A Study On Pharmaceutical Sector Of Uk

To Investigate The Impact Of Working Capital On Firm’s Profitability: A Study On Pharmaceutical Sector Of Uk 

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Abstract

Contemporarily, companies in the business world have focused towards the ways to increase their profitability while minimising the possibilities of risks that could affect companies' financial health and performance. In this regards, working capital and liquidity position is defined as critical for an organisation in order to meet the short-term or long-term obligations. Hence, this research was aimed at the determination of the effect of working capital on the profitability of pharmaceutical companies in the UK. For this purpose, secondary quantitative research was conducted on 10 years data of 5 pharmaceutical publicly listed companies in the UK. The variables of the study consisted of ROA, ROE, and net profit margin as dependent variables; whereas independent variable consisted of inventory turnover, debt to equity, current ratio, and accounts payable in days. Meanwhile, three regression tests were conducted with each dependent variable, and the result of the first test suggests that only current ratio and accounts payable in days have a statistically significant and positive impact on the ROA. On the other hand, the second test result suggests that there is a statistically insignificant impact of working capital on profitability. However, the third test of net profit margin indicates that inventory turnover, current ratio and accounts payable in days has a statistically significant and positive impact on the return on equity. Meanwhile, the paper also discusses the applications and implications of the research; in order to assist Pharmaceutical companies and future researcher.

List of Figures

Figure 1 Descriptive Statistics Result 27

Figure 2 Correlation Results 29

Figure 3 Regression Model 1 33

Figure 4 Regression Model 2 34

Figure 5 Regression Model 3 35

Chapter 1: Introduction

1.1 Contextual Background

This research serves the purpose of determining how working capital management impacts the profitability of a firm. Working capital of a firm can be in form of a stock having a resale value so that the firm can generate profit out of it. Usually, working capital comprises of around 30% to 40% of the total investment of the firm. Profit generated from working capital investment determines how the firm is operating and whether its investment is effective or not. Managing working capital efficiently is significantly important for a business; it involves plan and control of current liabilities and current assets so that a balance can be maintained between profitability and liquidity (Enqvist, Graham and Nikkinen, 2014). 

Working capital could be regarded as highly critical for companies that wish to operate in a complex working environment. The rising complexities have made it difficult for businesses to operate and attain operational efficiency. In this regard, it becomes imperative for firms to assess every factor and its impact on the profitability of the company. While working capital has been established as a critical component in the performance of firms, less has been studied regarding the impact and effect of it in the pharmaceutical sector. As it has been understood that the implications of various factors may differ in varied industries and businesses, it is important to specifically focus on a particular industry to rightly deduce an assessment. One of the major objectives of firms in the private sector could be regarded as profit maximization. With this being said, businesses are keen to understand the factors that may have an effect on it (directly or indirectly). While several external influences have an impact on the firm and its success, working capital could be identified as an internal element of the company that proves to be significant.

Considering working capital to be an important aspect for organisations, the management of the same could also be regarded as imperative for firms. In simple terms, the difference between current liabilities and current assets of the company could be regarded as working capital. Adequate management of working capital could be regarded as critical for the financial health of the organisation along with operational success. Businesses should attempt to utilize WCM to maintain a good balance between liquidity, growth and profitability. If a business does not have enough working capital to cater to its obligations, the financial insolvency may lead to serious concerns (bankruptcy or liquidation of assets). In order to ensure effective WCM, firms must majorly focus on managing inventories, accounts payable, cash and accounts receivable. While the need for working capital may vary in different industries, it is critical for every organisation to assess the need for it.

This study is subject to assessing working capital management skills of pharmaceutical companies to generate profit. This study focuses on the pharmaceutical industry of the UK because the management of the working capital in large pharmaceutical industries has been quite difficult. Moreover, as stated by Vishnani and Shah (2007) pharmaceutical industry is more sustainable, cost-effective and less risky business model which requires effective working capital management in order to provide potential benefits and high returns on cash to the investors. An entity that wants to generate higher profit must keep a balance between short term liabilities and short-term assets. The purpose of this study is to explore the effect of working capital on earnings in UK pharmaceutical companies. This research proposal indicates how this research will be carried out to reach results as to what is the influence of working capital on profit of business entities but it is restricted to the pharmaceutical sector in the UK.

1.2 Problem Statement

Studies have been carried out in the context of firms’ profitability due to the working capital management of the organisation (Martinez-Solano, 2007; Mathuva, 2015). However, it has been observed that the liquidity of the firm is reduced with the increasing profitability of the firm and increasing focus towards liquidity will influence the profitability (Enqvist, Graham and Nikkinen, 2014). Therefore, the major focus of the companies revolves around the topic of maximising the firms’ profitability by limiting the liquidity of the firm. On the other hand, this would result in a number of problems which might lead to the financial insolvency within companies (ÖNER, 2016). Therefore, this study is carried out by focusing on effective working capital while maintaining equilibrium between these two variables. The major focus of the study is to analyse the best methods of working capital that can be utilised within pharmaceutical firms in order to increase the profitability, bearing in mind the influences of increased or decreased liquidity of the firm.

One of the major reasons why the focus of investigations has been put on the pharmaceutical sector is the fact that there has been very less research carried out in this field with regards to the impact of working capital on the profitability of the firm (Mathuva, 2015). Considering the impact and contribution of working capital has been assessed in various fields, and it has been assessed that working capital plays an imperative role in the performance of the organisation. Having said this, not a lot has been done to assess the impact on pharmaceutical sectors and how companies in this industry would be affected by it. Through this study, the research gap would be filled as the specific focus has been put towards the organisations operating in this field. The performance of varied firms in the pharmaceutical sector would be analysed through reviewing their annual reports, in order to assess how the aspect has been affecting the businesses and what must be done in order to avoid the adversities. 

1.3 Aim and Objectives

The research aims at the determination of effect of working capital on profit of pharmaceutical companies in UK. This aim is to be achieved through the following objectives;

• To understand the concept of working capital 

• To determine how working capital can be managed efficiently by a company

• To identify the components of working capital

• To determine the effect of working capital on profit in general

• To assess the influence of working capital on earnings of pharmaceutical companies in the UK.

1.4 Research Questions

The research will address the following questions;

• What is the idea of working capital?

• How working capital can be managed efficiently?

• What are the components of working capital?

• What is the effect of working capital on the profit of companies in general?

• What is the effect of working capital on earnings of pharmaceutical entities in the UK?

