QUANTITATIVE RESEARCH METHOD

MGT646

“WORKING CAPITAL MANAGEMENT AND FIRMS’ PROFITABILITY IN MALAYSIA:

EVIDENCE FROM CONSTRUCTION SECTOR”

PREPARED BY: STUDENT ID

NINA CARYN BINTI KHAIRUL BAHRI 2016630788

ZETTY NUR SUHADA BINTI SALLEHUDDIN 2016629758

PREPARED FOR:
DR. HAMIZAH BINTI HASSAN
Table of Contents
ABSTRACT ................................................................................................................................... 3
ACKNOWLEDGEMENT ............................................................................................................ 4
CHAPTER 1 : INTRODUCTION ............................................................................................... 5
1.0 Introduction ........................................................................................................................... 5
1.1 Background of the study ....................................................................................................... 5
1.2 Problem statement ................................................................................................................. 6
1.3 Research question .................................................................................................................. 7
1.4 Research objective................................................................................................................. 7
1.5 Scope of study ....................................................................................................................... 7
1.6 Limitations of study .............................................................................................................. 7
CHAPTER 2: LITERATURE REVIEW ................................................................................... 8
2.0 Introduction ........................................................................................................................... 8
2.1 Role of Working Capital Management ................................................................................. 8
2.2 Optimal Working Capital Management ................................................................................ 8
2.3 Theories of Working Capital Management ........................................................................... 9
2.4 Past studies on Working Capital Management ................................................................... 10
2.5 Development of the Hypotheses .................................................................................... 14
2.6 Summary of previous studies .............................................................................................. 14
CHAPTER 3 : DATA AND RESEARCH METHODOLOGY ............................................. 16
3.0 Introduction ......................................................................................................................... 16
3.1 Theoretical Framework ....................................................................................................... 16
3.2 Research Design .................................................................................................................. 17
3.3 Selection of Measures ......................................................................................................... 17
3.3.1 Dependent Variable ...................................................................................................... 17
3.3.2 Independent Variables .................................................................................................. 18
3.3.3 Measurements of Variables .......................................................................................... 20
3.4 Sampling Technique ............................................................................................................ 21
3.5 Type of Data Collection ...................................................................................................... 21
3.6 Type of Data Analysis ......................................................................................................... 21
3.7 Research Strategy ................................................................................................................ 22
CHAPTER 4: FINDINGS AND ANALYSIS ........................................................................... 23
4.0 Introduction ......................................................................................................................... 23
4.1 Descriptive Analysis ........................................................................................................... 23
4.1.2 Correlation Analysis......................................................................................................... 25
4.1.3 Testing of Hypotheses ...................................................................................................... 26
4.1.4 The Effect of Working Capital Management (WCM) components on Profitability of
firms in Constructions sector..................................................................................................... 26

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CHAPTER 5: CONCLUSION AND RECOMMENDATIONS ............................................. 30
5.1 Conclusion........................................................................................................................... 30
5.2 Recommendations ............................................................................................................... 30
REFERENCES ............................................................................................................................ 31
APPENDICES ............................................................................................................................. 36
Appendix 1: Eviews Descriptive Analysis of Construction Sector.......................................... 36
Appendix 2: Eviews Correlation Analysis of Construction Sector ........................................... 36
Appendix 3: Eviews Regression Analysis of Construction Sector ........................................... 37

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ABSTRACT

The purpose of this study is to examine the impact of working capital management on
firms’ performance. All the data has been gathered from Thomson Reuters Datastream and were
analyzed for the year 2016. This study will be using simple regression analysis in order to study
the relationship between dependent variable and independent variables. Descriptive statistics,
Descriptive analysis and Correlation matrix are also applied on the cross-sectional data to see the
relationship of the different variables. The finding of the study indicates the relationship between
WCM and firms’ performance of construction sector in Malaysia is insignificant.

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ACKNOWLEDGEMENT

First of all, we would like to say Alhamdulillah to Allah S.W.T, the most merciful,
utmost gratitude for the divine blessings along the completion of this study on the given time.

We would like to express our gratitude to our lecturer Dr. Hamizah binti Hassan. The
task of conducting this study could never have been undertaken without her guidance and advice
that enable us to successfully complete this research project. It has given us tremendous
knowledge on our research topic.

We want to thank our families for their support during the preparation of this research
project, without their support, we could not have completed this report. We would also like to
extend this gratitude to our fellow classmates who have contributed towards completion of this
research.

Finally, we would like to give a big thanks to UiTM Library staff for the guidance of the
usage of online databases, usage of Mendeley and how to locate our data to be used in this study.
It was really a big help to undertake this study.

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CHAPTER 1: INTRODUCTION

1.0 Introduction

This chapter consists of background of study, problem statement, research questions,

research objectives, scope of study and limitation of study.

1.1 Background of the study

A finance manager of a corporation needs to determine working capital

management (WCM) as part of the financing considerations needs besides capital
structure and capital budgeting (Singh & Kumar, 2017). In determining the profitability,
many researchers have studied on the impact of WCM and capital structure, which the
results varies, in view that each company stressed on maximizing profitability that can be
generated from their business operation. The impact of WCM elements on the firm’s
profitability are analyzed in this study.

Concurrently, in determining the firm’s profitability, the finance manager needs to

take into consideration the firm’s WCM by managing the firm’s current assets and
current liabilities efficiently (Dong, H.P. and Su, 2010; Gill & Biger, 2010). Basically, in
a balance sheet, current assets are short-term assets that are used for production and sales
and are able to be converted into cash within the year. On the contrary, current liabilities
are short-term obligations that need to be paid within the year (Ross, Westerfield, &
Jaffe, 2005). Therefore, it is crucial to have an efficient WCM as it boosts the firm’s
profitability and shareholder value (Deloof, 2003; Dong, H.P. and Su, 2010; Smith,
1980). Moreover, in order to continue the operation of the firms, the firms’ ability to meet
its short term obligations and to maintain satisfactory liquidity position are the
advantages of having an efficient WCM (Eljelly, 2004a).

Over the last decades, many researches had conducted numerous studies to
investigate the relationship between WCM and firm’s performance as the decision of
WCM is a vital factor in determining the firm values maximization and shareholders
wealth. However, the findings exhibit contradictory behavior for different studies done

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 by numerous researchers and are carried out separately. In addition, there is also lack of
study being conducted on the impact of WCM on the firm’s probability in Malaysia.

In this study, cash conversion cycle (CCC), number of days Accounts Receivable
(ARDAYS), number of days Inventories (INVDAYS) and number of days Accounts
Payable (APDAYS) are WCM components that represent the efficiency of WCM. The
firm’s profitability is measured by gross operating profit (GOP).

1.2 Problem statement

Previously, the long-term financial decisions particularly investments, capital
structure, dividends and company valuation decisions have been the main focus study of
corporate finance. Recently, the important components of total assets that are receiving
more concern across the different industry by intersecting towards WCM efficiency are
current liabilities and current assets. Correspondingly, efficient WCM also comes from
an efficient management of current assets and current liabilities in a way to minimize the
potential obligations and also to shield the firms from excessive expenditure on the asset
(Ng, Ye, Ong, & Teh, 2017).

