Working Capital Management

on Firm’s Performance

A Study on BASF BANGLADESH LIMITED

A Report on

Working Capital Management on Firm’s Performance A Study on BASF BANGLADESH LIMITED

Prepared for

The Chairman Department of Finance & Banking

Prepared by

MD. Jobair Bin Habib Student ID: 602

Reg. ID: 30748, Exam Roll: 110084 BBA Program, Department of Finance & Banking

Jahangirnagar University

Savar, Dhaka

March 29, 2015

Letter of Transmittal

29 March 2015

The Chairman

Department of Finance & Banking

Jahangirnagar University

Savar, Dhaka

Through: Mr. Md. Yousuf Harun

Subject: Submission of the internship report.

Dear Sir:

I am pleased to present you with the paper ‘Working Capital Management on Firm’s Performance: A

Study on BASF BANGLADESH LIMITED’ as the final paper based on the internship program at

BASF Bangladesh Ltd.

Working capital management involves the relationship between a firm's short-term assets and its short-

term liabilities. The goal of working capital management is to ensure that a firm is able to continue its

operations and that it has sufficient ability to satisfy both maturing short-term debt and upcoming

operational expenses. The management of working capital involves managing inventories, accounts

receivable and payable, and cash.

This paper shows all related work, analysis and possible application of academic theories in possible

scenarios.

I hope the paper will satisfy your inquisitive mind.

Yours sincerely,

Md. Jobair Bin Habib

Exam ID- 110084

BBA program, Batch- 02

Department of Finance & Banking

Jahangirnagar University

Foreward

At the very beginning I would like to admit that, I retrieved all the information and data from BASF

SE, Germany with a view to understanding and analyzing them in the perspective of working capital

management. Question may arise on the localized firm about not showing the information related to

our country. Well, this could have been done but with little extent. The local is restricted by the parent

company to provide any financial information to third party, without any proper consent both from the

proper legislation of the country and BASF SE, Germany. This is the sole reason I chose BASF SE’s

data over the local one. So that, the paper can contains a bouquet of quality interpretations. Still I added

a portion naming credit management where I utilized the only data set that I was permitted to develop

from. My objective of the paper, in a few words, is simply find the correlation of different working

capital ratios with farm’s performance indicators i.e. net income, return on assets or return on equity.

I could manage to achieve this objective only working on the data from the financial statements from

BASF SE, Germany, which is the parent company of BASF Bangladesh limited.

I would like to express my gratitude to my supervisor Mr. Md. Yousuf Harun for his great support

during my internship research. He is the man behind this work, who simply shaped this paper with

resourcefulness, skill and of course with 24/7 support.

I would also like to thank to all of those people, without the help of those people it was not possible to

compile all the information and to give a structure, which this paper contains, in a structured and

flawless manner. Mr. Ikramul Hoque, CMA, the Senior Manager of Finance and Accounts, BASF

Bangladesh Limited, a heartfelt thanks to him for giving me the opportunity to work under him in a

great corporation with a beautiful, friendly and aesthetic corporate culture. He taught me several things

that I think can usher my path to future success. He taught me what punctuality and hard-working is.

I was used to be a little bit of procrastinating character, but the teaching and motivation from him lift

me up to a better level where I can now focus on finishing my responsibilities with care and preemptive

manner. Mr. Md. Kamruzzaman Ansary, Assistant Manager, Accounts & Finance, BASF Bangladesh

Limited, who was the great helping hand, showed me the way BBL goes in. He helped me to

thoroughly understand the functions of MS Excel, which I used in this paper to construct the analysis

part with many easy shortcuts and of course professionally. I wish every class should have a great

teacher like him, who can explain the Theory of General Relativity as simply as pie. I would also like

to thank Mr. Naimul Islam, Executive, BBL, for his continuous support in the firm. He actually showed

the corporate culture to me. He was friendly and I could express my thinking to him easily. From

photocopying to advanced accounting and auditing, every single job that a person have to do in an

organization was his instruction.

At last- I would say that I am grateful to them for what they gave me.

iii

Table of Contents Table of Tables ................................................................................................................................................. iv

Table of Figures ................................................................................................................................................ v

Synopsis of the Study .......................................................................................................................................... vi

1. Background .................................................................................................................................................. 1

1.1. Introduction ......................................................................................................................................... 1

1.2. Objective of the Study ......................................................................................................................... 1

1.3. Research Questions ............................................................................................................................. 2

1.4. Significance of the Study ..................................................................................................................... 2

1.5. Organization of the Research .............................................................................................................. 2

2. Literature Review ........................................................................................................................................ 3

To summarize: ............................................................................................................................................. 6

3. Data and Research Methodology ................................................................................................................ 8

3.1. Research Hypothesis ........................................................................................................................... 8

3.2. Sample Period ...................................................................................................................................... 8

3.3. Sources and Collection of Data: .......................................................................................................... 9

3.4. Definition of Variables ......................................................................................................................... 9

3.5. Methodology ..................................................................................................................................... 10

3.5.1. Research Design ........................................................................................................................ 10

3.5.2. Analysis ...................................................................................................................................... 10

3.5.3. Limitations ................................................................................................................................. 11

3.6. Company Overview ........................................................................................................................... 11

4. Working Capital Management................................................................................................................... 13

5. Analysis ...................................................................................................................................................... 19

5.1. Current Assets ................................................................................................................................... 19

5.1.1. Cash Management ..................................................................................................................... 19

5.1.2. Managing cash Inflows and Outflows ........................................................................................ 20

5.1.3. Forecasting ................................................................................................................................ 20

5.1.4. Management of Marketable Securities ..................................................................................... 23

5.1.5. Management of Receivables ..................................................................................................... 25

5.1.6. Inventory Management ............................................................................................................. 26

Objectives of Inventory Management ....................................................................................................... 27

Factors Determining Optimum Level of Inventory .................................................................................... 28

Tools of Inventory Management ............................................................................................................... 28

5.2. Current Liabilities ............................................................................................................................... 30

iv

5.3. Working Capital Ratio ........................................................................................................................ 30

5.4. Current Ratio, Quick Ratio, Current Assets/Total Assets & Current Liabilities/Total Assets ............ 32

5.5. Cash Ratio .......................................................................................................................................... 33

5.6. Dividend and Investment .................................................................................................................. 34

5.7. Capital Structure ................................................................................................................................ 36

6. Regression Analysis ................................................................................................................................... 38

6.1. Net Income and Working Capital ...................................................................................................... 38

6.2. Net Income and Current Assets & Liabilities ..................................................................................... 38

7. Correlation, working capital performance and industry performance ..................................................... 41

8. Conclusion ................................................................................................................................................. 44

9. Recommendation ...................................................................................................................................... 47

References ......................................................................................................................................................... i

Books .................................................................................................................................................................. iii

Appendix 1 ........................................................................................................................................................... iv

Appendix 2 ......................................................................................................................................................... viii

Appendix 3 ........................................................................................................................................................... xi

Appendix 4 .......................................................................................................................................................... xii

Appendix 5 ......................................................................................................................................................... xiv

Data of different variables ......................................................................................................................... xiv

Pearson’s Correlation Matrix ..................................................................................................................... xiv

Table of Tables Table 1: Working capital Performance and Firm Performance ........................................................................... 7

Table 2: Financial Statement 201 ...................................................................................................................... 12

Table 3: Detailed relationship among the Components of Current Assets & Liabilities and Net Income ........ 40

Table 4: Correlation, working capital performance and industry performance ............................................... 41

Table 5: CCC Pearson’s Correlations .................................................................................................................. 42

Table 6: Hypothesis Results ............................................................................................................................... 43

v

Table of Figures

Figure 1: Level of WC, Current Assets & Current Liabilities .............................................................................. 18

Figure 2: Cash or Cash Equivalent ..................................................................................................................... 20

Figure 3: Some Possible Cash Receipts .............................................................................................................. 21

Figure 4: Some Cash Disbursements ................................................................................................................. 23

Figure 5: Marketable Securities ......................................................................................................................... 24

Figure 6: ACR Turnover ...................................................................................................................................... 25

Figure 7: ACR Turnover in Days ......................................................................................................................... 26

Figure 8: Inventory Turnover ............................................................................................................................. 29

Figure 9: Inventory Turnover in Days ................................................................................................................ 29

Figure 10: Working Capital of BASF SE .............................................................................................................. 31

Figure 11: Current, Quick Ratio, CA/TA & CL/TA ............................................................................................... 32

Figure 12: EPS vs. DPS ........................................................................................................................................ 35

Figure 13: Net Income vs. Dividends .................................................................................................................. 35

Figure 14: Debt-Equity Difference ..................................................................................................................... 36

Figure 15: Debt Equity Ratio .............................................................................................................................. 37

Figure 16: Value Creation .................................................................................................................................. 44

vi

Synopsis of the Study Working capital management is the life blood of a company’s day to day activities. It always has a

positive relationship with value addition to firms. If the management of working capital can do

comparatively better, the net profit margin or simply the profitability of the firm will increase.

Working capital management has lately become a better known concept as more and more managers

are starting to realize the benefits that a well-managed working capital can bring. In literature, authors

generally refer to the concept of working capital as- working capital or net working capital.

The objective of a WC manager is to increase the revenue and reduce the costs of related subject

materials. Because the firm’s value depends on it. Firm value increases when the price of existing share

price increases. Higher net income leads to increase in the share price. We know, net income means

more dividends and more dividends means higher EPS. And the value of firm is simply calculated by

market price of per share multiplied by total number of shares outstanding.

The report is designed to achieve the objective- the level of working capital ratio and the correlation

among those ratios with net income, ROE, ROA and other performance indicators.

From the analysis, it is found that- Net income has a very steep tangent with year change. This is

because BASF SE is performing well in the selling area. They have reduced cost and generated more

revenues. The forecasted data shows that the NI will continuously increase. In some years they offered

dividends in a rising manner, suddenly the payment fall of but it was followed by a tremendous

payment in the latest years. This can be related to the NI, because NI increased dramatically in the

recent years. The company is getting back all the receivables.

Although NI is increasing, Gross profit will decline in the next years. This means- Their operating

income will increase, Non-operating income will also increase, Operating and non-operating expense

will decrease or simply all of those particulars indicate that the management is performing well to

reduced cost.

The intense upward trend of working capital means, BASF SE has more cash to pay their short term

liabilities, cash inflow is well functioning. It is forecasted that they have to pay a little to creditors.

Because their accounts payable forecasts a quick downward sloping which obviously is good sign.

The inventory turnover ratio is almost parallel to base, indicating a good performance as we observed

the sales revenue is upward through all the year. Their Inventory Turnover in Days is also increasing

a little bit, which almost seems parallel too. This means their retention ratio of inventories is almost

vii

the same for the years, which also clearly identify their proficiency in successfully selling the products

and also they are producing at a continuous rate but these being stored (this happens because, BASF

SE is a multination company running its business in almost all of the countries in the world- possibly

leading to stick in low sales in many different countries due to unprecedented events and issues),

though other sale ratios shows that sale is increasing. This can also show that- the demand is high in

the market, BASF Bangladesh are producing at a very high rate, their sale is comparatively high in

volumes, but not in the context of inventory turnover ratio. Many of their raw materials, finished goods

etc. are in stock for future sales. This can also be concluded that- for meeting the ongoing demand,

they are producing more and plan to produce more. That is why they are stocking lots of raw materials,

working process and finished goods.

It is not obvious why they are not maintaining any short term investments models like Baumol, Miller-

Orr or Beranek model. They could have used these model to best use of their idle cash by investing

and earn some extra value. Rather they use- contingency approach for short term investments.

Although, BASF is performing well in the context of net income, which has a very positive and steep

trend, it could have been much better if the proper, effective and efficient management of working

capital had occurred in the previous years. They could have introduced lockbox to reduce floatation

cost, Baumol, Beranek or Miller-Orr model to earn extra cash, better forecasting to know the market

demand and respond in accordance with that, JIT or EOQ models to reduce inventory holding cost and

better inventory management.

At last- the correlation grid summarizes the performance of working capital of BASF and industry

indicators. Except for few criteria, all of them match the results found by various academicians in their

research papers.

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1. Background Working capital management has lately become a better known concept as more and more managers

are starting to realize the benefits that a well-managed working capital can bring. In literature, authors

generally refer to the concept of working capital as, working capital or net working capital.

Total background is discussed in the subsections below. Background is divided into different parts, so

that it becomes easier to understand and specific topics regarding to this background can be found very

easily with a matter of single glance.

1.1. Introduction

In this paper, almost all of the elements of working capital management is going to be discussed. At

first a little description of working capital management is required.