1.5 Significance and Rationale of the study

The basic variables of the study are working capital and profitability and both these variables hold great importance for business entities (Raheman et al., 2010). These entities must be aware of managing working capital efficiently and generate profit. There are many studies in the literature on the topic but this research will be specific to the pharmaceutical sector of the UK. Different studies were conducted in relation to different sector and regions but there are very few studies on the pharmaceutical sector of the UK to assess the influence of working capital on profit. Therefore, this research is significantly important for the pharmaceutical sector of UK so that companies which are not aware of the importance of working capital get to understand its impact. Also, the study would lead to being significant for academicians who wish to study and research regarding the impact of working capital on the profitability of firms as different dynamics related to working capital would be discussed in it.

The study would not only add to the related dynamics of working capital, but would also provide critique regarding the impact of it on the profitability of firms in the pharmaceutical sector. While it has been understood that working capital is an important aspect for businesses and their performance, this study specifically focuses on the pharmaceutical sector and how the impact may vary in this regard. Working capital is mainly considered imperative for maintaining the financial health of the organisation, but the impact it has particularly on the profitability has been rarely discussed. With this study, the variable of profitability would keenly be assessed in terms of working capital in order to critically evaluate how businesses may be affected through the volatility of it. In order to assess the impact on it on business profitability, the pharmaceutical sector of UK has been taken into consideration, in order to deduce how pharmaceutical companies operating in the specific area would be affected by it. 

1.6 Research Structure

This reporting structure is divided into four main sections. In the first section, the researcher has identified the aims and objectives, research questions and problem statement of the research. In the second section, the researcher has reviewed various secondary researches to conduct the literature review by dividing the research topic into different parts. Then, the methodology in which the researcher has mentioned key methods and techniques that will be utilised in the research. In the final section, major ethical considerations that will be maintained by the researcher in the report are mentioned.

Chapter 2 Literature Review

2.1 Working Capital

Companies in this contemporary business world have focused on the ways of increasing their profitability while minimising the possible risks that could affect companies' financial health. Therefore, working capital is required and necessary for an organisation in order to meet the short-term or long-term obligation. According to Teruel and Solano (2007), it has been observed that working capital has the propensity to measure the efficiency and short-term financial health of the business. Working capital, in words of Mathuva (2015) is a way of measuring the tendency to pay business liabilities with the help of the current assets within the organisation. However, if a firm does not maintain effective working capital, it results in the lack of future growth of the business, similarly affecting the financial health of the organisation. The study of Makori and Jagongo (2013) defined working capital as a difference of current assets and current liabilities and it is necessary to maintain a balance between outgoing and incoming payments. Effective working capital indicates that the company is able to pay its short-term liabilities within a period of one year. This makes the financial analysts become sensitive for the calculation of working capital. 

The working capital ratio, as per the words of Enqvist, Graham and Nikkinen (2014) show the liquidity position of a firm; however poor working capital results in the decline in the ability of a firm to pay off their liabilities in a given period of time. According to Raheman et al. (2010), the working capital is important for any company, especially the distribution or manufacturing firms that have a direct impact on the profitability or liquidity of the firms. This is because in manufacturing and distributing firms, working capital accounts for more than half if its total assets and operations. However, it has also been explored that ineffective working capital or working capital management leads to the bankruptcy of the firms even if the company has positive and increasing profitability. Considering a number of varied policies that companies implement over time, enhancing working capital management has resulted in being one of the most important aspects for businesses. While the importance of working capital may vary from business to business, firms must assess the need for it according to nature and type of the organization.

Working capital has been understood as an imperative aspect for businesses in terms of maintaining financial health. The rising work complexities have made it critical for businesses to focus on all such aspects that may have an impact on the performance of the organization (Makori and Jagongo, 2013). In this regard, assessing the impact of working capital could be considered as a critical aspect for firms in the pharmaceutical sector. As stated by Napompech (2012) working capital management on the other hand is essential in order to plan and organize the finances so the firm may be able to ensure smooth operations. In order to maintain a balance between growth, liquidity and profitability, firms must develop effective working capital management strategies. Sustaining a positive cash flow for instance is critical for companies that have to make frequent transactions, and this could only be attained if proper WCM takes place within companies.

2.2 Importance of Working Capital

Several studies have been conducted in the subject of working capital or working capital management that asserts the significance and importance of the term in financial management (Sagner, 2010; Agyei-Mensah, 2010; Enqvist, Graham and Nikkinen, 2014). According to Nazir and Afza (2009), the term, working capital help the financial analysts to meet the financial requirements of an organization that are due within short-term and is not retained within the organization for a longer period of time. However, the amount of money which is invested in working capital may change its form. The study of Agyei-Mensah (2010) revealed that the maintenance of working capital might be a difficult task for an organisation. The importance of working capital is viewed as the flow of blood within the human body, as the working of funds and capitals is used to maintain the business (Enqvist, Graham and Nikkinen, 2014). Therefore, if the working capital of an organisation becomes weak, the survival of a business in the business environment is in serious threat.

The study of Hanushek (2013) explored that the working capital starvation can be the major cause of the business failure in various countries, however business can only be succeeded it is able to generate cash. Moreover, poor business performance can also be results of poor financial management in terms of working capital and planning of the cash requirements. However, most of the studies have related to business performance failure to the lack of managerial hold and competencies (Raheman et al., 2010; Mansoori and Muhammad, 2012; Sagner, 2010). On the other hand, the survival and growth of the company can be interpreted with respect to working capital management. For every size of the company, the management of working capital has been beneficial for its growth and survival which dictates the importance of working capital in terms of organisational context (Makori and Jagongo, 2013). The wealth of any business can be seen in terms of its assets, while most of the multinational organisations do not want to hold on to most of the assets on their financial books (Mansoori and Muhammad, 2012). The non-ideal conditions within production and manufacturing firms produce current assets which become the major reason for a business to invest in total assets (Abbasaali and Milda, 2012; Makori and Jagongo, 2013). Therefore, it can be said that working capital is of great importance which defines the cash flows and increases the business value.

2.3 Types of Working Capital

According to Alavinasab and Davoudi (2013), the working capital is divided into two main categories; balance sheet and operating cycle view. The balance sheet view is further divided into net working capital and gross working capital while the operating view is divided into permanent or temporary working capital. Mathuva (2015) asserted that the working capital is the movement of funds or capital that are needed for daily operations of the business while the definition of working capital in terms of balance sheet view is described as the amount of money that is invested or received for receivables, cash or receivables. This definition is normally related to the current assets that are included in the balance sheet of an organisation. Moreover, the balance sheet view also shows the part of the working capital in terms of payables or current liabilities of the firm that are supposed to be paid within a period of one year, is the net working capital (Abbasaali and Milda, 2012). According to Larson and Gray (2013), the net working capital; working capital is supposed to indicate the amount of money which is needed to be invested for long-term capital of a business as its working capital. However, the net working capital can be negative sometimes in situations when the company has more liabilities as compared to its assets.