There are numerous determinants of a firm’s profitability being analyzed by

researchers including WCM. An efficient WCM enables companies to reassign
underemployed of firm’s resources to fully utilized in which could boost the profitability
of the companies (Aktas, Croci, & Petmezas, 2015). Furthermore, there is also lack of
study being examined on factors contributing profitability of construction sector, since
the past studies carried out by researchers only focus solely on manufacturing sector (Ng
et al., 2017; S et al., 2017; Singh & Kumar, 2017). Thus, the evaluation on the factors
contributing the firm’s profitability in construction sector being analyzed in terms of the
impact of WCM is crucial.

Considering WCM is one of the financial considerations in business, there are

numerous evidences revealed by researchers regarding the impact of WCM towards the
profitability of the firms (Altaf & Shah, 2017). However, the WCM topic has not been
profoundly investigated in Malaysia in contrast to capital budgeting and capital structure
as WCM is discerned as investment and financing in short-term period (Zariyawati,

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 Taufiq, Annuar, & Sazali, 2010). In addition, despite WCM consumes substantial time
share of the finance managers, short-term financial management has been perceived as
less significant and often being left out by researchers, which lead to more focus on other
parts of corporate finance and investment (Zainudin, 2006).

Thus, this investigation is the first to investigate the impact of WCM towards the
profitability of the firm’s by focusing on firms under construction sector in Malaysia for
year 2016. The construction sector is the focus of the study as the growth of construction
sector in Malaysia is expected to be among the most rapid growth in the world from 2016
to 2020, with the help of the government’s planning to enhance the transportation
network and tourism infrastructure of the country as well as boost the volume of
renewable projects (Zarina Zakariah, 2017).

1.3 Research question

The research question of this study is: -

 What is the impact of working capital management towards firm’s profitability?

1.4 Research objective

The objective of this study is to examine the impact of working capital management towards
firm’s profitability.

1.5 Scope of study

This study focuses on firms of construction sector listed on the Bursa Malaysia for a span of
one year that is 2016. The analysis is done based on secondary data extracted from
Thompson Reuters Datastream.

1.6 Limitations of study

Although we have achieved our research objectives, there are some unavoidable limitation
and we still need to carry on with our research. First, is due to the time limit. This research
was conducted about four months. It is not enough for us to observe thoroughly the impact of
WCM on firm’s performance in Malaysia. Second, this study is limited to the availability of
data from the secondary sources.

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CHAPTER 2: LITERATURE REVIEW

2.0 Introduction

The goals of this section being written is to review past theoretical study that was
conducted as critically as possible with considering to working capital management areas.
There are a few past studies found being studied by the past researchers to provide better
understanding regarding the working capital management upon the firm’s performance.

In the beginning of this chapter starts with a brief introduction regarding the description
on the role of working capital management (WCM), then it is followed with the optimal
WCM and theories of WCM. The past studies in regards on the effect of WCM towards the
profitability of firms are being elaborated more in this chapter.

2.1 Role of Working Capital Management

Normally in traditional way, long-term financial decisions making in corporate finance is

only the main concern for the researcher, which particularly consist of capital structure,
investments, company valuation decisions and dividends. Nonetheless, the researcher rarely
talks about the liabilities and short-term assets as a crucial component of total assets and it
need to be investigated more instead of the usual corporate finance decision like capital
structure and others (Afza & Nazir, 2007). This is because the presence of the short-term
assets and liabilities are important which need an investigation that efficiently and effectively
cover all aspects of these assets is quite imperative since their parts play an important role
towards the profitability of the firm’s value and risk (Aminu & Zainudin, 2015).

Working capital serve as a way the company controlling its cash for day to day operating
activities as well as any urgent debt obligations is the definition of WCM. When controlling
the working capital, the company has to control their short-term obligations that consist of
liabilities and current assets which are the inventory, accounts receivable cash and also the
accounts payable. The main reasons for working capital management is to have sufficient
cash flow for day to day operations and to have the most beneficial usage of resources. WCM
can be studied as a crucial source of profitability of a firm. Numerous number of researchers
have done their investigation on the effects of WCM on profitability (Faden, 2014).

2.2 Optimal Working Capital Management

Over the years, lack of management for working capital has been the main factor for
bankruptcy, business insolvency and the ultimate business failure. Sustaining the working
capital at an optimum level is the primary concern of the financial managers as a firm may
loses their assets which is money (Mbithi, Muiruri, & Kingi, 2015) since due to the volatility
of the market which being exposed to inefficiencies like the uncertain transaction costs,

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 scheduling costs, information costs, production limitations and many more, it is crucial for
the firm to pay an attention on their short term asset to always maintain the amount to avoid
such costly risk to be a burden to the company. If company might face such problems, they
may have serious consequences, it is important that reserves are maintained so that it can be
liquidated at sight. As a precaution, the main objective for maintaining positive working
capital are to avoid risk due to unexpected events that could affect inflows or outflows of
cash, raw materials, or goods(Faden, 2014). When the time of economic downturn, the
companies that have reliable and efficient working capital management practices are capable
to stand strong even with the presence of economic downturn (Mbithi et al., 2015).

The level of current assets is the main element in a company’s liquidity position to be able
to achieve an efficient working capital management. The greater the level of current assets,
the more liquid the firms are which escalate that the firm’s high liquidity position gives the
company the ability for them to pay off their debts. It is vital for a company to be able to
generate sufficient cash to meet its short-term obligation in order to run the business for a
long period of time. Therefore, it is crucial for a company to efficiently manage their
working capital for the company’s long-term success (Hongo, 2014).

2.3 Theories of Working Capital Management

The theory of working capital management describes how a company’s working capital
should be handled and indicate the benefits in signs of profitability, efficiency, solvency,
liquidity and maximization of shareholders wealth which accumulate to the company from
properly managing working capital (Mcinnes, 2000).

The theories of working capital management which is according to the prescriptive

theories holds that when a company working capital is managed it is expected to invest in
working capital, monitor factors that affect working capital and finance the working capital,
accounts payable, accounts receivable, manage cash, the cash conversion cycle and evaluate
the performance to safeguard that the company’s non-current assets are utilized effectively
and efficiently (Mcinnes, 2000). A theory that consist of an explanation of a particular
activity, an assertion regarding the goals of the activity, and an analysis about the important
components of the activity, which also comprises a formula in reaching the goal(Ellis, 2010).

Another theory of working capital management is the tradeoff theory, where the
profitability and liquidity must be maintained appropriately by the companies to secure that
companies are capable in meeting its short-term agreement and its continuously progress,
which the companies profitable venture can be secured. Cash is vital in indicating for the
continuation of company financial stability, where it should not surpass in the outlook of its
crucial part within the business. It is a requirement for the company’s business to be able to
run both profitability and efficiently. However, concerning more on the liquidity will be a
cost to the profitability. Thus, it became a main confusion for the financial manager of the
business entity in achieving required tradeoff between profitability and liquidity in order for
the firm to maximize its value (Abuzayed, 2012). In securing an effectively management
regarding the company’s liquidity, proper observation and planning of the short-term assets

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 and liabilities current are vital in order for the companies to achieve its short-term
requirements and to minimize severe investment in these assets as it can affect the company’s
profitability and shareholder’s worth of the company (Eljelly, 2004b).