Several scholars defined working capital management with great extent. Arnold defines working

capital as, “the difference between current assets and current liabilities”. After reviewing different

sources about working capital, it has become clear that the definitions taken from Arnold is a very

general definition that is frequent used to define both working capital and net working capital.

Continuing with the concept of working capital management, Jeng-Ren, et al., describes this as

‘companies’ management of their short-term capital”. The short-term capital is here referred to as the

current assets and current liabilities.

This also to be noted that this paper also shows the relevancy of learning from books and corporate

practice of WCM. In this paper, almost all of the elements of working capital management is going to

be discussed and analyzed.

1.2. Objective of the Study

Working capital management concern companies’ management of their short-term capital. The short-

term capital refers to the capital that companies use in their daily operations and it consists of

companies’ current assets and current liabilities. Problem is--- Is the WC portfolio given at any point

enough to run the firm smoothly? This paper has been substantiated in numerous empirical studies.

Since the positive impact of WCM on firm profitability has been substantiated in various empirical

studies, several researchers have recently investigated potential positive correlations of Working

Capital performance that potentially boost firm’s performance.

This paper is designed to accomplish the answer to the former question with an objective, which is-

P a g e | 2

To find out the correlation among different indicators of working capital with net income,

profit growth of the company, return on assets, and return on equity, sales and other variables.

1.3. Research Questions

Finding out the level of Working Capital or Net Working Capital along with different indicating ratios

from the financial statements of BASF is the prerequisite of achieving the objective. While achieving

the objective, many other crucial question come that are really needed to be answered with a view to

showing the clarity of the objective. The questions are-

1. What are the indicators of Working Capital that actually will reflect the firm’s short term

performance?

2. Why the so-called-indicators will act as the ‘Indicators’ of working capital?

3. What are the endogenous and exogenous variables in the set of those indicating ratios?

4. What is the intensity and nature of the relation between net income and working capital of

BASF;

The relationship between Net Income and Working Capital

The relationship between Current Assets, Current Liabilities and Net Income

The relationship between Cash Level and Net Income

The relationship between Inventories and Net Income

The relationship between Net Income, Accounts payable, Accounts receivable and

Marketable securities

1.4. Significance of the Study

This study can be taken as a guide to the industry managers who are trying to find the relations among

the components of working capital, keeping this in mind that the indicators of working capital can vary

at any point. This paper will help them to summarize all the key components of working capital about

what intensity and what degree of them are affecting the output of a firm in accordance to the change

of the components.

This paper deals with a numerous mathematical calculations, theory and models. Students will find

them very much helpful in their academic work. Teachers can also use this paper to show different

methods to the students, so that the students can understand their text easily.

1.5. Organization of the Research

This paper is assigned by the Chairman, Department of Finance of Banking, Jahangirnagar University,

as an academic requirement which is to be finalized after three months of internship in a reputed

P a g e | 3

organization. As I completed my internship in BASF Bangladesh Limited, which is the largest

chemical manufacturing company in Bangladesh, I concentrated unambiguously on the working

capital management of BASF Bangladesh LTD. so that I can best tie the scenario/environment to my

previous academic knowledge. This paper is to be submitted to the Chairman, through the supervisor

on March 29, 2015.

2. Literature Review The purpose of this literature review is to describe working capital concepts, to outline existing WCM

performance measurement concepts and to identify value drivers that have been identified, analyzed,

and tested. A focus on the operating cycle has always highlighted WCM as a key success factor for a

firm's profitability.

The first paper about the relation between working capital management and firm performance was

published in 1989 and written by Ravindra Kamath (1989).1 It is worth noting that the paper was based

on authors’ investigations on data available in the public domain. While the paper was designed to

examine correlations between working capital measures and firm performance KPIs. The objective of

Kamath's academic work was to compare and contrast traditional static liquidity ratios with dynamic

concepts such as the Cash Conversion Cycle. Moreover, he also investigated the relationship between

these liquidity measures and firm profitability.

However, dynamic ratios such as CCC and NTC did reveal the expected positive correlation in most

cases. For his investigation four years later, Luc A. Soenen (1993) used the net trade cycle as the

endogenous variable and the total return on assets, measured as 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒+𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒

𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑠𝑡, as the

exogenous variable.2 For the purposes of his analysis, he classified 20 companies in the timeframe

from 1970 to 1989 into four quadrants, depending on whether the observed net trade cycle and total

return on assets was above or below the median value for that industry. In line with his hypothesis –

the shorter the cash cycle, the higher the profitability – he concluded that, although the cash cycle does

have some influence on the total return on assets, the correlation is not very strong. However, when

analyzing the postulated correlation by industry, he found significant evidence for the negative

correlation in 18 out of the 20 industries. In summary, Soenen concluded that a strong negative

relationship exists between the cash cycle and the total return on assets depending on the type of

industry.

1 Kamath (1989), p. 24-28. 2 Soenen (1993), p. 53-58.

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Following the same basic approach, Soenen (1993) published a further paper in collaboration with

Hyun-Han Shin five years later.3 Their database contained 58,985 firm years in the period from 1975

to 1994. The results confirmed the authors' previous conclusions: The statistics show a significant

negative relationship between NTC and firm performance, represented as 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒

𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑠𝑡 . Similarly,

the correlation between the current ratio and firm performance is significantly negative. For that

reason, the authors conclude that reducing the net trade cycle to a reasonable minimum increases

shareholder value.

Jerry L. Stevens (1996) continued the former theory by publishing their article "Corporate Returns and

Cash Conversion Cycles".4 Their main focus was to support the hypothesis that successful

management of a firm's operating cycle triggers superior firm performance. They argued that in the

past management focused mainly on investment and financing decisions, and then the authors wanted

to draw an attention to the day-to-day management of short-term assets and liabilities. In line with

other empirical research in the US, they used the Compustat database with a sample size of 2,718

companies. The exogenous variables used in the model were the return on assets and the return on

equity. For both relationships – between CCC and ROA and between CCC and ROE – the statistics

show a significant negative correlation for all industries except financial services. R² is .0808 for the

first regression and 0.1155 for the second. Introducing a control for size difference increased the

quality of the model: The negative relation is significant for all industries and the R² measure rises to

.3044 and .3145 respectively. (Footnote 4)

Yung-Jang Wang (2002), who, in line with the approach adopted by Jose et al. (1996), showed that

the statistical results again indicate a negative correlation between both ROA and ROE in the firm’s

performance in Japanese and Taiwanese industries.5

The first investigation in the European market was conducted by Marc Deloof (2003).6 He analyzed a

sample of 1,637 Belgian firms using almost the same variables. With regard to firm profitability, he

slightly modified the ROA and ROS ratios used previously, instead using the

KPI=𝑆𝐴𝑙𝑒𝑠−𝐶𝑂𝐺𝑆

𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑠𝑡−𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠. Similarly, he investigated a negative correlation with the CCC.

According to his calculations, the number of accounts receivable, inventory and accounts payable days

correlate negatively to firm performance too. According to Deloof (2003), it was remarkable that

3 Shin/Soenen (1998), p. 37-45. 4 Jose/Lancaster/Stevens (1996), p. 33-46. 5 Wang (2002), p.159-169. 6 Deloof (2003), p. 573-587.

P a g e | 5

accounts payable correlate negatively instead of the fact that accounts payables are presumed to reduce

the cash gap. According to Deloof (2003), profitability affects accounts payable days, not vice versa.

In 2006, Lazaridis et al. (2006) investigated the postulated correlation for companies listed on the

Athens Stock Exchange.7 Here again, a negative correlation was established. Deloof and Lazaridis et

al. (2006) both observed a negative correlation between accounts payable and firm profitability,

arguing in the same direction. In conclusion, Lazaridis et al. (2006) advocate greater attention to

working capital management and the optimized handling of the various components of the CCC.

Contrary to the research conclusions presented above, Padachi et al. (2006) published a positive

correlation between CCC and ROA using a fixed asset model.8 First, a very small sample of only 58

companies served as basis for the statistics used. Second, a market with unique conditions was chosen:

Mauritius. Accordingly, Padachi et al. (2006) explain the contradictory results mainly due to the small

firm sizes. They assume that smaller firms maintain a lower fixed asset base and rely mostly on current

assets to increase profits.

Similar correlations between CCC and firm profitability have been analyzed for Pakistan and Turkey

as well. Raheman et al. (2007) and Uyar (2009) correspondingly based their statistical analysis on data

for companies listed on the Karachi and Istanbul Stock Exchanges.9 The results established the

negative correlation.

A diverse measure to analyze working capital performance was used by Eljelly (2004).10 He focused

on the links between both the current ratio and the cash gap and firm performance. Firm performance

is defined in his study as𝑁𝑒𝑡 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒−𝐷𝑒𝑝𝑟𝑖𝑐𝑖𝑎𝑡𝑖𝑜𝑛𝑠

𝑁𝐸𝑡 𝑆𝑎𝑙𝑒𝑠. Based on his analysis of 29 Saudi

Arabian companies, Eljelly was able to verify the negative correlation between the current ratio and

firm performance. However, the correlation between the cash gap and firm performance was not

significant.

A unique approach has taken by Filbeck et al. (2007).11 Their research focused on whether efficient

working capital management has a positive impact on annual stock market closing price returns and

dividends. A database covering approximately 1,000 companies served as the basis for their statistical

analysis. According to these authors' results, a positive correlation exists between efficient working

7 Lazaridis/Tryfonidis (2006), p. 26-35. 8 Padachi (2006), p. 45-58. 9 Raheman/Nasr (2007), p. 279-300; Uyar (2009), p. 186-193. 10 Eljelly (2004), p. 48-61. 11 Filbeck/Krueger/Preece (2007), p. 18.

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capital management and the return to shareholders in terms of annual stock market closing prices and

dividends.

The most recent paper to focus on the effect of working capital management on firm performance was

published in 2009.12 Nazir et al. (2009) investigated the effect of variables such as the asset structure

or size of a company on firm performance, measured as the ROA. In particular, the authors reviewed

a data set containing 204 companies listed on the Karachi Stock Exchange for six variables: current

assets as a share of total assets, current liabilities as a share of total assets, size of firms, sales growth,

the GDP growth rate and financial leverage. They conclude that the variables current assets as a share

of total assets, firm size and the GDP growth rate correlate positively with the ROA. All the other

variables correlate negatively. Nazir et al. (2009) see evidence that the degree of aggressiveness of an

investment is negatively correlated to firm performance. Profitability increases as the ratio of current

assets to total assets increases. The same applies for the liabilities ratio: The higher the ratio of current

liabilities to total assets, the more aggressive the financing policy. According to the results of the study,

then, an aggressive financing policy yields a negative return on assets.

To summarize:

Academic research confirms the initial hypothesis that successful working capital management leads

to increased profitability. Especially with regard to the correlations based on the dynamic measures

CCC and ROA, numerous papers statistically verify a negative correlation. This finding gains even

greater importance from the fact that the investigations cover a large variety of industries and

marketplaces. Given that the positive impact of successful working capital management on firm

performance thus appears to be validated, the question of what specific factors affect working capital

performance must now be addressed. If firm performance is to be boosted by improving working

capital management, it is imperative to identify the precise drivers of working capital. The section that

follows presents a comprehensive overview of existing literature on this topic.

12 Nazir/Afza (2009), p. 19-30.

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The following table shows the correlation.

# Year of research and

Author

Area Endogenous Variable Exogenous Variable Correlation

1 Kamath (1989), p. 24-

28.

USA CCC

NTC

Current Ratio

Quick Ratio

Operating profits/ total

assets

-

-

+

+

2 Soenen (1993), p. 53-

58.

USA NTC Net income+ interest

expenses/total assets

-

3 Jose/Lancaster/Stevens

(1996), p. 33-46.

USA CCC ROA

ROE

-

-

4 Shin/Soenen (1998), p.

37-45.

USA NTC

Current Ratio

Operating income/Total

assets

Operating income/Sales

Operating income/Total

assets

Operating income/Sales

-

?

-

-

5 Wang (2002), p.159-

169.

Japan,

Taiwan

CCC ROA

ROE

-

-

6 Deloof (2003), p. 573-

587.

Belgium CCC (Sales-COGS)/(total

assets-financial assets)

-

7 Eljelly (2004), p. 48-

61.

Saudi

Arabia

Current Ratio

Cash Gap

Net operating income -

depreciations/net sales

-

?

8 Lazaridis/Tryfonidis

(2006), p. 26-35.

Greece CCC (Sales-COGS)/(total

assets-financial assets)

-

9 Padachi (2006), p. 45-

58.

Maturity CCC Profit before interest

and taxes/total assets

+

10 Raheman/Nasr (2007),

p. 279-300;

Pakistan CCC Net operating income +

depreciations/ (total

assets-financial assets)

-

11 Filbeck/Krueger/Preece

(2007), p. 18.

