Working
capital is essential for the day-to-day operations of a business,
and hence it is the life-blood of any business. The basic
theme of working capital management is to provide adequate
support for smooth and efficient functioning of normal day-to-day
business operations by striking a trade-off between the three
dimensions of working capital, i.e., liquidity, profitability
and risk (De and Chakraborty, 2008). In the present environment
of cut-throat competition, business does not have any other
option than cutting the cost of its operations in order to
be competitive as well as financially healthy. It is in this
connection that effective management of working capital plays
a vital role. But a great deal of controversy exists over
the issue as to whether the working capital of a firm, as
determined by its financing and investment decisions, affects
its profitability or not. On this issue, academicians are
sharply divided into two schools of thought (Mallik et
al., 2005, p. 51). According to one school of thought,
working capital is not a factor of improving profitability
and there may be a negative relationship between them.
The
other school of thought opines that investment in working
capital plays a vital role to improve corporate profitability,
and unless there is a minimum level of investment of working
capital, output and sales cannot be maintained. They argue
that inadequacy of working capital keeps fixed asset inoperative.
Obviously, a large number of considerations play a vital role
in the development of arguments and counter arguments in this
regard (Mallik et al., 2005, p. 51). Against the backdrop
of this academic debate, an attempt has been made in this
study to evaluate the interrelationship between working capital
management and profitability of 25 selected pharmaceutical
companies in the Indian pharmaceutical industry during the
period from 1996-97 to 2007-08. |