2.4 Past studies on Working Capital Management

This past studies have shown that managing working capital efficiently contributes to a better
effect of WCM on profitability (Agha, 2014). (Ng et al., 2017) had examined on the
association between WCM and firm’s profitability of Malaysian listed manufacturing firms.
The purpose of this research is to find the effect of WCM from elements of working capital
policy aggressiveness and WCM efficiency. 6-year

Total of 122 listed firms of industrial products sector on Bursa Malaysia Main Board for the
past 6-year period between 2007 to 2012 data from annual reports have been obtained to
analyze the relationship between variables of WCM that can affect the firm’s Gross
Operating Income(GOI). The findings show that the degree of aggressiveness of investment
policy is negatively related to GOI instead the degree of aggressiveness of financing policies
has indicate a positively relationship. Other than those findings, comes from a comprehensive
measure found that the Cash Conversion Cycle(CCC) has a positive relationship with GOI. It
indicates that when there is an increment in the company’s inventory conversion period it can
be linked to a positively firm’s profitability. The researcher also suggests that by reducing the
period of collecting account receivable firms can increase profitability.

According to (Tran, Abbott, & Jin Yap, 2017) had analyze on the relationship between WCM
and profitability in the 200 Vietnamese manufacturing SMEs listed on the Hong Kong Stock
Exchange (HSE) with financial statements available for each year of the 2010-2012 period.
From the studies done, it resulted that there is a significant negative relationship between
Gross Operating Income and the number of days of account receivable, account inventories
and cash conversion cycle. From the results obtained, the researchers have suggested that an
optimal level of working capital can be achieved if the owner-managers in Vietnamese SMEs
can increase their profitability, at the same time the profitability can be reduced if the optimal
level of working capital is not being preserved. To conclude the studies made have found
new evidence on the impacts of working capital on the profitability in Vietnamese SMEs as
the productive WCM can significantly influence on the profitability and liquidity of the
business and incompetent WCM is one of the main reasons for a firm’s failure. It is mostly to
be found in SMEs.

Research done by (Pais & Gama, 2015) regarding the impact of WCM on the profitability
of small and medium-sized Portuguese firms which used the sample of 6,063 Portuguese
small and medium-sized firms (SMEs), covering the time period 2002-2009 have the
outcome of that in order to gain higher corporate profitability, the firm must associated with
the devaluation in the inventories held and the number of days that firms take to complete
their commercial liabilities and to collect payments from its clients have. Identical results are
achieved when industry-specific effects are controlled, supporting the strength of the past
analysis. The importance of quadratic dependences of the profitability on certain variables

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was also recognized and proposed a falling trend of return on asset with uprising values of
the WCM characteristics variables.

(Altaf & Shah, 2017) had investigated the relationship between WCM and firm
performance. This study also investigates on the impact of financial constraints on non-
performance relationship. Secondary financial data of 437 non-financial Indian companies
retrieved from Capitaline Database, for the period of ten years. This study applies the two-
step generalized ways of moments technique to arrive at results. The results portray that
working capital management is negatively related to firm’s performance. Optimal result of
investment in working capital that balances cost and benefits and maximizes the firm
performance was also found on this study. The concept that at the lower level of working
capital, financial managers would likely to increase the investment in working capital in
order to boost the performance of the firm was also supported by the results found.
Nevertheless, based on the findings the researcher has made an argument that if the working
capital is being invested more than expected optimal level it will backfire and may increase
the possibility of the credit risk of firms. Thus, the researcher suggests in this study that it is
recommended for managers to stay align to optimal and try to avoid the deviations, between
above or below the optimal.

(S et al., 2017) had conducted a studied regarding the effect of WCM on firm’s
performance. A sample of 164 manufacturing firms listed on the main board of Bursa
Malaysia, covering span of five years starting from 2007 until 2011 was based on this study.
The type of analysis conducted by the researcher are the discriminatory panel regression and
Pearson correlation was used to test out the hypothesis. The results were found that implies
the log cash conversion cycle is insignificantly and negatively correlated to profitability
which also suggest by the researcher that the log cash conversion cycle have no influence
towards the firm’s profitability.

(Pais & Gama, 2015) have done the study on the WCM and Small Medium-sized
profitability: Portuguese evidence to present the empirical evidence on the effects between
WCM and SMEs profitability. Instrumental variables and panel regression (fixed effects)
were used to analyze the data findings for the sample of 6,063 Portuguese SMEs firms,
covering the time period of 2002 until 2009. From this study, it implies that there is a
negative relationship between inventory in days, accounts payable in days, account
receivable in days and cash conversion cycle variable with profitability. The researcher
suggests that, a routine aggressiveness towards the WCM policies can increase the firm’s
profitability. Furthermore, the researcher argues that how important it is for a good practice
in WCM which was portray by the results based on the study conducted which also suggest
regarding the existence of an optimal level for the working capital components.

The impact of WCM on firm’s profitability was being studied by (Nasreen, 2014) to find
the impact towards Malaysia consumer product firms. The study was based on the sample of
50 companies listed on the Bursa Malaysia, which covered for the year of 2011 until 2015
with amounting a total observation of 250 firms per year. The result indicates that inventory
turnover ratio, collection period and working capital turnover ratio does not have any impact
towards the firm’s profitability. However, the cash conversion cycle implies that there is a

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significant positive impact towards the return on asset which shows that the quick conversion
of cash plays an important role on the profitability of the consumer product companies listed
on the Bursa Malaysia. Based on the findings the researcher urges for the people to make
further research with a broader approach by addressing other sectors and also different
countries to identify whether similar result can be found if the research is being broaden.

The research done by (Tauringana & Adjapong Afrifa, 2013) aims to provide information
regarding the results of investigation made whether is it relatively important that the WCM is
measured by CCC and its components which is inventory holding period, account receivable
in days and account payable in days towards the firm’s profitability. Panel data and also
questionnaire survey was employed by this study for further findings which the researcher
has utilized the financial data for the period of 2005 until 2009 and sample of 133 Alternative
Investment Market (AIM) listed SMEs. The questionnaire resulted was from 19 SMEs
respondent. Results obtained from panel data regression analysis portray that accounts
payable in days and account receivable in days are essential for the firm’s profitability.
Inventory holding period and CCC was found not to be essential towards firm’s profitability.
In other words, accounts payable in days are far more influential rather than account
receivable in days. The survey based on questionnaire have shown that the management of
CCC and its components which is account receivable, account payable and inventories is
important however, the for the firm’s profitability the management of account receivable is
far more important rather than account payable. Based on the findings, the researcher
suggests further investigation should be conducted regarding those two components which
are account payable and receivable whether those two components can influence SMEs
profitability.