USA Cash Conversion

Efficiency

Days Working Capital

Rank

Annual stock market

closing price returns and

dividends

+

?

12 Uyar (2009), p. 186-

193.

Turkey CCC ROA

ROE

Sales

-

?

-

13 Nazir/Afza (2009), p.

19-30.

Pakistan Current assets/TA

Current liabilities/TA

Size

Growth of Sales

GDP growth rate

Financial leverage

ROA +

-

+

+

+

- Table 1: Working capital Performance and Firm Performance

It is also to be noted that the chart is followed to construct this paper.

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3. Data and Research Methodology

3.1. Research Hypothesis

The research objective was to find the correlation. So, for the purpose of the research, we can take the

hypothesis as-

H0: There is no correlation between the endogenous and exogenous variables.

Mentioning to theoretical review on working capital management, there are several factors which have

an impact on the management of working capital such as company characteristics and industry effect.

If hypothesis H0 can be established, this research will proceed to the next stage where company

characteristics will be tested with cash conversion cycle (CCC). The following part presents company

performance indicators or variables, their impact on working capital and development of hypotheses

which would be tested in this study- in order to determine the effect of these indicators on the cash

conversion cycle as a measure of working capital.

It is worthy of making a note that those hypothesis are established by prior authors. Here, just the

hypothesis are given without any description, as because those are previously postulated- both in this

paper which is described earlier in the literature and in different articles with highest credibility.

H1: Net Income is negatively related to CCC.

H2: Operating profit/Total assets is negatively related to CCC.

H3: ROA is negatively related to CCC.

H4: ROE is negatively related to CCC.

H5: Sales is negatively related to CCC.

H6: (Sales-COGS)/ (Total Assets-Financial Assets) is negatively related to CCC.

H7: Profit Before Interest and Taxes/Total Assets is positively related to CCC.

H8: Net Operating Income-Depreciations/ (TA-Financial Assets) is negatively related to

CCC.

3.2. Sample Period

As this is not a research heavily depending on primary data, it did not collaborate any extensive process

of data collection throughout a systematically designed sample from any population, rather it is done

with a secondary data set which was already established by the source of data. And this data set

P a g e | 9

stretches from 2005 to 2014, a combination of ten year movement of the components of working

capital.

3.3. Sources and Collection of Data:

In this research the main source of data is secondary. The collection of annual report of BASF SE,

Germany from their local office in Bangladesh and the collection of some information by taking

personal interview of the employee were the most important events. Some of the financial data was

also collected from the website of BASF SE, Germany. Also from the personnel in the firm,

information has been derived from. There was a restriction also, infringement law enforced by the firm

did not allow to pile up all the necessary data that were crucial for several analysis. Yet a theoretical

and metaphorical analysis is done here to support the paper’s hypothesis. Data from different published

sources i.e. research papers; literatures on working capital structure has been used in this paper, too.

To ensure the relevance, reliability and timeliness of data, necessary checking and cross checking were

executed in the process of data mining and scanning of information.

3.4. Definition of Variables

A lot of variables are related in a firm’s performance and working capital.

Variables Set 1 Description

CCC

(Cash Conversion Cycle)

The average number of day’s inventories represents the period that

inventories are held by the companies before they are sold. A lower

number of days are better.

Cash Conversion Cycle = Average Number Of Days Inventory +

Average Number Of Days Accounts Receivable - Average Number Of

Days Accounts Payable

Current Ratio A liquidity ratio that measures a company's ability to pay short-term

obligations.

Quick Ratio Quick Ratio = (Cash And Equivalents + Marketable Securities +

Accounts Receivable) / Current Liabilities

Current Assets/TA Current Assets to Total Assets = Current Assets/Total Assets. The

current assets to total assets ratio is a measurement of how liquid a

construction company's assets are.

C. Liabilities/TA Current Liabilities/Total Assets

Growth Of Sales Sale growth is calculated from current year’s sale minus previous year’s

sales and divided by previous year’s sales

Financial Leverage The amount of total debt of a firm

P a g e | 10

Variable Set 2

Operating Profits/ Total Assets The ratio of Operating Profits to Total Assets

Net Income+ Interest

Expenses/Total Assets -Operating

Income/Sale

Adjusted amount of net income, where operating income is subtracted.

ROA Profitability is measured by the return on assets (ROA) which is the

ratio of earnings before tax and interest (EBIT) to total assets.

ROE Profitability is measured by the return on equity (ROE) which is the ratio

of income and equity. After-Tax Return on Equity = Net Profit after

Taxes / Equity and Pretax Return on Equity = Net Profit before Taxes /

Equity.

Sales The amount of sales revenue.

(Sales-COGS)/(Total Assets-

Financial Assets)

The total asset turnover measures the efficiency of all assets (fixed and

current) to general sales.

Profit Before Interest And

Taxes/Total Assets

The ratio of Profit Before Interest And Taxes to Total Assets.

Net Operating Income-

Depreciations/(TA-Financial

Assets)

A performance exogenous ratio indicated by Eljelly (2004)

Operating Income/Total Assets Operating income with proportion to Total Assets

Net Operating Income -

Depreciations/Net Sales

A performance exogenous ratio indicated by Eljelly (2004)

WC/WCM Working Capital/ Working Capital Management

NI Net Income

CCC Cash Conversion Cycle

CA,CL, TA, TL Current Assets, Current Liabilities, Total Assets, Total Liabilities

NTC Net Trade Cycle

ACP Accounts Payable

AR Accounts Receivable

3.5. Methodology

3.5.1. Research Design

This paper is mainly an analytical research. The main focus of this paper is to find out the correlation

and drivers of working capital management of BASF. Information that determine the correlation has

been adopted throughout 3 months of internship in BASF with intense care.

3.5.2. Analysis

For quantitative analysis of data, regression analysis is applied. Trend and ratio analysis is also done

in accordance with industry standards. The variables that were tested here are selected from the

P a g e | 11

reporter’s perspective and the comparison of correlations were done with the standard results found by

other authors. Here, Correlation is used to measure the direction of the linear relationship between two

variables as well as to measure the strength of association between variables. In this study, the

Pearson’s Correlation Coefficient is calculated to see the relationship between all variables. As for the

direction of the relationship, the positive correlation indicates that when one variable increase another

also increases while the negative correlation show inverse relationship.

3.5.3. Limitations

There were a few limitations faced while reaching the objectives of this paper. Some of these

limitations are notable:

Scattered Information: Though the information was collected from the primary sources, but

seemed scattered while the data collection process was running as because WCM is a vast area

to work on which may easily confuse all what to search actually.

Confidentiality: In order to the policy and infringement issues about revealing data to third

party, researcher are restricted to different sensitive information by BASF Bangladesh. They

didn’t breach their policy at all.

3.6. Company Overview

BASF Bangladesh Limited ("the Company") is a private limited Company, incorporated in Bangladesh

as a subsidiary of BASF SE, Germany with an authorized capital of Taka 20,000,000 divided into

2,000,000 ordinary shares of Taka 10 each, to carry on the business of manufacturing and

merchandising of industrial chemicals, pesticides etc. and also the indenting of such items. The address

of the registered office of the Company is SAM Tower (Level 7), House # 4, Road # 22, Gulshan 1,

Dhaka – 1212, Bangladesh.

The Company is currently engaged in the manufacturing and the trading activities of chemical products

used by the local textile, leather and construction industries. The Company used to sell some chemicals

after repacking for agricultural purpose which are exempted from VAT. Sales of agricultural products

were closed in July 2011. The Company is also engaged in the indenting of chemical products and

earns commission. The Company has started the production of construction chemicals i n July 2012 at

its production plant at 113/C Tejgaon Industrial Area, Dhaka.

The financial statements have been prepared and accordance with Bangladesh Financial Reporting

Standards (BFRSs) and as per the Companies Act 1994.

P a g e | 12

A simple glance at the latest financial statement will describe BASF Bangladesh Limited a little bit

professionally.

BASF Bangladesh Limited

Statement of financial position

In Taka 31 December

2013

31 December 2012

Assets Intangible assets 3,216,306 4,068,590 Deferred tax assets 20,509,512 11,242,709 Non-current assets 126,829,057 126,283,251

Inventories

45,832,395

59,928,752 Trade and other receivables 302,779,471 174,906,222 Advances, deposits and prepayments 19,651,213 15,597,329 Advance income tax 81,188,400 48,266,395 Advance VAT 3,910,072 13,406,194 Cash and cash equivalents 108,343,005 79,797,364 Current assets 561,704,556 39 I ,902,256

Total assets 688,533,613 5I 8,185,507

Equity

Share capital 12,275,840 12,275,840

Non -distributable special reserve 491,485 49 1,485

Retained earnings 237,536,683 192,164,274 Total equity 250,304,008 204,931 ,599

Liabilities

Employee benefits - staff gratuity 44,890 ,224 35,927,550 Non-current liabilities 44,890,224 35,927,550

Trade and other payables

269,404, I 04

220,509,363

Provision for tax 117,929,164 53,422,052 Workers' Profit Participation Fund 6,006,113 3,394,943 Current liabilities 393,339,381 277,326,358 Total liabilities 438,229,605 313,253,908

Total equity and liabilities 688,533,613 518,185,507

Table 2: Financial Statement 201

P a g e | 13

4. Working Capital Management Working capital management concern companies’ management of their short-term capital. The short-

term capital refers to the capital that companies use in their daily operations and it consists of

companies’ current assets and current liabilities. A well-managed working capital promotes a

company’s well-being on the market in terms of liquidity and it also acts in favor for the growth of

shareholders value.13

Current assets consist of capital tied up in cash, short-term financial investments, inventories, account

receivables and other current assets.14 Current assets can be defined as assets used in companies’ daily

operations with the expectation to provide companies cash in return within a period no longer than

approximately a year. The short-term investments can be seen as a safety net for companies due to the

fast cash conversion ability.15

The current liabilities include short-term loans, the debts to suppliers as account payables, accrued

income taxes, and interest payments on long-term debts, dividend and other current liabilities.16

Current liabilities provide external financing for companies and they are especially important for

smaller companies that can experience difficulties to get long-term loans.

When purchased material has undergone a manufacturing process and become finished goods, it is

time to get the products sold to earn money. The money derived from sales are used to pay debtors,

finance new investments and give money back to shareholders in dividends. From here the cycle starts

over again.17

Schonberger18 states that one fundamental objective of world class manufacturing performance is to

"cut flow time, flow distance, inventory, and space along the chain of customers". Regarding supply

chain risk, Jüttner19 notes that "[...] supply chain control mechanisms like decision rules and policies

regarding order quantities, batch sizes and safety stocks can either amplify or absorb risk effects".

Scherr20 (1989) adds that "one of the major features of this world is uncertainty (risk), and it is this

feature that gives rise to many of the strategies involving working capital accounts". These remarks

give clear indication that a genuine link of the research areas manufacturing performance, supply chain

13 Jeng-Ren, et al., (2006), p. 149-155. 14 Brealey, Myers & Allen, (2006), p. 813. 15 Raheman & Nasr, (2007), p. 279. 16 Pass & Pike, (2007) 17 Pass &Hike, (2007) 18 Schonberger (1990), p. 296. 19 Jüttner (2005), p. 123. 20 Scherr (1989), p. 3.

P a g e | 14

performance, supply chain risk and working capital management prevails – Providing strong support

to further investigate in their correlation.

The concept of working capital was originally to ensure that obligations could be met in case the firm

went into liquidation. Holding sufficient short-term assets guaranteed that the firm would be able to

satisfy short-term creditors in the event of liquidation. Thus, the main objective was to control business

in a way that short-term assets matched short-term liabilities.21

In the mid-20th century, the focus shifted towards a going-concern view of the firm. By consequence,

the immediate liquidation of the firm was no longer of concern. This strategic shift in the basic view

of the firm had sensible consequences for the concept of working capital. Since then, the new example

of working capital management has been to maintain the firm's operating cycle while seeking to

maximize its profitability. The operating cycle consists of the whole sequence of cash flows generated

by the physical activities of the firm’s operations.22 In a perfect world, operations would be accurately

predictable. Inflows and outflows of raw materials, goods or cash could thus be anticipated with such

precision that buffers in terms of inventory or cash holdings would be superfluous. However, in a

world of machine outages, late payments and order changes, inventories, cash holdings and receivables

are indispensable.23 Given these imponderables, a firm that is shy of sufficient liquid reserves may

need to delay payments, obtain temporary financing on potentially unfavorable terms or even sell

assets.24 To avoid such costly actions that, if the worst comes to the worst, can have serious effects,

reserves are maintained that can be liquidated at sight. As a consequence, the main reasons for

maintaining positive working capital are unexpected events that could affect inflows or outflows of

cash, raw materials, or goods.25

Maintaining a buffer of short-term assets to safeguard the operating cycle is only one side of the coin,

however. Since short-term assets are usually the firm's least profitable assets, the goal is to keep them

as low as possible. Low net working capital serves in this context to boost firm performance and,

ultimately, increases shareholder value.26

Osisioma (1997) defines proper working capital management as "the regulation, adjustment, and

control of the balance of current assets and current liabilities of a firm such that maturing obligations

21 Fess (1966), p. 266. 22 Hill/Sartoris (1988), p. 7. 23 Scherr (1989), p. 2-3. 24 Emery (1984), p. 25. 25 Gentry/Mehta/Bhattacharyya/Cobbaut/Scaringella (1979), p. 29. 26 Scherr (1989), p.