In terms of operating working capital, it is the receivables minus payables plus inventories. The permanent working capital is defined as a limited and particular amount of money that is required to perform business activities at all levels. Guimaraes and Nossa (2010) explained permanent working capital as the current assets that are required to perform business activities continuously for a period of one year. However, the working capital has a particular period for its existence, i.e. one year, while a particular amount of investment is always constant or permanent (Enqvist, Graham and Nikkinen, 2014). In the case of production, a certain amount of investment always remains constant even after the end of the accounting period such as finished stocks or raw materials. However, the calculation of such working capital is carried forward to the next year (Sagner, 2010). Therefore, as a concluding statement, it can be said that the permanent working capital is the minimum amount of capital in current assets which are considered important for the continuous operations of the company. In terms of temporary working capital, the investments made by the business in order to cater to the fluctuations in any business operations or activities are crucial for the company's sustainability as well. According to Tufail and Khan (2013), the temporary working capital is considered important in the context of seasonal variations that occur during the company operations. Companies are not required to maintain the accounts for this working capital in a year, however temporary working capital is considered significant for the case of short-term capitalisation (Makori and Jagongo, 2013).

2.4 Components of Working Capital

As working capital has been regarded as an imperative aspect for companies which they need to take into consideration for ensuring smooth business operations, it is necessary to understand the major components of working capital that have to be managed efficiently. The two broad categorisations of it could be identified as current assets and current liabilities, in which there are several elements that have to be keenly managed (Tauringana and Adjapong Afrifam, 2013) . While current assets could be considered as those assets that could be converted into cash within the period one year, the management of this requires a set of activities. On the other hand, current liabilities could be regarded as those claims of outsiders that are expected to mature for payment within a year. Both of these aspects are highly important for businesses and require keen attention.

Cash could be considered as one of the most important components of current assets and so it is critical for businesses to develop effective cash management strategies (Pandey and Jaiswal, 2011). It is essential that the firm maintains an adequate cash balance in order to ensure smooth business operations and activities. This could be done by managing the inflows and outflows of cash in the business. On the other hand, receivables could be mentioned as another essential component of working capital. The debtors of the firm require keen attention and focus by the companies and it becomes imperative to coordinate and ensure effective collection of money from the ones who owe the business (Agha, 2014). The third important component is of payables, as it is the money that has to be given to individuals outside the business. While creditors play an imperative role in the operational efficiency of a firm, it is essential to keep such individuals satisfied to ensure a steady supply of material. The last essential component is of inventory as it constitutes a major part of total working capital. Efficient management of inventory may lead to maximisation of earnings of the shareholders (Tauringana and Adjapong Afrifam, 2013). 

2.5 Impact of Working Capital on the Firm's Profitability

A number of studies have been conducted to determine how working capital affects the profitability of a firm. Different studies have been carried out in different regions and different sectors. Abbasaali and Milda (2012) stated the result of their study over how working capital affects profitability using few entities in Tehran and indicated that there is a material relationship between working capital and earnings. This study demonstrates that the working capital and profitability of the company have a significant relationship with each other but there is no significant relationship between the working capital and market value of the company. Another study conducted by Mary and Laurie (2010), indicated that inventory has an effect on profitability and return on investment on inventory provides profitability to the company. Melita and Petros (2010), also determined this relationship, it used data of listed entities in Cyprus for the period of 1998-2007 and found that working capital management and earnings of the firm are interlinked. Another study was carried out by Kaddumi and Ramadan (2012, p.217) in which, results revealed that the working capital and the performance of the Jordanian industrial firms have a positive correlation between each other. The regression analysis also explored that the firms follow less aggressive financial policies in the context of working capital that has been adding values to the wealth of the shareholders.

Vida and Rezvan (2011) assessed how working capital and profit are interrelated using information of 101 companies on the stock exchange of Tehran. Regression and correlation were used for hypothesis testing of the study which concluded that working capital has material relationship and influence on profitability on such companies. Organizations listed on the Stock exchange of Istanbul were also tested by Hasan and Salih (2011) for the period of 2005 to 2009 to show the empirical relationship that working capital has with the profit of a company. The study concluded that the reduction in the cash conversion cycle can affect return on assets. These studies focused on the impact of working capital on profitability in different regions and on companies listed on different stock exchanges. The purpose of mentioning these studies is to highlight the rising concern of researchers towards identifying the impact of working capital on the performances of the firms. By reviewing these studies, positive results can be concluded, however it can be noticed that no research has been carried out in the context of the pharmaceutical industry. Therefore, this study intends to determine the impact on UK pharmaceutical companies. The purpose is to highlight the importance of working capital to enhance the earnings of a company.

Moreover, with regards to the impact of working capital on the profitability of the business, it must be understood that the impact and importance of it may vary in different industries and companies. While it has been understood that working capital contributes to the performance of the organisation, it is imperative to understand how the impact may vary in different situations (Alavinasab and Davoudi, 2013). In general, all those companies that function in an environment which does not allow them to operate on credit terms and who have the high amount of financial transactions on a frequent basis are keenly concerned with managing working capital. The inability to operate on credit terms mean that the business would require an ample amount of cash to make all sorts of transactions, and for this purpose working capital must be given critical attention and importance.

Considering the example of textile, garment and leather industries, the need to manage working capital is essential. The amount of transactions in these industries is so high, that the firms operating in the sector have to maintain a considerable amount of working capital. On the other hand, companies in the technology sector do not rely on working capital as they do not have physical products to be sold. This lowers their requirements of possessing working capital and managing the cash flows. Companies operating in the service industry are majorly dependent on their abilities and skills, which earn them their desired profits. In this case, the involvement of money and management of cash flows is considerably low. This being said, organisations in such sectors focus less on maintaining working capital as compared to other industries such as, textile, healthcare, leather and more.

2.6 Pharmaceutical Industry of UK

The pharmaceutical industry of UK is one of the largest industries in the world. This sector in UK provides jobs in a variety of differnet areas like distribution, manufacturing, R&D and clinical trials and provides employment for approximately 70,000 peple in the country (ABPI, 2011). The manufacturing of the pharmaceutical is one of the very few elements of the manufacturing industry in UK which has gone through a comparatively persistent productivity, employment and output growth in the last decade. Moreover, this sector has the projection of approximately 4% to 10% of growth per year (Kazzazi et al., 2017). The pharmaceutical sector is usually seen to have high spending in R&D and in UK also, this sector has the most spending in the R&D that accounts for approximately 25% of all the investments related to R&D in the UK economy.