(Abuzayed, 2012) examined on the effect of WCM on firm’s profitability where the
empirical results were based on the sample taken from firms listed on the small emerging
markets namely Amman Stock Exchange for the period of 200 to 2008. The goals of this
study are to find out whether the efficiency of WCM can improves a firm’s accounting
profitability and also firm’s value. The measurement used to find the results of WCM skills
are CCC as well as its components. This study also uses two performance measure which is
firstly the accounting measure and another one is the market measure. The researcher
strongly believe that shareholder’s main concern is towards the wealth maximization of the
firm’s. for an extensive result, the researcher uses more than one estimation technique which
is first, the panel data analysis, fixed and random effects and also generalized method
moments. Results found indicate that CCC has a positive relationship towards firm’s
profitability.

(Vahid, Elham, Mohsen, & Mohammadreza, 2012) has examined the relation between
WCM and firm’s performance which are listed on Tehran Stock Exchange (TSE). Average
collection period(ACP), inventory turnover(ITO) in days, accounts payable period(APP),
CCC and net trading cycle were used to study the effects of WCM and net operating
profitability. The findings are based on the 50 different companies during the time period of
2006 until 2009 by the usage of multi regression model. Followed by the findings, the results
imply that a negative and significant relationship appears between the variables of ACP, ITO
in days, APP, net trading cycle and the firm’s performance. Moreover, another result from

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the findings reveal that the increment in collection period, payment period and net trading
will appoint towards the reduction of profitability of the companies. The researcher
recommend that manager can increase the profitability of companies accordingly if they are
efficiently reducing the collection period, inventory turnover, and payment period.

The connection between WCM and profitability of Spanish SME by supervising for
unobservable heterogeneity and potential endogeneity that was examined by (Baños-
Caballero, García-Teruel, & Martínez-Solano, 2012) have outcome that working capital level
and firm profitability have non-monotonic connection in other words there is a negative
relationship between working capital level and profitability, which represent that SMEs have
an optimal working capital level that expand their profitability. In addition, a strengthen
check on the results have proven that the firm’s profitability decreases as the move away
from their optimal level. The results on this study have suggested that by lowering the firm’s
working capital levels a firm’s can increase their performance. Nevertheless, the findings
found by researcher neglect the risk of loss of sales and interruptions in the production stage
which are related with poor levels of working capital, which might also be found with a non-
linear relation.

(Juan García‐Teruel & Martínez‐Solano, 2007) have provided empirical evidence from the
study made on the impact of WCM on SME profitability from a sample of small and
medium-sized Spanish firms. 8,872 smalls to medium-sized enterprises (SMEs) covering the
period 1996-2002 of samples were collected by the researcher. From the sample collected,
the results indicate that there is a significant negative relationship between SMEs profitability
that shows by cutting of the inventories and the number of days for which their account are
outstanding managers can create value. However, the researcher argues that it cannot be
confirmed that the number of days for the account payable can affect the SMEs return on
assets. Furthermore, it is suggested by the researcher that the profitability of the firms can be
enhanced by lessening the cash conversion cycle.

Investigation of the past studies of trends in WCM and its impact on firm’s performance
which were done by (K. Padachi, 2006) have given an outcome from the regression that the
lower profitability of a firm is related to the high investment in investors and receivables. The
main variables which were employed in the studies were inventories days, account receivable
days, account payable days and cash conversion cycle. A robust significant connection
between WCM and profitability has been detected in previous empirical work. This study has
shown that the paper and printing industry have been able to achieve high scores on the
various components of working capital and this has positively affected its profitability.
Research that had been done have concluded that there is an extensive need for deeper
empirical studies to be initiated on small business financial management, in precise on their
working capital practices by expanding the sample size can help reveal the components that
explain the greater performance for some industries and how these best methods could be
continued to the other industries to be more an industry-wise analysis. Further studies will
aim at expanding the sample size for better and consistent panel estimates.

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 (Deloof, 2003) research had done the investigation on the connection between WCM and
firms’ profitability of the sample from 1,009 large Belgian non-financial corporations from
1992 until 1996. His outcome has shown that there is an insignificant negative relationship
between the accounts payable, inventories, accounts receivable towards the firm’s
profitability. Thus, from the 30-outcome gained from this research, it suggests that the
shareholders’ value can be improved by keeping up a required number of days accounts
receivable, inventories and accounts payable. Recognized that firm’s profitability is being
measured by gross operating income instead of return on assets as for firm that has mostly
financial assets on its balance sheet, the operating activities have less impact towards the
return on assets.

2.5 Development of the Hypotheses

Based on the research objective and research question in chapter 1, there are four hypotheses
developed to examine the impact of WCM on firm’s profitability particularly construction
sector in Malaysia for year 2016. The summary of the null and alternate hypotheses is as
shown below: -

Ho : There is no significant relationship between cash conversion cycle (CCC) and

Firms profitability.
Ha : There is a significant relationship between cash conversion cycle (CCC) and firm’s
profitability.

Ho : There is no significant relationship between number of days accounts payable

(APDAYS) and firm’s profitability.
Ha : There is a significant relationship between number of days accounts payable
(APDAYS) and firm’s profitability.

Ho : There is no significant relationship between number of day accounts receivable

(ARDAYS) and firm’s profitability.
Ha : There is a significant relationship between number of days accounts receivable
(ARDAYS) and firm’s profitability.

Ho : There is no significant relationship between number of days inventories

(INVDAYS) and firm’s profitability.
Ha : There is a significant relationship between number of days inventories
(ARDAYS) and firm’s profitability.

2.6 Summary of previous studies

In the past studies, according to (Deloof, 2003) there is a negative relationship between
WCM and firm’s profitability which suggest the lower the investment in working capital the
more profitable the company are. This can be supported by (Kesseven Padachi, 2006) (Altaf
& Shah, 2017; Baños-Caballero et al., 2012; Juan García‐Teruel & Martínez‐Solano, 2007;

14
Pais & Gama, 2015; S et al., 2017; Tran et al., 2017; Vahid et al., 2012). In placing more
emphasis, (Tauringana & Adjapong Afrifa, 2013) results have shown a slightly different as
compare to other studies where the accounts payable in days and account receivable in days
is positively related to firm’s profitability while the inventory in days and CCC is negatively
related to firm’s profitability.

However, these claims (Abuzayed, 2012) have found that the CCC is positively related to
the firm’s profitability, then further investigation made by (Nasreen, 2014) also support the
previous study which indicate the same results where CCC have positive impact towards the
firm’s profitability then followed by (Ng et al., 2017) who share similar results also found
that the CCC is positively related to the Gross Operating Income.