P a g e | 15

are met, and the fixed assets are properly serviced".27 In line with this definition, desirable quantities

of each component of working capital must be maintained for management purposes. Identifying the

best possible capital structure is clearly a challenging task.28 An overview of different advanced

approaches in working capital management is presented by Smith.29 An empirical study by Saran is

demonstrates that a significant negative financial risk effect on borrowing and fixed investment has

been shown by modeling of inter-related demand equations in the UK demand sector.30 Contrary to

the theorem introduced by Modigliani and Miller (1958), this provides evidence that an optimal capital

structure does in fact exist.31 In all previous studies of investment behavior, the influence of financial

policy on the investment is ignored.32

It is perfectly reasonable to discuss strategies to optimize working capital. Excess working capital does

not earn the cost of capital. As a consequence, determining the optimal amount of WC maximizes

shareholder value.

For the ease of work, the total financial management can be divided into two parts- considering the

time limit. The first one is short-term financial management which is described as working capital

management, and the rest one is long term financial management which deals with assets and capital

and long term liabilities.

This can be shown in a tree chart-

27 cit. op. Appuhami (2008), p. 10. 28 Ball/Brown (1969), p. 300. 29 Smith (1973), p. 50-55. 30 Sarantis (1980), p. 393. 31 Modigliani/Miller (1958), p. 261-297; Myers (1984). p. 575. 32 Sarantis (1980), p. 393.

Financial management

Long term financial management

Finance required to meet Capital Expenditure,

Also, known as Fixed Capital Finance.

Short term financial

management

Finance required to meet day-to-day Business requirements,

Also, known as Working Capital Finance.

P a g e | 16

In this paper WCM is described, analyzed and elaborated. WCM has basically 2 parts in the context

of Balance Sheet. The first one is current assets and the other one is current liabilities. All the analysis

consists of the elements of those two balance sheet items.

Working Capital is the amount of Capital that a Business has available to meet the day-to-day cash

requirements of its operations. It is the difference between resources in cash or readily convertible into

cash (Current Assets) and organizational commitments for which cash will soon be required (Current

Liabilities). In other words it can be referred to the amount of Current Assets that exceeds Current

Liabilities (i.e. CA - CL).

From the previous insights of different scholar articles, it can be concluded that Working Capital

Management is concerned with the problems that arise in attempting to manage the Current Assets,

Current Liabilities and the inter-relationship that exists between them. Working Capital Management

means the deployment of current assets and current liabilities efficiently so as to maximize short-term

liquidity. It also entails short term decisions - generally, relating to the next one year period - which

are "reversible". Working Capital refers to that part of the firm’s Capital, which is required for

Financing Short-Term or Current Assets such as Cash, Marketable Securities, Debtors and Inventories.

Working Capital is also known as Revolving or Circulating Capital or Short-Term Capital.

Working Capital has two concepts. Gross Concept means Current Assets. This is knows as

Quantitative aspect of Working Capital that Focuses on Optimum Investment in Current Assets and

Financing of Current Assets. And the other one is Net Concept: It means difference between Currents

Assets & Current Liabilities. This is knows as Qualitative aspect of Working Capital which has a focus

on Liquidity Position of the Firm and WC Amount that can be financed by Permanent sources of

Funds.

There are several factors, found from the research papers described earlier, affect the management of

Working Capital. Factors affecting Working Capital/ Determinants of Working Capital: are given

below-

Nature of Business/Industry; Size of Business/Scale of Operations; Growth prospects

Business Cycle; Manufacturing Cycle; Operating Cycle & Rapidity of Turnover

Operating Efficiency; Profit Margin; Profit Appropriation

Depreciation Policy; Taxation Policy; Dividend Policy and Government Regulations.

P a g e | 17

There are basically four approaches or Methods of estimating Working Capital. First- Conventional

Method: where matching of Cash Inflows & Outflows is important. This method ignores Time Value

of Money. Second- Operating Cycle Method: Debtors + Stock - Creditors. This method takes into

Account length of Time which is required to convert cash into resources, resources to final product,

final product to Debtors and Debtors to Cash again. Third- Cash Cost Technique: Working Capital

forecast is done on Cost Basis (i.e. taking Profit & Loss items into account). Fourth- Balance Sheet

Method: Working Capital forecast is done on various Assets & Liabilities (i.e. taking B/S items into

account). There are two Steps involved in the Working Capital Management: Forecasting the Amount

of Working Capital and the second one is determining the Sources of Working Capital. Working capital

management includes four basic topics. In this paper these topics are well described. These elements

are-

Management of Inventory

Management of Receivables/Debtors

Management of Cash and

Management of Payables/Creditor

The following chart tree will describe the areas covered in the paper. The chart describes about the

Current Assets part that are to be analyzed.

And the following chart shows the areas of long term liabilities that are going to be covered.

Current Assets

Accounts Receivable

Management

Inventory Management

Uncertainty Approach

Certainty Approach

Cash & Temporary Investment

Forecasting ModelsCash Inflows

Outflows

P a g e | 18

And before going further into analysis, let’s check the WCM level of BASF SE. Notable that the green

marked line is the level of WC on the basis of current assets and current liabilities.

Figure 1: Level of WC, Current Assets & Current Liabilities

Current Liabilities

liquidity Management

Short term LIabilities

Management

Integer-Programming Approach to

Structuring Current Debt

15,127

18,392 18,908

21,27419,587

24,861

27,088 27,46725,951

27,420

8,385

13,98012,482

16,295

11,680

15,56816,477 16,710

14,33915,893

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Cas

h in

Mill

ion

Eu

ro

Year

Level of WC, Current Assets & Current Liabilities

Current Assets Current Liabilities

Linear (Current Assets) 2 per. Mov. Avg. (Current Assets)

Linear (Current Liabilities) 2 per. Mov. Avg. (Current Liabilities)

P a g e | 19

5. Analysis

5.1. Current Assets

Current assets (1) are in the form of cash, (2) will be realized in cash, or (3) conserve the use of cash

within the operating cycle of a business or one year, whichever is longer.

The five categories of assets usually found in current assets, listed in their order of liquidity, include

cash, marketable securities, receivables, inventories, and prepayments. Other assets may also be

classified in current assets, such as assets held for sale.

The operating cycle for a company is defined in such a way that the time period between the acquisition

of goods and the final cash realization resulting from sales and subsequent collections of money. Only

a few businesses have an operating cycle longer than a year.

5.1.1. Cash Management

Cash is a medium of exchange that a bank will accept for deposit and a creditor will accept for payment.

To be classified as a current asset, cash must be free from any restrictions that would prevent its deposit

or use it to pay creditors classified as current. If restricted for specific short-term creditors, many firms

still classify this cash under current assets, but they disclose the restrictions. Cash should be available

to pay general short-term creditors to be considered as part of the firm’s short-term debt-paying ability.

The cash account on the balance sheet is usually entitled cash, cash and equivalents, or cash and

certificates of deposit. The cash classification typically includes cash in hands, cash to be realized

soon, marketable securities, FDR (in case of BASF Bangladesh Ltd.), inventories, accounts receivables

and short term investments.

There are two major problems encountered when analyzing a current asset: determining a fair valuation

for the asset and determining the liquidity of the asset. But this is not a problem of Working Capital

Management, as all the components are liquid as good as cash equivalents.

In the working capital management, cash comes up in different modes. But naturally cash management

includes forecasting and managing cash inflows and outflows.

Before looking forward to forecasting and managing cash inflows and outflows it is better to look at

the internal condition of cash or cash equivalent.

P a g e | 20

Figure 2: Cash or Cash Equivalent

In the year 2008 BASF SE hold a lot of cash compared to other years, it may refer to that-

1. Their sale increased

2. There might be no impact of global recession fall upon the cash level of BASF

3. They received accounts receivable

4. Business performance is going up

5. They are not following any Model like Beranek, Baumol or Miller-Orr.

5.1.2. Managing cash Inflows and Outflows

I personally spoke with an official of BASF Bangladesh, he told me that they do not follow any cash

inflow outflow model. They are not used to any floatation cost due to highly uncertainty in the political

condition of Bangladesh. That is why, anything regarding to managing cash outflow inflow is not well

discussed in the paper. Also collection of receivables does not occur in a timely manner as because the

creditors are often found in unfavorable cash positions. The company has a diverse business area, so

the market portfolio for them is quite varied with different return pattern. Cash inflow and cash

outflow, as a result, is not structured in a concrete methodology.

5.1.3. Forecasting

Forecasting is a vital element of cash management. Without forecasting, sometimes it is really a

headache for a manager to plan for the next. The following chart shows the items that can be forecasted.

908 834 767

2,776

1,835

1,493

2,048

1,6471,827

1,718

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Cas

h in

Mill

ion

Eu

ro

Year

Cash or Cash Equivalent

Cash Level Linear (Cash Level) 2 per. Mov. Avg. (Cash Level)

P a g e | 21

Items to be Forecasted

Some possible types of Cash Receipts Some possible types of Cash Disbursements Accounts Receivables Taxes

Notes Receivables Salaries

Rental Income Mortgage

Interest Income Dividends

Dividends etc. Accounts Payables

Capital Expenditures etc.

Figure 3: Some Possible Cash Receipts

Receiving cash from different sources is essential for the firm. For any company to survive, cash flow

is the single most important financial factor. A company could have fantastic revenue, reasonable

expenses, and significant income, but if its financial operations are not designed efficiently, it could

still have negative cash flow. And without positive cash flow, any company, no matter how promising

the business model, will go bankrupt.

Of course, if a business has just been launched, it may be able to endure negative cash flow in the

short-term in hopes of achieving long-term success. But eventually, any company must focus on

7,020

8,2238,561

7,752 7,738

10,167

10,886

9,506

10,233 10,385

5,430

6,672 6,578 6,763 6,776

8,688

10,0599,581

10,160

11,266

1,586

2,6072,337

3,948

3,223

3,883 3,7813,455

3,7144,032

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Cas

h in

Mill

ion

Eu

ro

Year

Some Possible Cash Receipts

Accounts Receivable Inventories Other Receivales

Linear (Accounts Receivable) Linear (Inventories) Linear (Other Receivales)

P a g e | 22

creating positive cash flow. Without it, a company will not even be able to accomplish the simplest of

tasks: paying its monthly expenses.

To grow, a company often will need to invest in factories, real estate assets, machinery, or technology.

These are typically one-time costs that require significant funds. Without cash on hand, a business may

not be able to make these necessary investments and, as a result, may never be able to experience

company growth. Sure, a business can take out a loan, but even a loan will generally require a

significant down payment, which will in turn require that the company have access to cash. Loans also

come with interest rates that can further consume into a company’s bottom line. Many small businesses

have had to learn the hard way that lenders are becoming thriftier with how they loan money. If a

business has cash available, it can better take advantage of opportunities to expand and make important

acquisitions – options that may otherwise not be available in the absence of loans.

The next page shows a graph of some cash disbursement. We can see different trend in different cash

disbursements. The most jig jagged trend is seen in the additions of property, plant and equipment and

intangible assets. This happened because BASF SE dispatched its several business units in many areas,

on the contrary they sold as well as acquired a portion of their fixed assets and office equipment in an

ongoing process.

Depreciation followed a straight line method, leaving the trail that the business’s assets are all okay

from misuse. In 2009, depreciation became less than previous year, it can conclude that- whether the

assets are sold (as because- in 2009, property addition will leave the accounting to add its depreciation

in the next year, clearly showing the result of occurrence of other things) or some other thing happened.

Tax liability is straight upward, showing a correlation of net income. Tax liability increased, as because

the net income increased.

Accounts payable gives an almost positive sine curve, meaning that the company pulls hard break at

the time when the need to- at the time of low payable, they borrow more and gradually they pay it and

let the curve be lowered at desired point.