There have been different researches that have been carried out to study the impact of working capital in the pharmaceutical sector. The main reason for which the pharmaceutical sector has been selected for this research is that the leadership of the pharmaceutical firms is not dependent on the innovation of the products but it is dependent on the development of the new products. Therefore, the pharmaceutical industry has to put a lot of investment in the developing new drugs and also have to bear a very high cost of R&D (Mehra, 2013). This is the reason for which studying the effect of working capital in this industry has motivated the researcher to select this industry.

There is an array of literature available on the impact of working capital on the profitability of the pharmaceutical industries. The study of Sahrif and Islam (2018), which was carried out in the pharmaceutical sector of Bangladesh, revealed that there is a significant relationship between the workig capital and profitability. Similarly, the study carried out by Chowdhury et al., (2018) also showed a positive relationship between the profitability and working capital of the pharmaceutical industry.Another study carried out on the pharmaceutical industry of UK by (Qurashi, 2017) has shown that the leverage and the size of firm has a postitve relation with profitability but the liquidity and growth has a negative relation.

Chapter 3: Methodology

3.1 Introduction

The target in this section is to portray an in depth assessment of the methodology of investigation engrossed by the author. According to Miller, Mauthner and Jessop, (2012), Research methodology confirms the structure of the whole study and is believed to be an essential measure of the investigation. In addition to that, all the methods and tools that the researcher adapts to perform the specific study are embraced in the research methodology. Furthermore, a set of measures followed to get to the bottom of the research problem organizationally is also conveyed in the section. It does not particularly illustrate the evolution of the methods but also it provides the explanation for electing such approaches (Maxwell. 2012). Following diagram depicts the research flow which was followed in this research,

3.2 Research Philosophy

A way of explaining the perception, notion as well as the exploration of the derived visions over the approaches initiated is specified in the research philosophy. There are three types of research philosophies named as Positivism, Interpretivism, and Realism, on which the research is grounded generally.

As stated by Lohr, (2009), the evolution of awareness and the collection of the experiences and attitudes are highlighted in the notion of Interpretivism. In addition to this, it emphasizes on diagnosing the experiences and lucid rationale under the approach of the research. Furthermore, the Positivism philosophy is accommodated when the investigator is aimed to investigate or delve into the conception at the bottom of the investigation. It covers numerous attributes like hypothesis formation, target exploration, and dealing with the research questions. Additionally, it leads the author in the direction of social realism and practices and the justification of the discoveries obtained through analysis (Heit and Rotello, 2010). The realism philosophy highlights the aspects like the placement of regulation and imposition and political norms. Therefore, this specific analysis is intended to be stranded on the philosophy of positivism considering the nature of the study which is mainly related to the financial analysis with the support of statistical methods. Through the inclusion of positivism research philosophy, the researcher was able to conduct an in-depth analysis associated with working capital and profitability of the company. In this context, the observations and findings gathered through positivism were analysed through statistical methods in order to find the relationship between two variables.

3.3 Research Approach

As stated by Saunders, (2011), the research approaches are classified into two significant types that are deductive approach and inductive approach of research. According to Bryman and Bell, (2015), the deductive approach is acclimated; the researcher initiates from the identification of associated theories, then gather the essential data for inspection and construe the discoveries through such analysis. Therefore, the approach that is aimed to be adapted by the researcher for the analysis of the research concept is deductive. Since the data taken for the research is quantitative in nature, therefore, the deductive approach has been selected for this research. The utilisation of the deductive approach has enabled the researcher for the effective utilisation of the study variables in order to assess the relationship between the two variables selected for this research.

3.4 Research Design

The foundation of the study on which the entire research is targeted to be evaluated is Research Design. Quantitative research design quantifies the research issues by the evolution of the scope and connotation of association between variables and how one variable influence the other variable and for that it requires numerical data that is calculable (Williams, 2011; Fowler, 2013). Whereas, as the name implies the mixed method stresses equally on quantitative and qualitative data i.e. it involves both the quantification of research issue and the viewpoint of targeted respondents on the notion commenced in the research (Williams, 2011). Therefore, in this research study the researcher is targeted to adopt the quantitative research design to acquire the functional vision of the research notion.

3.5 Data Collection Method

 It is essential to highlight the foundation of data collection in the research study in terms of the reliability and credibility of that foundation or sources. Therefore, the investigator can approach two data collection methods to gather the relevant data referred to as Primary and Secondary data collection methods (Sunders, et.al, 2012). Primary method refers to the collection of fresh data that is not obtained from the previous researches through interviews, experiments, and surveys. Whereas, the secondary is the method in which the data is gathered from existing and open research information like facts and figures from previous literature, websites (World Bank, Stock Exchange, IMF, etc.), Books, and Research papers. Therefore, in this study, the data is gathered from the secondary source relevant to the research issue. The secondary data has been collected from the annual reports of the pharmaceutical companies in the UK. For this purpose, 5 companies have been selected in order to conduct analysis for the variables working capital and profitability. The data related to the selected variables have been collected from the annual reports and Thompson Reuters website which is a database that provides useful financials regarding the company.

3.6 Sample Size

The suitable number of sources and reactions are the foundations on the investigator finalized the sample size of the research study for the analysis of the research issue. As this study is centred on the quantitative evaluation and the researcher is aimed to access the data from the secondary source for examination; therefore, the investigator determine the sample size of the research study through the number of companies adequate for the evaluation, which means that the sample size is reliant on the number of the reviewed companies. The data or information is aimed to be gathered from the official sites of the companies that are undertaken. The data has been taken from five different pharmaceutical companies listed at stock exchange where ten years of data has been taken for the period of 2008-2017.

3.7 Data Analysis Plan

Data analysis plan is the method of building the structure, analysis, demonstration and clarification of the research data in order to change and unstructured data into a well-meaning and functional concept and to build up valuable deductions. According to Harwell, (2011), there are various data analysis methods that rely on the environment of analysis required by the researcher. As stated by MacDonald and Headlam, (2011), SPSS (Statistical Package for Social Scientists) is the most ordinary tool used for the quantitative analysis and this tool is often adopted for research studies, however, since SPSS does not support, process and read panel data, hence Eviews 8.0v was used for statistical purposes. Therefore, in this study, the descriptive statistic, correlation test and regression test was conducted through Eviews statistical software. The data gathered for the 10 years was tabulated in the excel sheet in order to conduct analysis on Eviews. 

3.8. Variables of the Study

Dependent Variable: Profitability 

• Net profit margin

• ROA

• ROE

Independent Variable: Working Capital

-Current Ratio

-Accounts Receivable

-Debt/Equity Ratio

-Inventory Turnover

3.9 Ethical Considerations

While gaining access to the past literature or awarding new aspects to the prevailing concept, it is essential for the researcher to keep an eye on the ethical codes and rules for the purpose to conduct broad and reliable research. Therefore, the past studies that the researcher accessed are properly quoted and appropriately credited by the researcher of this study. Likewise, the researches that are older than 2010 has not been used by the investigator in order to attain modern and reliable statements. Moreover, it is ensured by the researcher that quantitative and secondary data is gathered from verified and reliable sources to propose reliable outcomes.