Most of the previous studies on working capital management have only focused on the
manufacturing sector (Ng et al., 2017; K. Padachi, 2006; S et al., 2017), SMEs (Abuzayed,
2012; Baños-Caballero et al., 2012; Juan García‐Teruel & Martínez‐Solano, 2007; Pais &
Gama, 2015; Tauringana & Adjapong Afrifa, 2013; Tran et al., 2017), consumer
product(Nasreen, 2014) firms in developed countries like Spanish, Portuguese, Jordan
Belgium and Tehran but less in Malaysia especially on the construction sector. Overall from
this review of literature, it is concluded that there is significant relationship between WCM
and firm’s profitability. But there is no research on WCM available specifically on
construction sector of Malaysia. Construction is an essential part of any country’s
infrastructure and industrial development (Kandpal, 2015). Construction sector can play a
major role in the future growth of economy of Malaysia. So, this sector requires considerable
attention. This study aims to fill this gap of non-availability of research work on construction
sector of listed companies in Malaysia

15
CHAPTER 3: DATA AND RESEARCH METHODOLOGY

3.0 Introduction
This chapter explains the methods and procedure that are employed on the data collected, the
theoretical framework, variables, data collection and methodology. Below is a theoretical
framework of our study (refer Figure 3.1).

3.1 Theoretical Framework

Cash Conversion Cycle (CCC)

Number of Days Accounts Payable

(APDAYS)
Gross Operating Profit
(GOP)
Number of Days Accounts Receivable
(ARDAYS)

Number of Days Inventories (INVDAYS)

Independent Variables Dependent Variable

Figure 3.1: Theoretical Framework

16
3.2 Research Design
The research design is based on secondary data collected from the Thompson Reuters
Datastream. A simple random sample of 46 firms is selected out of 115 firms listed on the Bursa
Malaysia for year 2016. The construction sector is the focus of the study as the growth of
construction sector in Malaysia is expected to be among the most rapid growth in the world from
2016 to 2020, with the help of the government’s planning to enhance the transportation network
and tourism infrastructure of the country as well as boost the volume of renewable projects
(Zarina Zakariah, 2017). The firms with inaccessible data were factored out from the study.
Random sampling is sort of a useful technique as it is easily understood and avoids sampling
error by giving each firm equal chance of being selected (Coakes & Steed, 2011).

3.3 Selection of Measures

In this study, there are two types of variables measured which are dependent variable and
independent variable.

3.3.1 Dependent Variable

In this study, firm’s profitability is dependent variable. Previous studies found that most
researchers had used GOI as proxy for firms’ profitability (Deloof, 2003; Gill & Biger, 2010;
Lazaridis & Tryfonidis, 2006). Moreover, to study cash conversion cycle and its component, it
is more relevant to use gross operating income as the measure for firm’s performance as it is
more related to the measurement of WCM (Baños-Caballero et al., 2012; Deloof, 2003b)(Baños-
Caballero et al., 2012; Ng et al., 2017). Therefore, the proxy for firm’s profitability refers to
gross operating profit. The computation of gross operating profit is as shown below:

Sales – Cost of Goods Sold

Gross Operating Profit (GOP) =
Total Assets

17
3.3.2 Independent Variables
The proxies for working capital management in this study are cash conversion cycle (CCC),
number of days accounts receivable (ARDAYS), number of days inventories (INVDAYS) and
number of days accounts payable (APDAYS) are proxies for WCM to examine the relationship
between independent variables and dependent variables to get the findings of this research
project. All of the variables are chosen as they have significant impact on the firm’s
performance.

Cash conversion cycle (CCC) is the key indicator for the firm’s WCM (Richard & Laughlin,
1980). CCC refers to (what). CCC has been found to have a negative significant relationship
with firm’s profitability. The firm’s profitability depends on the length of CCC. Decrease in the
length of CCC will increase the firm’s profitability (Lazaridis & Tryfonidis, 2006; Falope &
Ajilero, 2009; Singh, Kumar, & Colombage, 2017; Zariyawati, Annuar, Taufiq, & Rahim, 2009).
Therefore, in this study, cash conversion cycle is used to measure WCM. The computation of
cash conversion cycle is as shown below:

Cash Conversion Cycle = ARDAYS + INVDAYS - APDAYS

Falope and Ajilore (2009) defines number of days accounts receivable as the number of days for
a firm takes to collect payments from its clients, in order to manage its debtors by lessening the
time interval between sales and payment collection from clients (Falope & Ajilero, 2009). Past
studies reveal that there is a significant negative relationship between number of days accounts
receivable and firm’s profitability (Deloof, 2003; Dong, H.P. and Su, 2010; Gill & Biger, 2010;
Lazaridis & Tryfonidis, 2006; Falope & Ajilero, 2009). Therefore, in this study, the number of
days accounts receivable is used to measure WCM. The computation of number of days accounts
receivable is as shown below:

Accounts Receivables
ARDAYS = X 365 days
Sales

18
Number of days accounts payable (APDAYS) is also recognized as average period of payment.
It indicates how long a firm takes to pay its debtors. Past literature reviews suggested that
number of days accounts payable have significant negative impact on firm’s profitability
(Deloof, 2003; Falope & Ajilero, 2009; Tran, Abbott, & Jin Yap, 2017). Meanwhile, there are
also past studies found that the number of days accounts payable has a significant positive
association with firm’s profitability (Dong and Su, 2010). Therefore, in this study, the number of
days accounts payable is used to measure WCM. The computation of number of days accounts
payable is as shown below:

Accounts Payable
APDAYS = X 365 days
Cost of Goods Sold

Based on the findings from previous studies, there is a significant negative relationship revealed
between number of days inventories and firm’s profitability which indicates a decrease in
number of days inventories will improve firm’s profitability (Deloof, 2003; Dong, H.P. and Su,
2010; Falope & Ajilore, 2009). Nonetheless, there are also studies found that there is a
significant relationship between number of days inventories and firm’s profitability (Capkun,
Hameri, & Weiss, 2009). Therefore, the number of days inventories is used in this study to
measure WCM. The computation of number of days inventories is as shown below:

Inventories
INVDAYS = X 365 days
Cost of Goods Sold

19
3.3.3 Measurements of Variables

Table 3.3.3 shows the measurement of independent variables and dependent variable.

Variable Measurement Citation

Dependent Variable

Sales – Costs of Goods Sold 1. (Baños-Caballero et al.,2012

Gross Operating Profit
Total Assets 2. (Deloof, 2003)
3. (Ng et al., 2017)
Independent Variables

1. (Deloof, 2003)
Number of days accounts payable +
2. (Kandpal, 2015)
Cash Conversion Cycle Number of days accounts inventories –
3. (Kasiran, Mohamad, & Chin,
Number of days receivable
2016)
4. (Tran et al., 2017)

1. (Juan García‐Teruel &

Number of Days Accounts Payable Martínez‐Solano, 2007)
X 365 days
Accounts Payable Cost of Goods Sold 2. (Gul et al., 2013)
3. (Pais & Gama, 2015)
4. (Altaf & Shah, 2017)

1. (Gul et al., 2013)

Number of Days Accounts Receivable X 365 days 2. (Nasreen, 2014)
Accounts Receivable Sales
3. (Nazir & Afza, 2015)
4. (Tran et al., 2017)

1. (K. Padachi, 2006)

2. (Hong Yuh Ching et al., 2011)
Number of Days Inventory
X 365 days 3. (Pais & Gama, 2015)
Inventories Cost of Goods Sold
4. (Tran et al., 2017)
5. (Tran, Abbott, & Jin Yap,
2017)

Table 3.3.3: Measurements of Variables

20
3.4 Sampling Technique
A simple random sample of 46 firms is selected out of 115 firms listed under construction
sector on the Bursa Malaysia for year 2016. The companies with missing or inaccessible data
are eliminated from the sample of study. Simple random sampling technique has been
applied as it is easily understood and it avoids sampling error by giving each firm equal
chance of being selected (Coakes & Steed, 2011).