P a g e | 23

Figure 4: Some Cash Disbursements

5.1.4. Management of Marketable Securities

An important element of WCM is marketable securities. The business entity has varying cash needs

throughout the year. Because an inferred cost arises from keeping money available, management does

not want to keep all of the entity’s cash needs in the form of cash throughout the year. The available

alternative turns some of the cash into productive use through short-term investments (marketable

securities), which can be converted into cash as the need arises.

To qualify as a marketable security, the investment must be readily marketable, and it must be the

intent of management to convert the investment to cash within the current operating cycle or one year,

whichever is longer.

887 858 881 860 1,003 1,140 1,038 870 968 1,07910151484

1831 1791 15612021

2296 2388 2480 25722523

10039

4425

3634

5972

5304

3646

5263

77267285

24032973 2909 3099

37113370 3407 3267 3272 3417

2,777

4,755

3,763

2,734 2,786

4,7385,121

4,502

5,1534,861

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

In M

illio

n E

uro

Axis Title

Some Cash Disbursements

Tax liabilities

Dividends

Additions to property, plant and equipment and intangible assets

Depreciation and amortization of property, plant and equipment and intangible assets

Accounts payable, trade

Linear (Tax liabilities)

Linear (Dividends)

Linear (Additions to property, plant and equipment and intangible assets)

Linear (Depreciation and amortization of property, plant and equipment and intangibleassets)

P a g e | 24

It is to management’s advantage to show investments under marketable securities, instead of long-term

investments, because this classification improves the liquidity appearance of the firm. When the same

securities are carried as marketable securities year after year, they are likely held for a business

purpose.

Investments classified as marketable securities should be temporary. Examples of marketable

securities include treasury bills, short-term notes of corporations, government bonds, corporate bonds,

preferred stock, and common stock. Investments in preferred stock and common stock are referred to

as marketable equity securities.

Sometimes marketable securities are used when there is excess cash. It helps to generate some profits.

There are some models that tells when to invest in securities, when to disburse them, when to use cash

generated from these securities. Some of those models are- Beranek model, Miller-Orr model, Baumol

model. Etc.

But in the context of BASF Bangladesh limited, no relevant was found. This limitation caused

nonperformance of analyzing optimal short term investments. Here the forecasted line indicates a fall

in marketable securities of BASF SE. Appendix 1 has a detailed chart about this.

Figure 5: Marketable Securities

183

56 51

35

15 16 19 14 17 19

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Mill

ion

Eu

ros

Year

Marketable Securities

Marketable Securities Linear (Marketable Securities) 2 per. Mov. Avg. (Marketable Securities)

P a g e | 25

The graph clearly shows that at the point of time after 2005, a portion of marketable securities have

been liquidated, as per the need for cash for liquidity purpose in a dire situation, seemingly, indicating

that either the firm fall in a cash gap or simply a new policy for investment, or even this can be possible

that the directors simply liquidated them for other purposes.

5.1.5. Management of Receivables

An entity usually has a number of claims to future inflows of cash. These claims are usually classified

as accounts receivable and notes receivable on the financial statements. The primary claim that most

entities have comes from the selling of merchandise or services on account to customers, referred to

as trade receivables, with the customer promising to pay within a limited period of time, such as 30

days. Other claims may be from sources such as loans to employees or a federal tax refund.

Claims from customers, usually in the form of accounts receivable, neither bear interest nor involve

claims against specific resources of the customer. In some cases, however, the customer signs a note

instead of being granted the privilege of having an open account. Usually, the interest-bearing note

will be for a longer period of time than an account receivable. In some cases, a customer who does not

pay an account receivable when due signs a note receivable in place of the account receivable.

Now at this point, the management of receivables is being described. At first we will try to figure out

Accounts Receivable Turnover and Accounts Receivable Turnover in Days.

Figure 6: ACR Turnover

6.096.40

6.77

8.04

6.556.28

6.75

7.597.23 7.16

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Tim

es

Year

ACR Turnover

ACR Turnover Linear (ACR Turnover) 2 per. Mov. Avg. (ACR Turnover)

P a g e | 26

Accounts Receivable Turnover Accounts Receivable Turnover in Days

The liquidity of receivable in 2008 was very high

which means good, but in the later years the

liquidity is low. This means they have a negative

trend in receiving payments.

The turnover in days is a leaping frog shape. This

means, their management is good. Because,

when they see any anomaly in the trend they

adopt different and new approach to stick to

policy and grab better controlling of the firm.

Figure 7: ACR Turnover in Days

From the above analysis. We can say, they are having proficiency in managing receivables as the part

of WCM. The common characteristic of receivables is that the company expects to receive cash

sometime in the future.

The forecasted line indicates a downward movement in the following years, meaning that the accounts

receivable turnover in days are decreasing, which obviously is a positive sign for the firm- it is running

well in the collection process of receivables.

5.1.6. Inventory Management

Inventory is often the most significant asset in determining the short-term debt-paying ability of an

entity. In the context of WCM, the better the management is, the more the profit is. It is also visible

59.9457.05

53.92

45.41

55.7258.10

54.06

48.1050.49 51.00

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Ave

rage

Day

s

Year Movement

ACR Turnover in Days

ACR Turnover in Days 2 per. Mov. Avg. (ACR Turnover in Days) Linear (ACR Turnover in Days)

P a g e | 27

that an efficient management of inventories leads a better cost reduction, time saving and resource

allocation. Often, the inventory account is more than half of the total current assets. Because of the

significance of inventories, a special effort should be made to analyze properly this important area to

max out the successful level off WCM.

To be classified as inventory, the asset should be for sale in the ordinary course of business, or used or

consumed in the production of goods. A trading concern purchases merchandise in a form to sell to

customers. Inventories of a trading concern, whether wholesale or retail, usually appear in one

inventory account (Merchandise Inventory).

A manufacturing concern produces goods to be sold. Inventories of a manufacturing concern are

normally classified in three distinct inventory accounts: inventory available to use in production (raw

materials inventory), inventory in production (work in process inventory), and inventory completed

(finished goods inventory).

Usually, the determination of the inventory figures is much more difficult in a manufacturing concern

than in a trading concern. The manufacturing concern deals with materials, labor, and overhead when

determining the inventory figures, while the trading concern only deals with purchased merchandise.

The overhead portion of the work in process inventory and the finished goods inventory is often a

problem when determining a manufacturer’s inventory. The overhead consists of all the costs of the

factory other than direct materials and direct labor. From an analysis viewpoint, however, many of the

problems of determining the proper inventory value are solved before the entity publishes financial

statements.

The inventory management system can be classified into 2 different classes. The first one is certainty

approaches and the second one is uncertainty approaches. Now some of the important of inventory

management is described below-

Objectives of Inventory Management

Operating Objectives Financial Objectives

Availability of Materials Economy in Purchasing

Promotion of Manufacturing Minimizing Cost

Efficiency Reasonable Price

Minimizing the Wastage Optimum Investment & Efficient use of Capital

Better Service to Customer

Control of Production Level

Optimum Level of Inventories

P a g e | 28

Factors Determining Optimum Level of Inventory

Seasonal Nature of Raw Materials and Demand for Finished Goods

Length & Technical Nature of the Production process

Style factor in the End Product

Terms of Purchase

Supply conditions

Time Factor

Price Level Variation

Loan Facility

Management Policies

Other Factors

Tools of Inventory Management

Fixation of Levels of Inventory: Maximum; Minimum, Re-order and Danger Level

ABC Analysis: Small; Medium & High Number/Usage

Perpetual inventory System: Restoration of the Stock Issued

VED Analysis: Vital, Essential and Desirable

FSN Analysis: Fast Moving, Slow Moving & Non Moving

Periodical Inventory Valuation: Annual Stock Taking

Economic Order Quantity (EOQ) Analysis: Ordering Cost & Carrying Cost

SDE Tool: Scarce, Difficult & Easy (Procurement Difficulty)

For better understanding the inventory, it is good to look at some historical data of inventory and some

ratio analysis. Please go to the Appendix 2 for detailed data.

P a g e | 29

Figure 8: Inventory Turnover

Figure 9: Inventory Turnover in Days

We can conclude from the figures that-

1. The inventory turnover ratio is decreasing, while the inventory turnover in days is slightly

upward sloping; indicating a true relationship between those two of them

2. The liquidity of inventory is gradually decreasing, which means the company is not performing

well to manage the inventories. Because the indicator ratio shows the turnover is lower in the

recent years than that of previous years.

4.89

6.326.96

5.425.86 5.79 5.65 5.63

5.21

2006 2007 2008 2009 2010 2011 2012 2013 2014

Tim

es

Year

Invetory Turnover

Invetory Turnover 2 per. Mov. Avg. (Invetory Turnover) Linear (Invetory Turnover)

74.70

57.7152.41

67.3662.29 63.05 64.60 64.83

70.03

2006 2007 2008 2009 2010 2011 2012 2013 2014

Invetory Turnover in Days

Invetory Turnover in Days Linear (Invetory Turnover in Days)

2 per. Mov. Avg. (Invetory Turnover in Days)

P a g e | 30

3. This also can be concluded that the- they are holding a lot of inventories, that’s is why their

inventory turnover is getting lower.

4. Their Inventory Turnover in Days is also increasing, this means their retention ratio of

inventories is getting higher, which also clearly identifies their lack of successful sale that they

are producing at a continuous rate but these being stored because of low sales rate, though other

sale ratios shows that sale is increasing. So we can logically say that- with a fair amount of

investment, the production process is elevated gradually.

This can also show that- the demand is high in the market, BASF SE (BASF Bangladesh too)

are producing at a very high rate, their sale is comparatively high in volumes, but not in the

context of inventory turnover ratio. Many of their raw materials, finished goods etc. can be in

stock.

5. This can also be concluded that- for meeting the ongoing demand, they are producing more

and plan to produce more. That is why they are stocking lots of raw materials, working process

and finished goods. Which leads a lower inventory liquidity ratio.

6. Comparing both of the ratio of WCM, we can conclude that inventory management is up to the

mark and highly satisfactory.

5.2. Current Liabilities

Current liabilities are ‘obligations whose liquidation is reasonably expected to require the use of

existing resources properly classifiable as current assets or the creation of other current liabilities.’

Thus, the definition of current liabilities correlates with the definition of current assets.

5.3. Working Capital Ratio

The working capital of a business is an indication of the short-run solvency of the business. Compute

working capital as follows:

Working Capital = Current Assets − Current Liabilities

The current working capital amount should be compared with past amounts to determine if working

capital is reasonable. Because the relative size of a firm may be expanding or contracting, comparing

working capital of one firm with that of another firm is usually meaningless because of their size

differences. If the working capital appears to be out of line, find the reasons by analyzing the individual

current asset and current liability accounts.

Companies with positive net working capital have more current assets than liabilities and can use the

surplus of current assets to fulfil their financial commitments and obligations to shareholders which is

P a g e | 31

a vital aspect for the continuing growth of any company.33 The advantages of having a positive net

working capital are clear, but there are also disadvantages to consider and they occur when companies

have to high level of capital tied up in their current assets. Tied up capital, is capital that do not generate

companies any additional value and would do more good in new investments that could bring the

company further return.34

If current liabilities exceed current assets, the net working capital is negative which means the company

does not have enough own capital for financing its short-term debts. Most companies suffer badly

when their net working capital is negative and this is a condition that also profitable companies can

end up in if they do not manage their working capital efficiently. Profitability is great but it is not

enough to become a successful company as a well-managed working capital is equally as important.

As a way to avoid bankruptcy in poor situations, companies can use credits or sell off short- term assets

to get capital for payments.35

The calculation of working capital of BASF SE was pretty easy. The detailed information is given in

the Appendix 2 for detailed and expanded view.

Figure 10: Working Capital of BASF SE

33 Lantz, (2008), p. 113 34 Lantz, (2008), p. 114. 35 Maness & Zietlow, (2005), p. 5-9.

6,742

4,4126,426

4,979

7,9079,293

10,611 10,75711,612 11,527

15,127

18,392 18,908

21,27419,587

24,861

27,088 27,46725,951

27,420

8,385

13,98012,482

16,295

11,680

15,56816,477 16,710

14,33915,893

0

5,000

10,000

15,000

20,000

25,000

30,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Mill

ion

Eu

ro

Year

Working Capital of BASF SE

WCM Current assets Current liabilities Linear (WCM)

P a g e | 32

Working Capital of BASF SE

Criteria Performance Comment

Trend Upward Good position

Difference Very High Positive difference is good, the

better it is when the difference is

very high

Highest level Recent years Good performance

Lowest level Previous years Indicates the growth

Forecasting Possibility of better performance More production with low

liabilities

5.4. Current Ratio, Quick Ratio, Current Assets/Total Assets & Current Liabilities/Total

Assets

Another indicator, the current ratio, determines short-term debt-paying ability and is computed as

follows: Current Ratio = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

We have calculated the data for Current Ratio of BASF Bangladesh Limited. The detailed information

is given in the Appendix 2.

