduce its cash conversion cycle by taking less time to convert its input resources into cash flow, profitability of company will increase.

DSO and ROA has also negative relationship, which indicates that if company strict its credit policy by giving less time to its customers to pay receivables, no. of days account receivables will decrease and company’s profit will be increased. The analysis also shows significant positive relationship between debt ratio and ROA. If company’s more assets are financed by external debt, it will have negatively impact on profitability because now more fixed financial cost will incurred.

The correlation also indicates a positive relationship between profitability and firm size, which was calculated with natural logarithm of sales. Profitability will be high, if company’s size is big. Furthermore there is a positive relationship between DIP and ROA, which indicate that more the time taken by company to pay its payables, more profit will be generated because company will get time to assure the quality of material purchase and for time being cash will be invested on which company will enjoy returns. DIO and SG also have positive relationship with profitability.

4.22: Regression Analysis:

The impact of working capital management on profitability is modeled by using the following regression model.

ROA it = β0 + β1 (ACP it) + β2 (ITID it) + β3 (APP it) + β4 (CCC it) + β5 (CR it) + β6 (DR

it) + β7 (SG it) + β8 (Size it) + ε

The model 1: used for regressing account receivable as independent variable.

GOP it =β0 + β1 (ACP it) + β2 (CR it) + β3 (DR it) + β4 (SG it) + β5 (Size it) +ε

The model 2: used for regressing inventor as an independent variable

GOP it =β0 + β1 (ITID it) + β2 (CR it) + β3 (DR it) + β4 (SG it) + β5 (Size it) +ε

The model 3: used for regressing account payable as an independent variable

GOP it =β0 + β1 (APP it) + β2 (CR it) + β3 (DR it) + β4 (SG it) + β5 (Size it) +ε

The model 4: used for regressing cash conversion cycle as an independent variable

GOP it =β0 + β1 (CCC it) + β2 (CR it) + β3 (DR it) + β4 (SG it) + β5 (Size it) +ε

ACP is No. of days accounts receivables, ITID as No. of days inventory, APP as No. of days accounts payable, CCC as the No. of days of the cash conversion cycle, ROA as return on asset, DR as debt ratio, CR as current ratio, SG as sales growth and SIZE the company size measured by the natural logarithm of sales.