3.5 Type of Data Collection

In this study, the type of data collection used is secondary data. Secondary data refers to the
existing data that can be accessed by the public. The data has been collected from the
secondary data source which is Thompson Reuters Datastream. The datastream is subscribed
by the Universiti Teknologi MARA. The datastream software can be easily downloaded from
Universiti Teknologi Mara library website.

3.6 Type of Data Analysis

The type of data analysis employed is cross-sectional data. Cross-sectional data is a research
tool used to obtain information based on data gathered for a specific period of study (Rivers,
2017). We used a sample of 46 firms listed under construction sector in Malaysia for one
specific year 2016. This is because cross-sectional data enables us to prove and disprove
assumptions, cost-saving to perform and time-saving (Rivers, 2017).

3.4 Type of Research Method

This study is being conducted by using exploratory research method. Exploratory research
method is performed to clarify uncertain problems. It is carried out hoping that subsequent
research will probably be needed to provide conclusive evidence. Through exploratory
research, we wish to generate hypotheses about what is going on in a situation. A hypothesis
is a statement that explains how several variables are related. As for this study, we are able
develop the hypothesis of is there any significant relationship between cash conversion cycle
(CCC), number of days accounts receivable (ARDAYS), number of days inventories
(INVDAYS) and number of days accounts payable (APDAYS) with firm’s profitability.
21
3.7 Research Strategy
A research strategy is a general plan for conducting a study. As for our
research study, we use experiments strategy. The motive of this strategy is to verify the existence
of a cause-and-effect relationship between two variables. It is also determined to display or
conceal a causal relationship between a factor and an observe outcome. To accomplish this
finding, an experiment exploits one variable while a second variable is measured and other
variables are controlled. There are several cause-and-effect relationships found in our research
study. For example, the relationship between cash conversion cycle (CCC), number of days
accounts receivable (ARDAYS), number of days inventories (INVDAYS) and number of days
accounts payable (APDAYS) with firm’s profitability.

22
CHAPTER 4: FINDINGS AND ANALYSIS

4.0 Introduction
Outcome gain from the cross-sectional regression analysis is being discussed in this particular
chapter. The analysis regarding the outcomes begins with the descriptive analysis, correlation
analysis and lastly the regression analysis regarding the construction sector in Malaysia. A
description of the outcomes with contrast on the findings collected from past researcher are also
being conveyed.
Cross sectional data are carried out in this study, which similar variables are observed from
similar cross-sectional sample from various duration of time (Studenmund, 2014). Coefficients
of econometric models with a technique called Ordinary Least Squares (OLS) estimation are the
main ingredient of regression analysis which are gathered and estimated from the regression
coefficients from a set of data (Studenmund, 2014)
A sample of 41 companies are the main data being used to carried out this research. The data
gathered are the listed companies in the main market of Bursa Malaysia in the year of 2016,
which constitute the sector of construction. Analysis of the sample collected from firms under
construction sector are being investigate by employing E Views version 9.0 package of
statistical.
Afterwards, in order to test the hypotheses made before in the chapter 3, an investigation is
carried out to know whether the WCM components have an effect or not towards the firm’s
profitability and to also know the differences of the WCM mean towards the firm’s profitability
in the construction sector.

4.1 Descriptive Analysis

Below is the summary of the descriptive analysis which consist of mean, median, maximum and
minimum for the dependent and independent variables in Table 4.1.1 below, which representing
statistics of descriptive for 46 firms under construction sector in Malaysia for the year of 2016.

Table 4.1.1: Summary of Descriptive Analysis for construction Sector

Mean Median Maximum Minimum

GOP 0.134601 0.116827 0.320207 0.031859
INVDAYS 178.4348 93.00000 1445.000 0.000000
ARDAYS 197.3696 119.0000 752.0000 39.00000
APDAYS 125.8043 103.5000 444.0000 12.00000
CCC 250.0217 167.5000 1637.000 -47.00000
Observations 46 46 46 46

23
Based on the outcome of table 4.1.1, the mean profit of the listed firms as indicated by GOP is
13.46% from total average of 35.21%. The minimum value for GOP is reported as positive of
3.19% with highest profitability reported as 32.02%. from results shown, it is undeniably that
firm performance in terms expressed in the GOP for the construction firms was stable with firms
gaining profit as high as 32.02% on their operating profit and as low as 3.19% shows that the
construction firms are still in manageable form and all the listed construction firms are not in
position where their operating profit is in negative which shows a good sign of profit but still
have to improve as the lowest GOP is 3.19%.
For WCM components, noted that INVDAYS has the mean value of 178 days. It is also ranged
from as high as 1,445 days and as low as 0 days. The result of minimum for INVDAYS shows
that there are firms are able to quickly manage its inventories and turns it into cash while there
are also certain firms that are unable to efficiently convert their inventories into cash to generate
more sales which resulted as an indicator for the firm performance due to the maximum results
shown in the descriptive model.
ARDAYS results have portray an average of 197 days and the maximum of firms ARDAYS are
752 days while the minimum were 39 days. The outcome means that it took an average of around
4 months for the construction firms to collect payments from their customers. Construction firms
need to efficiently manage its credit and collection efforts at a timely manner as the maximum
results of descriptive models shows as high as 752 days for the firms to get its money back from
its customers. This will be resulted in lower profitability, as the firms will have problems in the
cash flow due to the outstanding amount from customers account receivable that makes the firm
taking longer to collect the money back to generate more sales.
The descriptive analysis on the APDAYS found that it is rank as low as 12 days and as high as
1,637 days with a mean of 128 days. Thus, the construction firms take on average of around 4
months for the payments made by the firms on credit terms. This means that the account payable
is indicating a good result as the maximum results shows a longer day for the firms to pay back
its creditors, suppliers or vendors which indicating that there will be a cash inflow for the firms
and automatically increase the working capital.
From the descriptive model, it is also found that CCC is rank from -47 days as the minimum and
a maximum of 1,637 days with an average mean of 250 days. This indicate that, the construction
firms will take 250 days in average to hold the cash gain from sales made in order to pay for the
purchases made from the firms to the suppliers, vendors or creditors. In other words, the
construction firm’s sales can be transform into hard cash 250 days before sales is made. Thus,
the results shown the company is taking a longer time to collect cash from sales of inventory
which resulting the firms to slower generate cash back to gain profit. However, the minimum
indicates a negative CCC which basically means that some of the construction firms are being
paid by its customers way long before there are being paid by their suppliers.