3.10 Limitations

There are certain limitations that can be aroused while directing a research study either in gathering the data or in inspecting the retrieved data. These limitations can influence the outcomes of the study and also limit the room of the research that is being directed. Therefore, some of the limitations that the researcher faced during this specific research study are as follows:

•  Budget Limitation: The initial limitation that the researcher faced was a budget limitation as the research is held at an academic level. Therefore, it is difficult and incapable for the researcher to study the present concepts and visions of researches broadly and to acquire an extensive scope of data.

• Time Limitation: An essential element for directing broad research always is Time period. For this study the researcher has limited time which can drive the researcher to access limited data. Moreover, it can lead the researcher to acquire limited previous studies to build the concepts.

• Limitation of Multifaceted Variables: The incidence of human errors and complex or compound expressions that researcher is incapable to comprehend can influence the room of study.

Chapter 4: Data Analysis And Discussion

4.1 Introduction

 This chapter is intended to conduct an analysis of ten years of data of five different publicly listed Pharmaceutical companies in the UK. Meanwhile, based on the objectives and aim of the study, descriptive statistics, correlation test, and regression test were conducted. Furthermore, it is also important to mention that Eviews 8.0 was used for these statistical tests; since collected data was panel data that SPSS cannot read and process. Meanwhile, the following chapter provides analysis of results, and conducts a discussion of objectives to highlight how each objective is achieved by means of primary and secondary findings. 

4.2 Descriptive Statistics

Figure 1 Descriptive Statistics Result

Mean return on equity (ROE) of the selected companies is 0.22, which means each company on average has 22% (ROE), and 7.1% return on assets (ROA). However, the table also shows that ROE and ROA may deviate by ±0.31, and ±0.055 respectively. It can be further analysed that ROE and ROA may increase or decrease by ±31%, and ±5.5% which is the standard deviation of the ROE and ROA. Furthermore, the mean net profit margin of a given company is 15.18% with a standard deviation of ±8.9%. It shows that the mean net profit margin of the given company might increase or decrease by ±8.9%. It is also identified that in panel data, the minimum net profit margin is -15% and the maximum profit margin is 35%. It implies that the net profit margin depends on the size of the company, nature of the business, and revenues growth. Based on these characteristics net profit margin is affected positively or negatively.

Mean inventory turnover is 2.5 with a standard deviation of 1.25; and minimum inventory turnover is 1 and maximum inventory turnover found 8.3. It can be analysed that average inventory turnover is 2.5 which can be increased or decrease by ±1.25. However, this is very low which indicates inefficiency of the firm to make sales, and the inability of the company to change its inventory into the sales. However, as per the Mary, John, and Laurie (2010) lower inventory turnover may also be due to the nature of the business, and type of industry. This is also supported by a reported generated by Calc Bench Inc in 2013, that average inventory turnover of the pharmaceutical industry is 2.4. Hence, it can be stated that the result of inventory turnover is consistent with secondary findings.

Furthermore, the mean debt to equity is 1.04 with a standard deviation of 2.8, and the mean current ratio is 2.01. On the other hand, mean accounts payable in days is 145 with a standard deviation of 103. It means company payback venders and suppliers within 145 days. It can be analysed that for debt to equity ratio, on average each firm owns £1.04 over each £1 in the equity; it means that the company has more debt than its equity. Meanwhile, debt to equity was also included into the study to measure to what extent capital structure plays a role in affecting the profitability of the firm. However, the mean current ratio is attractive that the company can meet with its current liabilities obligations twice.

4.3 Correlation Coefficient 

The correlation coefficient is also known as only coefficient as observed in literature and discussion in academic papers. It is defined by Schober Boer and Schwarte (2018) that correlation is a statistical measure of the relationship between two or more quantitative variables. It is conceptualized that correlation assist in defining and determining the statistical association between the variables. Meanwhile, in order to determine the correlation coefficient between the variables of the study, the correlation test through Eviews was conducted. See the result of the test below

Figure 2 Correlation Results

The result above determines two important properties of correlation; the strength of the relationship, and nature of the relationship. The strength of the relationship refers to either relationship is strong or weak, or strength of the relationship is determined through coefficient. If the correlation coefficient is between 0.3 to 0 then the relationship is described as very weak. Similarly, if the coefficient is greater than 0.3 and less than 0.5 then the relationship is described as weak (Gogtay and Thatte, 2017). On the other hand, if the correlation coefficient is between 0.8 to 1 then the relationship is described as very strong, and if the coefficient is between 0.5 to 0.8 then the relation is described as strong only.

Furthermore, referring to the type of relationship, it is determined through a negative or positive coefficient. If the coefficient has a negative sign then the relationship is stated as negative. In contrast, the absence of negative (-) sign is indicative of a positive relationship (Schober Boer and Schwarte, 2018). Meanwhile, referring to the correlation result the correlation coefficient between ROE and ROA is 0.60 which indicates a positive and strong relationship. Hence, it is stated that a change in the ROE will also bring a change in ROA extent to strength of relationship and as per the direction of the relationship. However, there is no direct relationship between both variables, since there is a moderator or mutual variable in both measures of profitability that affects the relationship as also stated by (Kabajeh, Al Nuaimatand Dahmash, 2012). This moderator variable is the net profit, which if changes direction then relationship between ROE and ROA will also be affected.

This is also a major reason that has created a strong positive relationship between ROE, ROA and net profit margin. Furthermore, ROE, ROA, and net profit margin have a weak relationship with the inventory turnover, which implies that a positive change in the profitability will bring a negative change in the inventory turnover. However, inventory turnover is a measure of a company's ability to replace its inventory in a given period and return on assets and equity are the measure of firm's efficiency to generate the return on assets and capital employed. Hence, it can be determined that a positive change in inventory turnover should translate and reflect higher revenues; net profit hence should also increase the ROE and ROA. It is because, higher inventory turnover means company has been replacing its inventory multiple times, hence revenues and net income tend to increase positively.

In contrast, inventory turnover has a weak negative relation with profitability in the case of the pharmaceutical industry in the UK. Thus, it can be stated that high inventory turnover in the Pharmaceutical industry tends to increase costs in proportion to revenues. Hence, ROE and ROA are affected negatively regardless of the increase in the revenues. Apart from this, this is can also be analysed in another direction that a positive change in the inventory turnover will bring a negative change in the ROE, ROA, and net profit margin based on the effect of increase costs. Furthermore, ROE has a weak positive relationship with the debt to equity, which implies that a positive change in the ROE will also increase the debt to equity extent to the strength of their relationship. This is a usual and natural association between variables given that a positive change in the ROE means an increase in net income, which will increase the ratio.