Figure 11: Current, Quick Ratio, CA/TA & CL/TA

1.80

1.32

1.51

1.31

1.681.60

1.64 1.64

1.811.73

1.16

0.840.94

0.89

1.101.00 1.02

0.88

1.101.02

0.42 0.41 0.40 0.42 0.38 0.42 0.44 0.44 0.40 0.38

0.240.31 0.27

0.320.23 0.26 0.27 0.27

0.22 0.22

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Rat

io

Year

Current Ratio, Quick Ratio, Current Assets/Total Assets & Current Liabilities/Total Assets

Current Ratio Quick Ratio CA/TA

CL/TA Linear (Current Ratio) Linear (Quick Ratio)

Linear (CA/TA) Linear (CL/TA)

P a g e | 33

Current Ratio of BASF

Criteria Performance Comment

Trend Almost flat, upward After 2008, the trend is steep to upwards, meaning decline

in the level of liabilities. The short term liquidity is in good

situation. The firm is able to tackle uncertainty

Difference Good in recent years Should be sustained

Highest level Recent years Good performance of current assets management in the

recent years

Lowest level Previous years Indicates the decline in assets in earlier years of Global

crisis

Forecasting Possibility of increase

in assets

More assets to help in paying the liabilities in the future

Quick Ratio of BASF

Criteria Performance Comment

Trend Jig Jagged at small

levels, Slightly

upward

Every year has a negative relations compared to last year’s

performance- an indicator of good control of liquidity.

Difference Average recent years Should be improved

Highest level Recent year Good performance of current assets management in the

recent year

Lowest level Previous years Indicates the decline in assets

Forecasting Possibility of increase

in assets

More assets to help in paying the liabilities in the future-

in line with the trend of current ratio

5.5. Cash Ratio

Sometimes an analyst needs to view the liquidity of a firm from an extremely conservative point of

view. For example, the company may have pledged its receivables and its inventory, or the analyst

suspects severe liquidity problems with inventory and receivables. The best indicator of the company’s

short-run liquidity may be the cash ratio. Compute the cash ratio as follows:

Cash Ratio = 𝐶𝑎𝑠ℎ 𝐸𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡𝑠 + 𝑀𝑎𝑟𝑘𝑒𝑡𝑎𝑏𝑙𝑒 𝑆𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

The analyst seldom gives the cash ratio much weight when evaluating the liquidity of a firm because

it is not realistic to expect a firm to have enough cash equivalents and marketable securities to cover

current liabilities. If the firm must depend on cash equivalents and marketable securities for its

liquidity, its solvency may be impaired.

Analysts should consider the cash ratio of companies that have naturally slow-moving inventories and

receivables and companies that are highly speculative. For example, a land development company in

Florida may sell lots paid for over a number of years on the installment basis, or the success of a new

company may be in doubt.

P a g e | 34

The cash ratio indicates the immediate liquidity of the firm. A high cash ratio indicates that the firm is

not using its cash to its best advantage; cash should be put to work in the operations of the company.

Detailed knowledge of the firm is required, however, before drawing a definite conclusion.

Management may have plans for the cash, such as a building expansion program. A cash ratio that is

too low could indicate an immediate problem with paying bills.

We have calculated the data for Cash Ratio of BASF SE. The detailed information is given in the

Appendix 2.

The analysis of Cash Ratio from Figure 11 is given below-

Cash Ratio of BASF Bangladesh Limited

Criteria Performance Comment

Trend Upward The company is holding a lot of cash in 2013, compared to

other years. Where in the other years, the level of holding

cash is moderate and relevant to previous years

Difference Very high in recent

years

In 2013 they hold a lot of cash

Highest

level

Recent years 2013

Lowest level Previous years Relevant to previous years, no steep change, drastic fall or

rise

Forecasting Low cash in the future Although they are holding a lot of cash in 2013, obviously

they have an intention to pay in cash, which indicated that

the level of cash holding by now is going to be depleted in

the upcoming years

5.6. Dividend and Investment

The shareholders will get the highest dividends if the NI is higher. NI gets higher when WCM works

better. The following figure shows the Earning per Share and Dividend per Share.

P a g e | 35

Figure 12: EPS vs. DPS

And the trend between net income and dividends payment to the stockholders is as below -

Figure 13: Net Income vs. Dividends

2.873.19

4.16

3.13

1.54

4.96

6.74

5.25 5.225.61

1.001.50

1.95 1.951.70

2.202.50 2.60 2.70 2.80

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Euro

Year

EPS vs DPS

Earnings per share Dividend per share

Linear (Earnings per share) Linear (Dividend per share)

1273.00

1951.002267.00

2982.00

2176.00

3737.003506.00

2880.00 2826.00

5853.00

1015.00

1484.001831.00 1791.00

1561.00

2021.002296.00 2388.00 2480.00 2572.00

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Mill

ion

Eu

ro

Year

NI vs. Div.

Net income of BASF SE Dividends Linear (Net income of BASF SE) Linear (Dividends)

P a g e | 36

From the EPS vs. DPS graph it is clearly visible that-

1. The booming period was in 2009-2011, after the global financial crisis.

2. The EPS falls in 2009 because of sudden fall in global market, yet the firm continued to

giveaway a strong level of desired dividends.

3. After 2011, EPS started to settle down and went into a steady upward move.

4. Dividends per share is always in an upward slope, which obviously a very good sign.

From the Figure 13, we can also conclude some insights about net income and dividends.

1. Net income followed a jig jagged slope, while dividends followed a steady upward slope.

2. In some areas of the graph, the difference between net income and dividends is higher, it

indicate that the level of investment is higher, while the dividends payout policy is parallel to

the company policy.

3. The slope of NI is steeper than that of dividends.

4. In the last year, BASF SE went for a massive investment, as the portion of retained earnings is

extraordinarily high.

5.7. Capital Structure

WCM plays a vital role in capital structure. The accounts payable and WCL are in the total debt or

liabilities section. The following chart shows capital structure of BASF Bangladesh Limited for 10

years.

Figure 14: Debt-Equity Difference

4,417

4,4204,397

4,4174,405 4,392

4,379 4,3644,341 4,319

3,682 5,788 6,954 8,290 12,444 11,670 9,019 8,704 11,151 11,839

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Total Equity Financial indebtedness

P a g e | 37

Figure 15: Debt Equity Ratio

From the graph above we can conclude that-

1. Debt has a higher ratio.

2. They are getting tax advantages.

3. Because of high leverage, the firm’s value, in accordance with the Modigliani & Miller

Model, in the recent years has increased.

4. Less equity in the capital structure.

Shareholder will get less dividends for some of the next years, the trend indicates. But BASF SE

policy always intends to pay dividends more to the shareholders.

4,417

4,4204,397

4,417

4,405 4,3924,379 4,364

4,341 4,319

3,682 5,788 6,954 8,290 12,444 11,670 9,019 8,704 11,151 11,839

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Debt Equity ratio

Total Equity Financial indebtedness

P a g e | 38

6. Regression Analysis It is always better to know the correlation and regression of different entities. In this paper, 2 different

regression analysis were prepared.

1. Net Income and Working Capital

2. Net income and other components of current assets and current liabilities.

6.1. Net Income and Working Capital

In this part the relation between net income and working capital is determined. It should be noted here

that working capital is the difference between current assets and current liabilities.

The summary of the regression model is given below. For further information please go to Appendix

3.

Coefficients of NI and WC (Dependent= NI)

Model Unstandardized Coefficients t Sig. F

Coefficient Std. Error

WCR + 0.47 0.038 12.24 .000001

The chart above indicates that- for every unit of WCR increase will lead to 0.047x net income.

Relationship of NI and WC

Nature Positive More WC means more NI. WC leads to better

production. And the more the production is the

more the revenue is. Revenue generates NI

Degree Strong NI does change heavily with WC

6.2. Net Income and Current Assets & Liabilities

In this part we are going to show the relation among net income and other components of current assets

and current liabilities. The other components are-

Current asset

Current liabilities

Accounts payable

Inventories

P a g e | 39

Accounts receivable, trade

Marketable securities

Cash and cash equivalents

All of the above components are the part of working capital. The following relationship grid is going

to show the nature, degree and responsiveness of net income regarding to each of the elements. It is

found that some of them have negative and some of them have positive relationship. It is also clear

that some of the relations have strong response with each other.

All the related information is in the Appendix 4. Here is only the findings.

Coefficients Std. Error t stat

Current assets 0.10 0.62 0.16

Current liabilities -0.02 0.45 -0.04

Accounts payable 0.49 1.42 0.35

Inventories 0.23 1.11 0.20

Accounts receivable -0.14 0.98 -0.15

Marketable securities 1.89 10.21 0.18

Cash and cash equivalents -0.36 1.40 -0.26

The following chart describes in detail about all of them.

Detailed relationship among the Components of Current Assets & Liabilities and Net Income

Current assets Nature Positive More cash holding leads a bit of increase in NI

Degree Low Intensity is low

Current liabilities Nature Negative The more the payable amounts goes up, the less

the NI would be

Degree Very low Intensity is very low

Accounts payable Nature Positive The more the company gives its money/cash

payable, the more the NI grows

Degree Good And the degree of relationship is good enough to

have a strong impact

P a g e | 40

Inventories Nature Positive More inventories leads more production, which

helps to gain higher NI through increased

revenue

Degree Moderate Moderate relationship means a fair amount of

positive impact of inventories in NI

Accounts receivable Nature Negative More receivable leads to lower NI

Degree Low Relationship is weak, yet can affect negatively

Marketable

securities

Nature Positive More marketable securities will lead more NI

Degree Very

High

And the relationship is highly positive-moving

Cash and cash

Equivalents

Nature Negative For this particular company, more cash leads to

decrease in NI

Degree Fair Degree of relationship is fair enough to make a

big impact

Table 3: Detailed relationship among the Components of Current Assets & Liabilities and Net Income

P a g e | 41

7. Correlation, working capital performance and industry performance

Endogenous

Variable Exogenous Variable Correlation

Industry

performa

nce

CCC Operating profits/ total assets -0.67 -

NTC -0.62 -

Current Ratio -0.33 +

Quick Ratio -0.51 +

NTC Net income+ interest expenses/total assets -0.53 -

Operating income/Sales -0.61 -

CCC ROA 0.27 -

ROE 0.34 -

Sales -0.01 -

(Sales-COGS)/(total assets-financial assets) 0.32 -

Profit before interest and taxes/total assets 0.34 +

Net operating income-depreciations/(TA-financial

assets) 0.21

-

Current assets/TA ROA 0.45 +

C. Liabilities/TA 0.44 -

Growth of Sales 0.916 +

Financial

leverage -0.77

-

Current Ratio Operating income/Total assets -0.33 -

Operating income/Sales -0.20 -

Net operating income -depreciations/net sales -0.14 - Table 4: Correlation, working capital performance and industry performance

At the very beginning, Table 1 shows the 20 years of research summarization about the correlation

between several parts of working capital, conducted by thirteen different researchers/teams around the

globe. Compared to their research, there is a slight mismatch with this research. The relationship

between Current ratio and Quick ratio with Operating profits/Total Assets ratio was supposed to be

positively correlated, but in the case of available data from BASF SE, the correlations among them get

negative. Correlation among Cash Conversion Cycle, ROA and ROE is negative in industry

performance in accordance with the researchers, but here the result is opposite.

While the industry standard imposes a negative correlation between ROA and Current liabilities/Total

Assets ratio, in our case, we got a different result- a positive correlation between those two ratios.

P a g e | 42

But, we can easily conclude that- working capital correlation of BASF SE is in collaboration with

industry performance- depicting that their day to day basis activities are strong enough to bring out the

most desired outcome set by the shareholders.

So, the H0 is tested, this stated earlier that there is no correlation, but it’s proved that there is correlation.

We can reject the hypothesis and conclude that there are relationships among the drivers.