24
4.1.2 Correlation Analysis
Analysis of correlation is carried out in order to know the relationship regarding the independent
variable and also dependent variable as at the WCM components towards the firm’s profitability
which are measured by the GOP. Moreover, if there is any multicollinearity issue happen, it can
be discover through the correlation analysis (Olufemi I. Falope & Ajilore, 2009). If there is a
high (not perfect) correlation appear between two or more independent variables it indicates that
there is a multicollinearity issue (Wooldridge, 2002). The detailed results of Pearson’s
correlation matrix for firms under construction sector for the year of 2016 is being summarized
in Table 4.1.2.

Table 4.1.2: Correlation Analysis of Construction Sector

GOP INVDAYS ARDAYS APDAYS CCC
GOP 1.000000
-----
INVDAYS -0.393604 1.000000
0.0068 -----
ARDAYS -0.437504 0.363054 1.000000
0.0024 0.0131 -----
APDAYS -0.384019 0.1133792 0.581095 1.000000
0.0084 0.4515 0.0000 -----
CCC -0.407089 0.922904 0.607004 0.071398 1.000000
0.0050 0.0000 0.0000 0.6373 -----

Based on Table 4.1.2, results shown that between ARDAYS and INVDAYS they are
significantly correlated. This is because the P-value between ARDAYS and INVDAYS are at the
level of P<0.01. The coefficient of ARDAYS against the INVDAYS is far from positive one
which indicates that between ARDAYS and INVDAYS there are no multicollinearity issue.
Between APDAYS and INVDAYS the results can be concluded that they are insignificantly
correlated due to the P-value falls above the level of P<0.10. However, there is a significantly
correlated between APDAYS and ARDAYS where the P-value is on the level of P<0.01. it also
indicates that between APDAYS and ARDAYS have no multicollinearity issue as the coefficient
value is far from positive 1.
The outcome between CCC and INVDAYS shows that they are significantly correlated because
the P-value is in the level of P<0.01. However, the coefficient value shows that it is close to
positive one. Hence, between CCC and INVDAYS there is multicollinearity issue occur between
them due to the coefficient value close to positive one. Furthermore, the correlation between
CCC and ARDAYS, it shows that they are significantly correlated but the coefficient value is far
from positive one which escalate that they are no multicollinearity issue between CCC and
APDAYS. Same goes to the results on the correlation model between CCC and APDAYS, which
they have no multicollinearity issue as the coefficient value is far from positive one however,
between CCC and APDAYS they are not significant due to the P-value falls above P<0.10.

25
Thus, cross sectional data regression models have been developed to investigate on the effects of
WCM components (ARD, INV, AP, CCC) in construction sector, which analysis have been
conducted towards the firms’ GOP as dependent variable.

4.1.3 Testing of Hypotheses

Based on the four hypotheses and one cross-sectional regression models developed earlier in
Chapter 2, the hypotheses are tested by examining on the effect of WCM components such as
INVDAYS, ARDAYS, APDAYS, and CCC on profitability of the firms.

4.1.4 The Effect of Working Capital Management (WCM) components on Profitability of

firms in Constructions sector

The results of the effect of WCM components on profitability of firms in the services sector are
reflected as per Eview output as per Appendix 3, while the summary of the cross-sectional data
regression analysis is presented under Table 4.1.4.

Table 4.1.4: Cross-Sectional Regression Analysis of Constructions sector

cross-sectional model of regression analysis is being used for further findings on this research in
order to analyze the relationship between the WCM and firm’s profitability. E views 9 software
were being used in order to run the data gained from data stream of the cross-sectional data for
the sample size of 46 listed firms from construction sector for the year of 2016. Below presented
the regression analysis result regarding the profitability of firm which is being measured by gross
operating profit is regressed against the inventory in days (INVDAYS), account receivables in
days (ARDAYS), account payable in days (APDAYS) and cash conversion cycle (CCC).

Dependent Variable: GOP

Method: Least Squares
Sample: 1 46
Included observations: 46

Variable Coefficient Prob.

INVDAYS 0.011091 0.5989
ARDAYS 0.011093 0.5988
APDAYS -0.011385 0.5893
CCC -0.011188 0.5957
C 0.195829 0.0000
Prob(F-statistic) 0.005141

4.1.4 Table of Least Square

26
The statistical equation that shows relationship of the Independent variable towards the
dependent variables are shown below:

GOP= 0.11091INVDAYS + 0.011093ARDAYS – 0.011385APDAYS – 0.011188CCC

The probability of F-statistic is 0.005141, indicates that the independent variable is significant at
level P<0.01. It indicates that the model can be accepted. This study rejects H0 which suggest
that there is a significant relationship between independent variable which are inventory in days,
account receivable in days, account payable in days and cash conversion cycle towards the
dependent variable which is gross operating profit. Based on the result presented below, it shows
that the coefficient determination, Adjusted R-square is approximately. 22.86% (0.228616). This
shows that the Adjusted R-square of 22.86% of Independent variable can explain the dependent
variable. Remaining 77.14% can be explained by another independent variable.

Based on regression analysis that analyze on the effect of inventory in days (INVDAYS) towards
the firms’ gross operating profit (GOP), it is revealed that inventory in days (INVDAYS) has a
positive relationship with GOP, but the relationship is not significant as, the p-value for
inventory in days is 0.5989 indicates that inventory in days is not significant at level p<0.10.
This indicates that an increase of the number of days inventories (INV) by a day has increases
the GOP of the firms by 0.011091%, but the result is not significant. The result obtained is found
to be contrary with previous literature review, which mostly revealed a negative relationship
between inventory in days and gross operating profit(Juan García‐Teruel & Martínez‐Solano,
2007; Pais & Gama, 2015; Tauringana & Adjapong Afrifa, 2013; Tran et al., 2017). However,
the result found is consistent with the study conducted by (Aguenaou, Farooq, Abrache, &
Brahimi, 2015; Deloof, 2003b; Makori & Jagongo, 2013) which revealed an insignificant
positive relationship between inventory performance measured by both total inventory and its
components, which refer to raw material, work-in-process and finished goods; and financial
performance of firms in manufacturing sector that is measured by gross profit and earnings
before interests and taxes (EBIT).

Based on the hypotheses developed to examine on the effect of INVDAYS on GOP: -

H10: There is no significant relationship between Number of days Inventories (INVDAYS) and
the firm’s profitability.

H1a: There is a significant relationship between Number of days Inventories (INVDAYS) and
the firm’s profitability.

Therefore, based on the result obtained in regression analysis above, the null hypothesis of H1o
is failed to be rejected which suggest that there is no significant relationship between inventory
in days and gross operating profit in view that the positive relation between INVDAYS and GOP
of the firms in construction sector is not significant during the year of 2016. The insignificant
result indicates that, even though the construction firm can increase their profitability by
managing to hold an optimal level of inventories however, it is not a crucial factor in considering
as an important decision in order to measure a firm’s profitability in construction sector.

