Working Capital Management in Select Indian Pharmaceutical Companies: A Cross-Sectional Analysis

Working Capital Management in Select Indian Pharmaceutical Companies: A Cross-Sectional Analysis

Debasish Sur (University of Burdwan, India), Sumit Kumar Maji (University of Burdwan, India) and Deep Banerjee (University of Burdwan, India)
DOI: 10.4018/978-1-4666-5154-8.ch001
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Abstract

The Indian pharmaceutical industry is the fifth largest pharmaceutical industry in the world in terms of volume and the fourteenth largest in value terms. There have been sevaral notable changes in the scenario of Indian pharmaceutical industry after the signing of GATT (now WTO). The mergers, acquisitions, and takeovers at both national and international levels have become a common phenomenon in this industry. In today's challenging and competitive environment, efficient management of working capital is an integral component of the overall strategy to create shareholders' wealth. So, the task of designing appropriate strategies for managing working capital in accomplishing the objective of maximizing shareholders' wealth of companies in the Indian pharmaceutical industry is of prime importance. In this backdrop, the chapter seeks to analyze the working capital management of ten selected companies in the Indian pharmaceutical industry during the period 1996-97 to 2010-11. While satisfying the objective of the study, relevant statistical tools and techniques have been applied at appropriate places.
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2. Review Of Existing Literature

Over a long period of time many research scholars have made significant contribution in the literature of finance by conducting unique and fruitful empirical research studies on WCM at both national and international levels. Some notable studies were reviewed in the following paragraphs for the purpose of identifying the research gap.

The findings of the empirical investigation conducted by Carpenter and Johnson (1983) showed that no linear relationship between the revenue systematic risk of US firms and level of current assets was present; rather they found non-linear relationship which was not observed to be statistically significant.

Lyroudi and Lazaridis, (2000) carried out an analysis of the Greek Food Industry to establish the relationship between the Cash Conversion Cycle and the traditional liquidity indicators. The results revealed a significant and positive linkage between the modern and traditional liquidity indicators. The Cash Conversion Cycle was also seen to be positively related with the Return on Assets.

The study undertaken by Eljelly (2004) on a sample of 929 joint stock companies in Saudi Arabia also showed that there was a significant negative relationship between the firm's profitability and its liquidity.

The study conducted by Ghosh and Maji (2004) for analyzing the relationship between working capital management and profitability of the Indian cement industry observed significant association between the earning capacity and outstanding use of current assets. Mohamad and Saad (2010) got similar inputs from their study of working capital management and market valuation of 172 Malaysian firms for the period 2003 to 2007.

Mallik et al. (2005) conducted their study on working capital management of Indian pharmaceutical industry and found no significant relationship between working capital and profitability.

The study conducted by Filbeck and Krueger (2005) emphasized the significance of efficient working capital management by assessing the working capital management policies of 32 US non-financial companies. The study revealed a significant difference in the working capital financing policies adopted by the companies over the time. The findings were further reinforced by the results of the similar studies conducted by Gombola and Ketz (1983), Maxwell et al. (1998), and Long et al. (1993).

Key Terms in this Chapter

Inventory Turnover Ratio (ITR): A measure of the efficiency of inventory management of the company. In general, a high ITR is good from the liquidity point of view and implies sound inventory management, whereas a low ratio signifies excessive inventory levels than warranted by the volume of operation indicating poor liquidity as well as inefficiency in the inventory management.

Debtors Turnover Ratio (DTR): A measure of the efficiency of debtors management of the company. The quality of debtors is also indicated by this ratio.

Current Ratio (CR): The basic measure of liquidity. The higher the value of CR, the higher the liquidity.

Quick Ratio (QR): This ratio is a stricter test of liquidity than CR, as it gives no consideration to inventory, which may be slow moving. It places more emphasis on immediate conversion of assets into cash than the CR does.

Cash Turnover Ratio (CTR): A measure of the efficiency of cash management of the company. The higher the CTR, the higher is the efficiency of cash management.

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