Relationship between Inventory Management and Profitability: An Empirical Analysis of Indian Cement Companies

Abstract

The importance of efficient working capital management (WCM) is indisputable. Moreover, the adequate and timely flow of inventory is imperative for the success and growth of any company. The present paper is an attempt to study in depth the inventory management practices of Indian cement companies and its impact on working capital efficiency. The purpose of this paper is to examine the relationship between inventory conversion period and firms‟ profitability. The dependent variable, gross operating profit is used as a measure of profitability and the relation between inventory management and profitability is investigated for a sample of five top Indian cement companies over a period of ten years from 2001-2010. This study employs Regression analysis to determine the impact of inventory conversion period over gross operating profit taking current ratio, size of the firm, financial debt ratio as control variables. The results indicate that there is a significant negative linear relationship between inventory conversion period and profitability. The results of this research are in line with the previous findings. The findings indicate that Inventory conversion period has an inverse relationship with firms profitability i.e. when the ICP days increase the profitability of firm decreases and vice versa. It was found that, the firms profitability as measured by GOP has a negative relationship with financial debt ratio. This implied that profitability increases with decrease in financial debt ratio. Furthermore in this study the relationship between the firm size and GOP was positive which indicates that profitability increases with an increase in firm size. The relationship between current ratio and the GOP was negative.

Keywords: Working Capital, Cement Companies, Inventory Management, Liquidity, Profitability