However, referring to the studies, the researchers had found different relationships between ROE and debt to equity ratio, where one concluded positive relation in case of the banking industry (Velnampy and Niresh 2012), and another concluded a negative relationship in case of the textile industry (Iqbal and Usmanm 2018). Similarly another study conducted by Lenka (2017) found a negative relationship between ROE and debt to equity in case of construction and agriculture industry. Therefore, based on the industry the relationship might differ, hence, based on the primary findings of the following research it can be stated that relationship between ROE and debt to equity ratio in case of Pharmaceutical is positive. However, ROA and net profit margin have a negative weak relationship; hence a decrease in the debt to equity ratio will enhance ROA and net profit margin. It implies that if liabilities or debt portion increases then profitability is negatively affected in the case of Pharmaceutical industry UK.

Meanwhile, it is determined the debt to equity ratio and its relationship with the profitability differs by industry. Meanwhile, in case of pharmaceutical industry, ROE has negative relation, and other measures of profitability has positive relationship. It implies that change in the debt to equity can bring a negative change in the ROA, but will bring positive change in the other measures of revenues. This finding is also consistent with the study of Lenka (2017) that found negative relation of ROA with debt to equity. Similarly, the current ratio only has positive relation with the ROA, but other reassures have negative relation. It implies that improvements in the working capital can bring a positive improvements in the ROA at some extent. Hence, pharmaceutical company should focus onto improve working capital conditions to support profitability.

The relationship between the current ratio and ROE is weak negative, which means a positive change in the current ratio will bring a negative change in ROE extent to the strength of the relationship. It is because an increase in the current ratio is influenced by either increase in current assets or decline in the current liabilities. In each case, the portion of liabilities tend to remain low as compared to current assets; hence proportionately rising current ratio tend to affect ROE negatively. On the other hand, ROE and net profit margin have a positive but weak relationship with the current ratio. It is can analyse that a positive change will be brought by the current ratio in the ROA and net profit margin; it is because the rising net current ratio is indicative of higher current assets, which reflects company’s increased and improved performance. Hence, ROA and net profit margin tend to increase consequently. Lastly, accounts payable in days has a positive but weak relationship with the profitability of the firm. Hence, a company negotiating with the suppliers and vendors over a longer payment schedule can enhance their profitability.

Furthermore, cash cycle in days has weak negative relation with ROA, and account receivable turnover also has negative relation with the ROA. However, cash cycle has positive but very weak relation with ROE, and also negative weak relation with account receivable turnover. Furthermore, revenues also have positive and strong relation with cash cycle and weak negative relation with accounts receivable. This implies that cash cycle has will influence a negative change in the ROA if it increases, but ROE, revenues, and NPM are positively associated; hence change will also be positive extent to strength of relationship. On the other hand, accounts receivable negative relation with the ROA, ROE, revenues and net profit margin. This indicates that if accounts receivable turnover increases then ROE, ROA, revenues and net profit margin will decreases, and vice versa.

Meanwhile, it can be concluded that ROA, ROE, revenues and net profit margin has weak negative relation with inventory turnover with coefficient of -0.19. Similarly, the these profitability measures also has positive and negative relationships with debt to equity , where only ROA has negative relation, but in contrast ROE, revenues and NPM has positive weak relationship. Therefore, it can be determined that profitability of the Pharmaceutical industry in UK has positive and negative relations with the independent variables. Therefore, firms need to achieve an optimal capital structure which can improve profitability. 

4.5 Regression Analysis

Regression is defined as a statistical technique or a statistical model which is used to estimate the relationship between two variables and to determine the impact of independent variables on the dependent variable. Meanwhile, is a technique which formulates and utilizes the statistical model to run the test in order to estimate relationships (Kumari and Yadav, (2018). It is further observed that there is always one dependent variable in the model, but independent variables may be more than one. It is because; the regression model uses multiple independent variables to predict the dependent variable. Hence, for multiple dependent variables multiple regression models have developed accordingly. Therefore, the following study also has multiple dependent variables; hence following regression models were developed

ROA = β0 +β1 INVT+ β2DdebtEquity+ β3 CR + β4 AP_Days+β5 ARDays+β6 Cash cycleDays+β7 Revenues

ROE = β0 + β1 INVT+ β2DdebtEquity+ β3 CR + β4 AP_Days+β5 ARDays+β6 Cash cycleDays+β7 Revenues

NPM = β0+ β1 INVT+ β2DdebtEquity+ β3 CR + β4 APDays+β5 ARDays+β6 Cash cycleDays+β7 Revenues

Figure 3 Regression Model 1

Referring to the result above, it is the outcome of the first regression model for predicting ROA. The R-Squared of the model is 0.399, which means 39.9% of ROA is predicated by inventory turnover, debt to equity, current ratio, accounts payable in days, account receivable turnover, cash cycle in days, and revenues. However, it can also be analysed that remaining portion of the ROA which is 0.601 or 60.1% is predictable by some other variables which are not included in the model (Hamilton, Ghert and Simpson, 2015). Meanwhile, r squared is also indicated how well data is close to fitted regression line, since r squared is 39.9%, thus it can be stated that 39.9% of the data is close fitted regression line.Meanwhile, one unit of change in the inventory turnover, debt to equity, current ratio, accounts payable, accounts receivable, cash cycle in days, and revenues will bring a change of -0.007, -0.0003, 0.024, 0.000, -0.0102, -7.82e-06, and -9.70E-07 respectively. However, considering the individual p-value of each coefficient, p-value of inventory turnover is 0.08, debt to equity 0.63, current ratio 0.195, and account payable turnover 0.47, account receivable turnover is 0.051, cash cycle 0.53, and revenues 0.17. Since, p-values of all variables are greater than alpha 0.05, hence it can be stated that no variable has statistically significant impact on the return on assets (ROA). Therefore, it can be determined that ROA is not influenced by any of the selected independent variables.

