Investigating the Nonlinear Relationship between Working Capital and Profitability: a Case of Pakistan Textile Firms

This study analyzes the impact of working capital (WCR) on operating profit of Pakistan textile firms from 2009 to 2016. The nonlinear relationship has been found between working capital and operating profit, which indicates that an optimal level of working capital exists in the textile firms of Pakistan. The firms are seeking the optimal working capital, where WCR (4.78%) of sales in generalized method of movement is used. Further, the study reveals that in the firms which maintain the positive working capital, it has a significant negative influence on the profitability, while in the firms with negative working capital, it has a significant positive influence on their profitability. The study also ascertains that cash holding level is an important factor for efficient working capital management.