Impact of inventory turnover on the profitability of non-financial sector firms in Pakistan

Abstract

The purpose of the study is to investigate the effect of inventory turnover on firm profitability. Three dependent variables including return on asset, return on equity and net profitability margin ratio have been employed for analysis. The variable of interest is inventory turnover ratio and three control variables are sales growth, net working capital and firm size. The sample consists of 79 companies from cement, sugar and automobile sectors of Pakistan. Data ranges from the year 2006 to 2015. Generalized Method of Moment (GMM) has been applied to capture the endogeneity. Three hypotheses were developed to check the relationship between dependent and independent variables. The results of the study show that inventory turnover ratio does not significantly affect return on asset. However sales growth ratio, net working capital, and firm size are significantly affected by inventory turnover.  In the second model, inventory turnover ratio, networking capital (NWC), log of sale (LOS) and sales growth ratio do not affect return on equity. In the third regression model, the inventory turnover ratio and NWC do not affect net profitability margin ratio but LOS affects it. The study recommends that the management should pay attention to those variables which play a pivotal role in determining the profitability of firms.