Figure 4 Regression Model 2

The result above is the outcome of the second regression model of predicating ROE. The R-Squared of the model is 0.256, which implies that 25.6% ROE is predicated by inventory turnover, debt to equity, current ratio, accounts payable in days, account receivable turnover, cash cycle in days, and revenues. However, it can also be analysed that the remaining portion of the ROE which is 0.744 or 74.4% is predictable by some other variables that have not been included in the model. Meanwhile, r squared also indicates that 25.6% of data is closely fitted with the regression line. Furthermore, referring to individual p-values of each coefficient, then p-value of inventory turnover is 0.08, debt to equity 0.83, current ratio 0.084, and account payable turnover 0.25, account receivable turnover is 0.045, cash cycle 0.68, and revenues 0.10. Since, p-values of inventory turnover, debt to equity, current ratio, accounts payable turnover, cash cycle and revenues is greater than alpha 0.05, hence it can be stated that there is no significant impact positive or negative impact of these variables on the return on equity (ROE). However, only accounts receivable turnover has p-value less than alpha, hence it can stated that there is significant impact of accounts receivable turnover on the return on equity (ROE) all variables are greater than alpha 0.05, hence it can be stated that no variable has statistically significant impact on the return on assets (ROA).

Figure 5 Regression Model 3

Referring to the result above, it is the outcome of a third regression model of predicting net profit margin. The R-Squared of the model is 0.471, which means 47.1% net profit margin is predicated by inventory turnover, debt to equity, current ratio, accounts payable in days, account receivable turnover, cash cycle in days and revenues. However, it can also be stated that the remaining portion of the net profit margin which is 52.9% or is predictable or explainable by some other variables that are not included in the model. Meanwhile, r squared is also indicated 47.1% data is closely fitted with the regression line.

Similarly, one unit of change in the inventory turnover, debt to equity, current ratio, and accounts payable in days, account receivable turnover, cash cycle in days and revenues will bring a change of -0.034, -0.0042, 0.0287, 0.0001, -0.014, 2.76e-05, and -6.60e-07 respectively. However, considering the individual p-value of each coefficient, then p-value of inventory turnover is 0.005, debt to equity 0.27, current ratio 0.227, and account payable turnover 0.53, account receivable turnover is 0.124; cash cycle 0.66, and revenues 0.56. The p-value of debt to equity, current ratio, accounts payable turnover, accounts receivable turnover, cash cycle, and revenues is greater than alpha 0.05; hence impact of these variables on net profit margin is not statistically significant. However, only p-value of inventory turnover is 0.00 which is less than alpha significance, hence it is determined only inventory turnover has negative and statistically significant impact on net profit margin. It implies that net profit margin is negatively influenced by inventory turnover. It means that net profit margin is only negatively influenced by inventory turnover; where a positive change in inventory turnover will bring a negative change in net profit margin. Similarly, revenues have also insignificant impact on the net profit margin, where model is significant; it implies that there is problem with the data in terms of range and length as stated by Lin et al (2013). Where authors also argues that low number of observations in regression tend to provide irrelevant or insignificant results; thus maximum number of observations should be taken to ensure reliable results with consistent data.

4.6 Discussion of Objectives

4.6.1 Objective 1: To understand the concept of working capital 

The first objective that had been proposed by the researcher is in understanding the concept of working capital. The first objective that had been developed is theoretical in nature and had been achieved through analysing the literature. The term working capital refers to the funds in which the organization is able to meet the short-term and long-term obligations. Similarly, Mathuva (2015) has defined working capital as the ability for paying the liabilities of the business as well as increasing the current assets of the organization. Moreover, the study of Makori and Jagongo (2013) has explained working capital as the difference between the current liabilities and current assets. Companies that have effective working capital are able to pay-off their short-term liabilities within a one-year time period. On the contrary, companies that have poor working capital are unable to pay off their liabilities within a year and faces difficulty in running their operations smoothly. Similarly, the study of Raheman et al. (2010) has highlighted that the working capital of manufacturing and distribution firms has a significant impact on the profitability and liquidity of the company. 

4.6.2 Objective 2: To determine how working capital can be managed efficiently by a company

The second objective that had been established by the researcher was to determine how the working capital can be effectively managed by the company. The objective had been achieved through analysing the literature in which it had been indicated that there are mainly two types of categories that need to be effectively monitored which are balance sheet and operating cycle. The monitoring of the balance sheet and operating cycle supports the company in effectively managing the working capital in terms of growth and survival. Similarly, the study of Makori and Jagongo (2013) has indicated that businesses should focus and monitor all the aspects of the financial performance in order to maintain financial health.

4.6.3 Objective 3: To identify the components of working capital

The third objective that had been proposed by the researcher was to identify the components of the working capital. The objective that had been developed by the researcher was theoretical in nature and had been successfully achieved through reviewing the literature. According to the study of Tauringana, Adjapong and Afrifam (2013), the components of the working capital consist of two broad categories which are current assets and current liabilities. The current assets are those assets of the company that can be easily converted into cash within a one year time period. On the other hand, the current liabilities are those claims that are needed to pay within a year. Therefore, both of these aspects are highly critical for the organization in which high attention is needed on both of these components. One of the most important components of the current assets is cash which helps in the development of effective cash management strategies. It is imperative for the business to have adequate cash balance for ensuring that the operations of the business run smoothly. Another important component of current assets is receivable in which the money is collected from the business for providing goods or services on an account. The last important component is account payable, in which the amount of money that has been owned by the creditors is required to be paid for improving the efficiency of the firm.

4.6.4 Objective 4: To determine the effect of working capital on profit in general

As it is defined and discussed earlier that working capital is an amount of money which is maintained by firms to meet with the short-term liabilities, obligations and also critical to continue to the daily operations. In this regards, it can be argued in light of Mathuva (2015) that working capital is often measured in current ratio, which is result of current assets minus current liabilities. A company with ratio of 2 indicates that company can meet with its short-term liabilities twice, and it also has sufficient short-term assets with sudden need of capital to continue operations. Similarly, sufficient and enough working capital increases operational efficiency to carryout operations timely, and helps to maintain the financial health. Hence, a study conducted by Sagner, (2010); Agyei-Mensah, (2010); Enqvist, Graham and Nikkinen (2014) defined and used working capital as a measure of firm’s efficiency to continue operations. Based on these arguments, it can be determined that there is direct and significant impact of working capital on the firm’s profitability. 

4.6.5 Objective 5: To assess the influence of working capital on earnings of pharmaceutical companies in UK 

It is conceptualized that generally working capital positively influences earnings and profitability of the firm. Meanwhile, since, there are different measures of working capital and profitability, regression test was conducted to determine impact of working capital on the profitability of the firm. Meanwhile, it is found that ROA is only significantly influenced by current ratio and ROE is not influenced by any component of working capital such inventory turnover, debt to equity, current ratio, accounts receivable, cash cycle in days and accounts payable in days. On the other hand, revenue as independent variable also did not affect ROA, ROE, and net profit margin significantly, which indicates problem with the sample size and observations. However, net profit margin is significantly influenced by inventory turnover, current ratio, and accounts payable in days. Meanwhile, it is found that ROA and net profit margin of the companies in Pharmaceutical industry of UK is positively affected by working capital.