CCC OP/TA ROA ROE Sales R1 R2 R3

CCC 1.00

OPs/TA -0.67 1.00

ROA 0.28 0.04 1.00

ROE 0.34 0.36 0.73 1.00

Sales -0.02 0.56 -0.07 0.53 1.00

R1 0.33 -0.49 0.71 0.13 -0.55 1.00

R2 0.35 -0.50 0.71 0.13 -0.54 1.00 1.00

R3 0.07 0.05 0.93 0.51 -0.36 0.74 0.74 1.00 Table 5: CCC Pearson’s Correlations

Here,

CCC Cash Conversion Cycle

OPs/TA Operating profits/ total assets

ROA Return in Assets

ROE Return in Equity

Sales Sales revenue

R1 (Sales-COGS)/(total assets-financial assets)

R2 Profit before interest and taxes/total assets

R3 Net operating income + depreciations/ (total assets-financial assets)

Not only had this report aimed to find the evidence of correlation among the drivers and components of

working capital, but also it targeted to discover the degree and nature as well as the intensity of correlation

among those components.

The next table describes each hypothesis individually.

H2: Operating profit/Total assets is negatively related to CCC.

Correlation of Hypothesis Nature of correlation of BASF Degree or Intensity

- - (Hypothesis accepted)

(.67) Semi-strongly correlated,

indicating intense effect

P a g e | 43

H3: ROA is negatively related to CCC.

Correlation of Hypothesis Nature of correlation of BASF Degree or Intensity

- + (Hypothesis rejected in case of BASF)

(.28) Slightly positively

correlated, indicating moderate

effect

H4: ROE is negatively related to CCC.

Correlation of Hypothesis Nature of correlation of BASF Degree or Intensity

- + (Hypothesis rejected in case of BASF)

(.34) Slightly positively

correlated, indicating moderate

effect

H5: Sales is negatively related to CCC.

Correlation of Hypothesis Nature of correlation of BASF Degree or Intensity

- -

(Hypothesis accepted, though

insignificant relation)

(.02) Almost zero correlation,

indicating almost no effect

H6: (Sales-COGS)/ (Total Assets-Financial Assets) is negatively related to CCC.

Correlation of Hypothesis Nature of correlation of BASF Degree or Intensity

- + (Hypothesis rejected in case of BASF)

(.33) Slightly positively

correlated, indicating moderate

effect

H7: Profit Before Interest and Taxes/Total Assets is positively related to CCC.

Correlation of Hypothesis Nature of correlation of BASF Degree or Intensity

+ + (Hypothesis accepted)

(.35) Slightly positively

correlated, indicating moderate

effect

H8: Net Operating Income-Depreciations/ (TA-Financial Assets) is negatively related to CCC.

Correlation of Hypothesis Nature of correlation of BASF Degree or Intensity

- +

(Hypothesis can be rejected in case of

BASF as the relation is not significant)

(.07) Not significantly

correlated, indicating almost

null effect.

Table 6: Hypothesis Results

P a g e | 44

8. Conclusion The objective of a WCM manager is to raise the firm value by creating much more revenue and

decreasing the cost.

Figure 16: Value Creation

Cash conversion cycle is the most important issue to be discussed as well as to be prepared for. The

management is continuously finding out the best and optimal solutions for optimized working capital

to increase the short term value and profitability of the firm. Strong cash conversion cycle helps the

firm to get the maximum free cash inflow for the firm. Free cash flow is determined by various factors.

But one of the important factor is working capital, as it is responsible for generating revenue. As for

the revenue, the optimal equation for this is sales minus costs. So, the more the revenue and the less

the costs are, the more the Firm’s value would be. Revenue and Costs are the headache of a WC

manager. Because, revenue means the sale of goods and Cost means the cash outflow. The following

chart express the channel among them- on how to approach them effectively.

Firm's Short Term Working Capital Value

• The objective of WCM manager

Optimized Asset-Liability Management

• Firm short term value can be increased by optimized working capital

Cash Flow•Value increases when positive cash stream is expected highly

Cash Conversion

Cycle

P a g e | 45

Revenue Sales Cash Forecasting

Cash inflow outflow

Sales Decisions

Inventories

Receivables

Investments Models Baumol, Beranek or Millar-Orr

Costs Floating Costs

Inventory Costs

With the help of previously stated chart we can conclude some statements for the BASF SE. These

are-

1. Net income has a very steep tangent with year change. This is because they are performing well

in the selling area. They have reduced cost and generated more revenues. The forecasted data

shows that the NI will continuously increase.

2. In some years they offered dividends in a rising manner, suddenly the payment fall of but it

was followed by a tremendous payment in the latest years. This can be related to the NI,

because NI increased dramatically in the recent years.

3. The company is getting back all the receivables.

4. Although NI is increasing, Gross profit will decline in the next years. This means-

a. Their operating income will increase

b. Non-operating income will also increase

c. Operating and non-operating expense will decrease

d. All of those particulars indicate that the management is performing well to reduced cost

5. In the next few years, BASF SE is going to enjoy cash receipt.

6. The intense upward trend of working capital means, BASF SE has more cash to pay their short

term liabilities, cash inflow is well functioning.

7. It is forecasted that they have to pay little to creditors. Because their accounts payable forecast

shows a quick downward sloping which obviously is good sign.

8. Forecast details the amount of tax to be paid is increasing sharp because of increased income

in recent years.

9. The inventory turnover ratio is decreasing.

10. The liquidity of inventory is gradually decreasing, which means the company is not performing

well to manage the inventories. Because the indicator ratio shows the turnover is lower in the

recent years than that of previous years.

P a g e | 46

11. This also can be concluded that- they are holding a lot of inventories, that’s is why their

inventory turnover is getting lower.

12. Their Inventory Turnover in Days is also increasing a little bit, this means their retention ratio

of inventories is getting higher, which also clearly identify their lack of successful sale that

they are producing at a continuous rate but these being stored because of low sales rate (this

happens because, BASF SE is a multination company running its business in almost all of the

countries in the world- possibly leading to stick in low sales in many different countries due to

unprecedented events and issues), though other sale ratios shows that sale is increasing. This

can also show that- the demand is high in the market, BASF Bangladesh are producing at a

very high rate, their sale is comparatively high in volumes, but not in the context of inventory

turnover ratio. Many of their raw materials, finished goods etc. are in stock.

13. This can also be concluded that- for meeting the ongoing demand, they are producing more

and planning to produce more. That is why they are stocking lots of raw materials, working

process and finished goods. Which leads a lower inventory liquidity ratio.

14. They have a very strong modules in the forecasting method.

15. They are not following any Economic Order of Quantity approach for many different countries.

16. They don’t need to follow inventory management like Just in Time Approach.

17. Cash management efficiency can be improved, no lockbox systems, or a very few in numbers.

18. They are not maintaining any short term investments models like Baumol, Miller-Orr or

Beranek model. They could have used these model to best use of their idle cash by investing

and earn some extra value. Rather they use- contingency approach for short term investments.

19. BASF Bangladesh has no valid model or management to reduce the floatation cost.

The management can come forward to manage those issues to maximize their profit.

P a g e | 47

9. Recommendation From the previous discussion, some recommendations can be drawn for BASF Bangladesh, note that

these recommendation is observed for BASF Bangladesh Limited only, which is extracted from the

reports of BASF SE-

Problems Suggestion

Forecasting 1. Track down the historical data

2. Hire professionals

3. Buy new technologies

4. Introduce new business developer teams for better specialty

Inventory Management 1. Follow EOQ or JIT model

2. Use inventory tracer

3. Hire professionals for researching market demand and

optimal production

4. Reduce costs

Cash Management 1. Introduce lockbox

2. Forecast receivables

3. Use modern techs to reduce cost of holding cash

Short Term Investments 1. Use Baumol. Beranek or Miller-Orr model to reduce costs of

holding cash

Sales 1. Create market demand with cost reduction methods

2. Link and communicate with more buyers

3. Use newer technologies for production

4. Hire professionals to continuously research the sources of

funds, this is one of the most important step to be successful

and competitive in the market.

With regards to the findings and literature explained throughout all the report, this can deductibly said

that if the WC managers of BASF Bangladesh can dig up the suggestions in accordance with their

company needs, the managers are likely to be successful in the long run. To be noted that, the

suggestions are both targeting long-run and short-run benefits of the company.

i

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iv

Appendix 1

BASF Report 2014

Balance Sheet

Million € 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Intangible assets 3,720 8,922 9,559 9,889 10,449 12,245 11,919 12,193 12,324 12,967 Property, plant and equipment 13,987 14,902 14,215 15,032 16,285 17,241 17,966 16,610 19,229 23,496 Investments accounted for using the equity method 244 651 834 1,146 1,340 1,328 1,852 3,459 4,174 3,245

Other financial assets 813 1,190 1,952 1,947 1,619 1,953 848 613 643 540

Deferred taxes 1,255 622 679 930 1,042 1,112 941 1,473 1,006 2,193 Other receivables and miscellaneous noncurrent assets 524 612 655 642 946 653 561 911 877 1,498

Noncurrent assets 20,543 26,899 27,894 29,586 31,681 34,532 34,087 35,259 38,253 43,939

Inventories 5,430 6,672 6,578 6,763 6,776 8,688 10,059 9,581 10,160 11,266 Accounts receivable, trade 7,020 8,223 8,561 7,752 7,738 10,167 10,886 9,506 10,233 10,385 Other receivables and miscellaneous current assets 1,586 2,607 2,337 3,948 3,223 3,883 3,781 3,455 3,714 4,032

Marketable securities 183 56 51 35 15 16 19 14 17 19 Cash and cash equivalents 908 834 767 2,776 1,835 1,493 2,048 1,647 1,827 1,718 Assets of disposal groups – – 614 – – 614 295 3,264 – –

Current assets 15,127 18,392 18,908 21,274 19,587 24,861 27,088 27,467 25,951 27,420

Total assets 35,670 45,291 46,802 50,860 51,268 59,393 61,175 62,726 64,204 71,359

Subscribed capital 1,317 1,279 1,224 1,176 1,176 1,176 1,176 1,176 1,176 1,176

Capital surplus 3,100 3,141 3,173 3,241 3,229 3,216 3,203 3,188 3,165 3,143

Equity 4,417 4,420 4,397 4,417 4,405 4,392 4,379 4,364 4,341 4,319

Retained earnings 11,928 13,302 14,556 13,250 12,916 15,817 19,446 23,708 26,102 28,777 Other comprehensive income 696 325 174 -96 156 1,195 314 -3,461 -3,400 -5,482

Minority interests 482 531 971 1,151 1,132 1,253 1,246 1,010 630 581

Total Equity 17,523 18,578 20,098 18,722 18,609 22,657 25,385 25,621 27,673 28,195

Provisions for pensions and similar obligations 1,547 1,452 1,292 1,712 2,255 2,778 3,189 5,421 3,727 7,313

Other provisions 2,791 3,080 3,015 2,757 3,289 3,352 3,335 2,925 3,226 3,502

v

Deferred taxes 699 1,441 2,060 2,167 2,093 2,467 2,628 2,234 2,894 3,420

Financial indebtedness 3,682 5,788 6,954 8,290 12,444 11,670 9,019 8,704 11,151 11,839

Other liabilities 1,043 972 901 917 898 901 1,142 1,111 1,194 1,197

Noncurrent liabilities 9,762 12,733 14,222 15,843 20,979 21,168 19,313 20,395 22,192 27,271

Accounts payable, trade 2,777 4,755 3,763 2,734 2,786 4,738 5,121 4,502 5,153 4,861

Provisions 2,763 2,848 2,697 3,043 3,276 3,324 3,210 2,628 2,670 2,844

Tax liabilities 887 858 881 860 1,003 1,140 1,038 870 968 1,079

Financial indebtedness 259 3,695 3,148 6,224 2,375 3,369 3,985 4,094 3,256 3,545

Other liabilities 1,699 1,824 1,976 3,434 2,240 2,802 3,036 2,623 2,292 3,564 Liabilities of disposal groups – – 17 – – 195 87 1,993 – –

Current liabilities 8,385 13,980 12,482 16,295 11,680 15,568 16,477 16,710 14,339 15,893

Total equity and liabilities 35,670 45,291 46,802 50,860 51,268 59,393 61,175 62,726 64,204 71,359

vi

BASF Report 2014

Income Statement

Million € 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Sales and earnings

Sales 42745 52610 57951 62304 50693 63873 73497 72129 73973 74326 Income from operations before depreciation and amortization (EBITDA) 8233 9723 10225 9562 7388 11131 11993 10009 10432 11043 Income from operations (EBIT) 5830 6750 7316 6463 3677 7761 8586 6742 7160 7626

Income before taxes 5926 6527 6935 5976 3079 7373 8970 5977 6600 7203 Income before minority interests 3168 3466 4325 3305 1655 5074 6603 5067 5113 5492

