Impact of Working Capital on the Profitability of UK Pharmaceuticals and Biotechnology FTSE All Share Index Firms

Abstract

The study is conducted to investigate the impact of a working capital on profitability for the Pharmaceuticals and Biotechnology firms listed on FTSE all share index. Panel data is collected (data is collected from 2009 to 2015 for 10 Pharmaceuticals and Biotechnology firms), Pearson’s correlation and fixed effect regression is used for the data analysis. Profitability is the dependent variable, which is measured through return on capital employed (ROCE). Five models have been generated based on different components of working capital (stock conversion period, debtor collection period, and creditor payment period and cash conversion cycle) in a stand-alone and collective manner to explore the impact of working capital components on the firm profitability. Four control variables (liquidity, leverage, firm size and growth) have also included in the models. The results have shown that stock conversion period has a positive while debtor collection period has a negative relationship with profitability. Insignificant results have observed for creditor payment period and cash conversion cycle therefore no relationship can be determined between these two variables with profitability. Similar results have been observed when all the working capital components were collected together to explore their impact on firm’s profitability. Leverage and firm size have shown a positive relationship with profitability while insignificant results have observed for the liquidity and growth.