Chapter 5: Conclusion And Recommendations

5.1 Introduction

The current study was aimed at assessing the influence of working capital on profitability of the pharmaceutical sector of UK and the current chapter has been written with the purpose of providing a conclusion based on the findings of the current research. This chapter has discussed the fulfilment of the major aims and objectives of the study and has concluded the entire study highlighting the insights gained. Furthermore, the current chapter has also provided some recommendations based on the concluded points of the current research. The major strengths and limitations of the current study along with its future implications have also been clearly mentioned in this chapter. Finally, this chapter has also indicated the areas in which future researches can be carried out.

5.2 Conclusion

The major objective of the current research study was to ascertain the influence of the working capital on the profitability of a company by studying the pharmaceutical sector of UK. This broad objective was broken down into different brief objectives on order to make the major objective more achievable. The brief objectives were designed by taking the major objective of the study into consideration and included the overall understanding of the working capital concept, identification of the ways to effectively management of working capital, determining the various components of working capital and their effect on the profitability in general and in relation with the pharmaceutical industry of UK.

For the purpose of achieving the objectives of the study, a review of the current thinking was carried out to develop an overall understanding of the topic under study and to find out the various aspects that relate to the particular concept. The literature review revealed the variables of the working capital and profitability that can be studied to examine the relationship between the two. The review of the current thinking established that the working capital is significantly important for the companies in order to increase their profitability. However, the effect of working capital on the profitability of a company is subject to the type of the company and the type of the industry in which the company operates. Therefore, as the current study was aimed at assessing the working capital influence on profitability of the pharmaceutical industry of UK, a secondary data collection was carried out to gather the data of pharmaceutical industry.

The secondary data was gathered form the annual reports of the 5 pharmaceutical companies operating in UK and then years data was collected from 2008 to 2017. In order to achieve the objective of the current research and to aid effective analysis, the dependent variable of study i.e. profitability was assessed by net profit margin, ROA and ROE whereas the independent variable i.e. working capital was examined by the variables of current ratio, accounts payable, debt to equity ratio and inventory turnover. After this, the data form the annual reports regarding the above mentioned variables was gathered and analysed to check the relationship between the dependent and the independent variables.

After the collection of the data, different statistical tools were applied to the data which included descriptive statistics, correlation analysis and regression analysis. The results of the descriptive statistics revealed that the average ROE of the selected companies was 22 percent, average ROA was 7.1 percent and their average net profit margin was 15.18 percent. On the other hand, the average inventory turnover was identified to be 2.5, average accounts payable were 145 days, debt to equity ratio was 1.05 and the average current ratio was 2.012. Based on these findings, it can be inferred that the working capital of the pharmaceutical companies is giving positive indications and the profitability of the companies is also positive.

In addition to this, the analysis of correlation and regression put forward the findings that the account receivable turnover and inventory turnover have a statistically significant impact on the ROE and net profit margin respectively whereas all the other determinants of working capital have no significant impact on the determinants of profitability. Therefore, it can be concluded based on the findings of the current research that the components of working capital such as accounts receivable and inventory turnover have significant impact on the profitability of the pharmaceutical companies operating in UK. This is because the accounts receivables and the inventory turnover are the major determinants of the working capital due to which the impact of these variables is important in determining the relationship between profitability and working capital.

The analysis carried out in the previous chapter of the current research study has completely achieved the objectives of this study as the impact of the working capital of the pharmaceutical industry on the profitability have been examined. The findings of the current research can be supported by the findings of the study carried out by Salih (2011) which stated that the cash conversion cycle which is the determinant of working capital has a significant impact on the return on equity which is the determinant of the profitability. Similarly, there are various other researches available in the literature that can be used to strengthen the findings of the current research (Kaddumi and Ramadan, 2012, p.217; Rezvan, 2011; Mary and Laurie, 2010).

5.3 Recommendations

The current study has provided the conclusion that the working capital of a company has a significant positive impact on the profitability of the company in the pharmaceutical sector of UK. The companies which have developed a mechanism of effectively managing their working capital have seen a positive change in their profitability. Therefore, based on the findings obtained in the current research, the recommendations that can be provided are as follows:

• The current research has established that the efficiency of the working capital management can prove to a significant element for increasing the profitability of the company. Therefore, the companies should focus on bringing the period of inventory conversion, average period of cash collection and conversion cycle of cash down to a desirable level along with the improvement in the average period of payment, so that they can significantly raise their levels of profitability.

• The pharmaceutical companies should also have an adequate amount of cash so that they can easily pay off their current liabilities. This can be done by decreasing the period of their cash conversion cycle. This is important because the firm’s current assets should exceed the current liabilities in order to ensure increased profitability. The pharmaceutical companies which have a high time period of receivables that is receivable turnover often have higher time period of payables. This shows that the firm lacks the ability to pay back its current liabilities on time and affects the profitability. 

• The efficient management of working capital has proven to be extremely beneficial for the companies in increasing the value of their shareholders. Therefore, the companies should utilise great amount of their available resources to develop effective policies to manage their working capital because without focus and effective polices, working capital cannot be used to positively impact the profitability.

5.4 Strengths and Limitations of Research

The current study has analysed the capital structure of the pharmaceutical industry with respect to the profitability of the same industry. The pharmaceutical sector of UK is a major sector and the findings of this research can have significant implications for this sector. Moreover, the current study has analysed different aspects of working capital and profitability in order to determine the relationship, which is one of the major strength of this research. Apart from this, the findings of the current study have been supported by different studies available in the literature which can also be considered as a significant strength of this research.

On the other hand, there are also some of the limitations of the current study. The current study has examined the effect of working capital on some aspects of the profitability of the pharmaceutical sector which is one of the limitation of the study as there are some other determinants of profitability also that were not taken into account in this study. Furthermore, the current research has been carried out specific to the pharmaceutical sector only which has also limited its scope. Therefore, its findings may not be applicable to any other sector. Finally, the current study has also geographical limitations as it was carried out on the pharmaceutical sector of UK only due to which its results may not be applicable to pharmaceutical industry of any other country.

5.5 Avenues for Future Research

The current research was specific to the assessment of the influence of the working capital on the profitability by studying the pharmaceutical sector of UK. Therefore, there are some areas that the current research has not covered. The future researches can take into account other sectors than pharmaceutical such as retail and restaurants as they often have a negative working capital because of the reason that their customers pay cash up front. For this reason, studying the impact of working capital of these sectors on profitability can have significant implications. Furthermore, studying the impact of working capital on business valuation in the pharmaceutical sector can also be an avenue of future research.

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