Net income 3007 3215 4065 2912 1410 4557 6188 4819 4792 5155

Capital expenditures, depreciation and amortization

Additions to property, plant and equipment and intangible assets 2523 10039 4425 3634 5972 5304 3646 5263 7726 7285 Thereof property, plant and equipment 2188 4068 2564 2809 4126 3294 3199 4084 6428 6369 Depreciation and amortization of property, plant and equipment and intangible assets 2403 2973 2909 3099 3711 3370 3407 3267 3272 3417 Thereof property, plant and equipment 2035 2482 2294 2481 2614 2667 2618 2594 2631 2770

Number of employees

At year-end 80945 95247 95175 96924 104779 109140 111141 110782 112206 113292

Annual average 80992 88160 94893 95885 103612 104043 110403 109969 111844 112644

Personnel expenses 5574 6210 6648 6364 7107 8228 8576 8963 9285 9224

Research and development expenses 1064 1277 1380 1355 1398 1492 1605 1732 1849 1884

Key data

Earnings per share 2.87 3.19 4.16 3.13 1.54 4.96 6.74 5.25 5.22 5.61

vii

Cash provided by operating activities 52,506 5940 5807 5023 5693 6460 7105 6602 8100 6958

EBITDA margin 19.3 18.5 17.6 15.3 14.6 17.4 16.3 13.9 14.1 14.9

Return on assets 17.7 17.5 16.4 13.5 7.5 14.7 16.1 11 11.5 11.7

Return on equity after tax 18.6 19.2 22.4 17 8.9 24.6 27.5 19.9 19.2 19.7

Appropriation of profits

Net income of BASF SE 1273 1951 2267 2982 2176 3737 3506 2880 2826 5853

Dividends 1015 1484 1831 1791 1561 2021 2296 2388 2480 2572

Dividend per share 1 1.5 1.95 1.95 1.7 2.2 2.5 2.6 2.7 2.8

Number of shares as of December 1028.8 999.4 956.4 918.5 918.5 918.5 918.5 918.5 918.5 918.5

viii

Appendix 2 Table 1

2006 2007 2008 2009 2010 2011 2012 2013 2014 AGV Inventory

6051.00 6625.00 6670.50 6769.50 7732.00 9373.50 9820.00 9870.50 10713.00

COGS 29567.00 41899.00 46455.00 36682.00 45310.00 54266.00 55483.00 55576.00 55839.00 COGS/365 81.01 114.79 127.27 100.50 124.14 148.67 152.01 152.26 152.98 Return on assets

17.50 16.40 13.50 7.50 14.70 16.10 11.00 11.50 11.70

Return on equity after tax

19.20 22.40 17.00 8.90 24.60 27.50 19.90 19.20 19.70

AVG AR 7621.50 8392.00 8156.50 7745.00 8952.50 10526.50 10196.00 9869.50 10309.00 Sales/365 117.11 144.14 158.77 170.70 138.88 174.99 201.36 197.61 202.67 AVG AP 3766.00 4259.00 3248.50 2760.00 3762.00 4929.50 4811.50 4827.50 5007.00 CS/365 114.47 128.91 138.64 108.85 136.50 161.18 162.10 164.45 164.13

Days Inventory Outstanding

74.70 57.71 52.41 67.36 62.29 63.05 64.60 64.83 70.03

Days Sales Outstanding

65.08 58.22 51.37 45.37 64.46 60.15 50.64 49.94 50.87

Days Payable Outstanding

46.49 37.10 25.52 27.46 30.31 33.16 31.65 31.71 32.73

Average Collation Period

66.58 65.10 58.83 71.15 65.59 65.31 62.90 60.01 62.81

Table 2

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

AR 7020 8223 8561 7752 7738 10167 10886 9506 10233 10385

Sales 42745 52610 57951 62304 50693 63873 73497 72129 73973 74326

AP 2777 4755 3763 2734 2786 4738 5121 4502 5153 4861

Net Credit Sales

34,139 41,780 47,053 50,604 39,732 49,823 58,830 59,168 60,026 59,909

Interest Expense

650 600 614 601 734 773 763 752 688 711

Table 3

CCC=DIO+DSO-DPO (Operating Cycle)

93.29 78.83 78.26 85.27 96.44 90.04 83.58 83.06 88.17

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

NTC=ACP+DIO-DPO

94.79 85.71 85.72 111.05 97.57 95.20 95.85 93.13 100.11

Current Ratio

1.80 1.32 1.51 1.31 1.68 1.60 1.64 1.64 1.81 1.73

Quick Ratio 1.16 0.84 0.94 0.89 1.10 1.00 1.02 0.88 1.10 1.02

CA/TA 0.42 0.41 0.40 0.42 0.38 0.42 0.44 0.44 0.40 0.38

CL/TA 0.24 0.31 0.27 0.32 0.23 0.26 0.27 0.27 0.22 0.22

ix

Growth of Sales (%)

18.75 9.22 6.99 -22.90 20.63 13.09 -1.90 2.49 0.47

Financial Leverage

3,682 5,788 6,954 8,290 12,444 11,670 9,019 8,704 11,151 11,839

ACR Turnover

6.09 6.40 6.77 8.04 6.55 6.28 6.75 7.59 7.23 7.16

ACR Turnover in Days

59.94 57.05 53.92 45.41 55.72 58.10 54.06 48.10 50.49 51.00

Inventory Turnover

4.89 6.32 6.96 5.42 5.86 5.79 5.65 5.63 5.21

Inventory Turnover in Days

74.70 57.71 52.41 67.36 62.29 63.05 64.60 64.83 70.03

Days Sales Outstanding

65.08 58.22 51.37 45.37 64.46 60.15 50.64 49.94 50.87

Days Payable Outstanding

46.49 37.10 25.52 27.46 30.31 33.16 31.65 31.71 32.73

Average Collation Period

66.58 65.10 58.83 71.15 65.59 65.31 62.90 60.01 62.81

Earnings per share

2.87 3.19 4.16 3.13 1.54 4.96 6.74 5.25 5.22 5.61

Net income of BASF SE

1273.00

1951.00

2267.00

2982.00

2176.00

3737.00

3506.00

2880.00

2826.00

5853.00

Dividends 1015.00

1484.00

1831.00

1791.00

1561.00

2021.00

2296.00

2388.00

2480.00

2572.00

Dividend per share

1.00 1.50 1.95 1.95 1.70 2.20 2.50 2.60 2.70 2.80

Table 4

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

WCM

6,742 4,412 6,426 4,979 7,907 9,293 10,611 10,757 11,612 11,527

Operating profits/ total assets

0.000000 0.001789 0.002453 0.002502 0.001960 0.002090 0.002430 0.002423 0.002372 0.002144

Net income+ interest expenses/total assets

0.018223 0.181526 0.192428 0.172188 0.165386 0.163748 0.184544 0.174537 0.164437 0.15443

ROA

17.7 17.5 16.4 13.5 7.5 14.7 16.1 11 11.5 11.7

ROE

18.6 19.2 22.4 17 8.9 24.6 27.5 19.9 19.2 19.7

Operating income/Sales

0.13639 0.128303 0.126245 0.103733 0.072535 0.121507 0.116821 0.093471 0.096792 0.102602

x

(Sales-COGS)/(total assets-financial assets)

1.234941 0.530334 0.364686 0.331798 0.290029 0.330821 0.328876 0.2838 0.309782 0.273582

Net operating income -depreciations/net sales

0.080173 0.071792 0.076047 0.053993 -0.000671 0.068746 0.070465 0.048178 0.05256 0.056629

Profit before interest and taxes/total assets

1.198346 0.508777 0.342977 0.31162 0.273289 0.312545 0.31436 0.265376 0.28654 0.25907

Net operating income + depreciations/ (total assets-financial assets)

0.236194 0.220471 0.227982 0.19549 0.148805 0.193785 0.1988 0.161142 0.164126 0.155933

Net Profit Margin

7.034741 6.111006 7.014547 4.673857 2.781449 7.13447 8.419391 6.681085 6.478039 6.935662

xi

Appendix 3 NI vs. WC

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.971256359

R Square 0.943338914

Adjusted R Square 0.832227803

Standard Error 1059.157146

Observations 10

ANOVA

df SS MS F Significance

F

Regression 1 168091661.3 168091661.3 149.8391731 1.84229E-06 Residual 9 10096324.75 1121813.861

Total 10 178187986

Coefficien

ts Standard

Error t Stat P-value Lower 95%

Upper 95%

Lower 95.0%

Upper 95.0%

Intercept 0 #N/A #N/A #N/A #N/A #N/A #N/A #N/A

WCR 0.465446

562 0.038023

942 12.24088

122 6.4995

3E-07 0.379430

428 0.551462

695 0.379430

428 0.551462

695

RESIDUAL OUTPUT

Observation Predicted Net

income Residuals Standard Residuals

1 3138.040719 -131.0407188 -0.130414119

2 2053.55023 1161.44977 1.155896042

3 2990.959605 1074.040395 1.068904634

4 2317.458431 594.5415694 0.591698638

5 3680.285963 -2270.285963 -2.259430091

6 4325.394898 231.6051024 0.230497632

7 4938.853466 1249.146534 1.243173465

8 5006.808664 -187.8086639 -0.186910615

9 5404.765474 -612.7654741 -0.609835401

10 5365.202516 -210.2025164 -0.209197387

xii

Appendix 4 All WC vs. NI

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.98617817

R Square 0.972547384

Adjusted R Square 0.250975485

Standard Error 1276.939879

Observations 10

ANOVA

df SS MS F Significance F

Regression 8 173296259.6 21662032.45 15.18274328 0.196066793

Residual 3 4891726.364 1630575.455

Total 11 178187986

Coefficients Standard Error

t Stat P-value Lower 95% Upper 95%

Lower 95.0%

Upper 95.0%

Intercept 0 #N/A #N/A #N/A #N/A #N/A #N/A #N/A

Current assets

0.10 0.62 0.16 #NUM! -1.8 2.0 -1.8 2.0

Current liabilities

-0.02 0.45 -0.04 0.9 -1.4 1.4 -1.4 1.4

Accounts payable

0.49 1.42 0.35 0.7 -4.0 5.0 -4.0 5.0

Inventories 0.23 1.11 0.20 0.8 -3.3 3.7 -3.3 3.7

Accounts receivable, trade

-0.14 0.98 -0.15 0.8 -3.2 2.9 -3.2 2.9

Marketable securities

1.89 10.21 0.18 0.8 -30.6 34.3 -30.6 34.3

Cash and cash equivalents

-0.36 1.40 -0.26 0.8 -4.8 4.1 -4.8 4.1

xiii

RESIDUAL OUTPUT

Observation Predicted Net income Residuals Standard Residuals

1 2940.835517 66.16448272 0.099217936

2 4026.765521 -811.7655214 -1.217295079

3 3562.06376 502.9362403 0.75418553

4 2609.158256 302.8417438 0.454130848

5 2868.926558 -1458.926558 -2.187755051

6 4489.532223 67.46777692 0.10117231

7 4892.449838 1295.550162 1.942761542

8 4845.967623 -26.96762305 -0.040439701

9 5031.564444 -239.5644441 -0.35924243

10 5273.912489 -118.9124889 -0.178316994

xiv

Appendix 5

Data of different variables

CCC Operating profits/ total assets

ROA ROE Sales (Sales-COGS)/(total assets-financial assets)

Profit before interest and taxes/total assets

Net operating income + depreciations/ (total assets-financial assets)

2006 93.29 0.001789 17.5 19.2 52610 0.530334 0.508777 0.220471

2007 78.83 0.002453 16.4 22.4 57951 0.364686 0.342977 0.227982

2008 78.26 0.002502 13.5 17 62304 0.331798 0.31162 0.19549

2009 85.27 0.001960 7.5 8.9 50693 0.290029 0.273289 0.148805

2010 96.44 0.002090 14.7 24.6 63873 0.330821 0.312545 0.193785

2011 90.04 0.002430 16.1 27.5 73497 0.328876 0.31436 0.1988

2012 83.58 0.002423 11 19.9 72129 0.2838 0.265376 0.161142

2013 83.06 0.002372 11.5 19.2 73973 0.309782 0.28654 0.164126

2014 88.17 0.002144 11.7 19.7 74326 0.273582 0.25907 0.155933

Pearson’s Correlation Matrix

Components A B C D E F G H

CCC (A) 1

Operating profits/ total assets (B) -0.67 1

ROA {C} 0.2 0.04 1

ROE (D) 0.3 0.3 0.73 1

Sales {E} -0.01 0.56 -0.0 0.52 1

(Sales-COGS)/(total assets-financial

assets) (F)

0.32 -0.49 0.71 0.12 -0.54 1

Profit before interest and

taxes/total assets (G)

0.34 -0.50 0.71 0.13 -0.54 0.99 1

Net operating income + depreciations/ (total assets-financial

assets) (H)

0.06 0.05 0.92 0.51 -0.35 0.73 0.73 1