27
Based on the analysis from the table above that analyze on the effect of account receivable in
days (ARDAYS) towards the firms’ gross operating profit (GOP), it is disclosed that between
ARDAYS and GOP there is a positive relationship, but unfortunately, they have an insignificant
relationship, as the p-value for ARDAYS is 0.5988 indicates that ARDAYS is insignificant at
level p<0.10. This indicates that an increase of the account receivable (ARDAYS) by a day has
increases the GOP of the firms by 0.011093%, but the result is not significant. The result
obtained is found to be contrary with previous literature review, which mostly revealed a
negative relationship between ARDAYS and gross operating profit (Deloof, 2003b; Juan García‐
Teruel & Martínez‐Solano, 2007; Kesseven Padachi, 2006; Pais & Gama, 2015; Tauringana &
Adjapong Afrifa, 2013; Tran et al., 2017) but consistent with studies made by (Mehta, 2014;
Nyamweno & Olweny, 2014; Sharma & Kumar, 2010).

Based on the hypotheses developed to examine on the effect of ARDAYS on GOP: -

H20: There is no significant relationship between Number of days Accounts Receivable

(ARDAYS) and the firm’s profitability.

H2a: There is a significant relationship between Number of days Accounts Receivable

(ARDAYS) and the firm’s profitability.

Thus, based on the outcome gained from regression analysis above, the null hypothesis of H2o is
failed to be rejected which suggest that there is an insignificant relationship between ARDAYS
and GOP in concept that the positive relation between ARDAYS and GOP of the firms in
construction sector is insignificant during the year of 2016. This imply that, even though short
number of ARDAYS is excellent in describing the financial performance of listed construction
firms in Malaysia, however it is not a crucial component in considering of making any decision
to improve the construction firm’s profitability.

In Table 4.2.4 of the regression analysis, APDAYS reported an insignificant negative

relationship with GOP, which implies that GOP has increased by -0.011385% by shortening a
day of the accounts payable (AP). Although the result obtained contradicts with some of the
earlier studies that revealed a negative relation but significant between APDAYS and
profitability (Abuzayed, 2012; Deloof, 2003b; Pais & Gama, 2015), however, the result is
supported by study conducted by (Nyamweno & Olweny, 2014) who had found an insignificant
negative association between APDAYS and profitability.

Based on the hypotheses developed to examine on the effect of APDAYS on GOP: -

H3o: There is no significant relationship between Number of days Accounts Payable (APDAYS)
and the firm’s profitability.

H3a: There is a significant relationship between Number of days Accounts Payable (APDAYS)
and the firm’s profitability.

28
Thus, based on the result obtained in regression analysis above, the null hypothesis of H3o is
accepted due to the relationship is not significant between APDAYS and GOP of the firms under
construction sector. This advocate that although the longer the number of APDAYS is preferable
as an indicator in explaining the financial performance of listed firms in the Malaysian
construction sector, it is not the main factor in considering to make a decision in improving the
firm’s profitability.

Based on the findings from regression analysis, CCC reported a negative relationship with GOP,
which indicates that there is a decrease in GOP by 0.011188% by lengthening the cash
conversion cycle (CCC). However, the relationship is found as not significant, which the
findings obtained is consistent with the results derived by (Deloof, 2003b; Mehta, 2014), who
had found an insignificant negative relationship between CCC and profitability under regression
analysis model, in view that profitability decreases as a result of an increase in the number of
days accounts receivable, inventories as well as number of days accounts payable that have
negative relationship with profitability.

Based on the hypotheses developed to examine on the effect of CCC on GOP: -

H4o: There is no significant relationship between Cash Conversion Cycle (CCC) and the firm’s
profitability.

H4a: There is a significant relationship between Cash Conversion Cycle (CCC) and the firm’s
profitability.

Thus, based on the outcome gained in table of regression analysis above, the H4o which are the
null hypotheses is accepted which is proven that there is an insignificant connection between the
WCM component which is the CCC and the firm’s profitability which are measured by the GOP
of the construction firms during the year of 2016. The insignificant result between CCC and
GOP suggest that although by correctly handling the firm’s CCC can show that firms can
improve profitability nevertheless, it is not a crucial mechanism in contemplate when making a
decision to enhance a firm’s profitability.

29
CHAPTER 5: CONCLUSION AND RECOMMENDATIONS

5.1 Conclusion

In conclusion, working capital management is important in measuring a firm’s profitability.

However, based on our observation on this paper which is in construction sector on firms listed
in Bursa Malaysia, the long term financial strategies are the main factor to be consider in
measuring a firm’s profitability especially in the construction sector in Malaysia instead of
considering the short term ones which is the original factor for the working capital management
as the working capital management is financing of the short term asset and liabilities for
upcoming operational activities which can give the firm profit. Hence, the insignificant
connection in between the working capital management towards firm’s profitability in
construction sector on firms listed on Bursa Malaysia. In other words, in measuring the WCM
components towards the firm’s profitability especially the construction sector it is vital to use
other measurement of WCM components such as the ratios for example like current ratio, quick
ratio or the turnover ratio in order to obtain a more accurate result in investigating the
relationship between WCM and the firm’s profitability.

5.2 Recommendations
The future researchers shall consider the recommendations as shown below: -

i. Future researchers may employ different types of data analysis such as panel data for
comprehensive analysis.
ii. Future researchers may extend the span of study by more than one year for thorough
analysis.
iii. Future researchers may expand the scope of study by including firms from all sectors
listed on the Bursa Malaysia.
iv. Future researchers may enhance the measurement of firms’ profitability by taking other
potential proxies into account such as return on investment or return on equity.

30
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APPENDICES

Appendix 1: Eviews Descriptive Analysis of Construction Sector

GOP INVDAYS ARDAYS APDAYS CCC

Mean 0.134601 178.4348 197.3696 125.8043 250.0217
Median 0.116827 93.00000 119.0000 103.5000 167.5000
Maximum 0.320207 1445.000 752.0000 444.0000 1637.000
Minimum 0.031859 0.000000 39.00000 12.00000 -47.00000
Std. Dev. 0.078812 241.3579 157.9176 96.95259 311.6746
Skewness 0.876936 3.443814 1.676610 1.116071 2.763897
Kurtosis 2.898303 17.71939 5.696770 4.054591 11.48802

Jarque-Bera 5.915612 506.1912 35.49026 11.68136 196.6556

Probability 0.051933 0.000000 0.000000 0.002907 0.000000

Observations 46 46 46 46 46

Appendix 2: Eviews Correlation Analysis of Construction Sector

Covariance Analysis: Ordinary

Date: 12/14/17 Time: 17:20
Sample: 1 46
Included observations: 46

Correlation
Probability GOP CCC APDAYS ARDAYS INVDAYS
GOP 1.000000
-----

CCC -0.393604 1.000000

0.0068 -----

APDAYS -0.437504 0.363054 1.000000

0.0024 0.0131 -----

ARDAYS -0.384019 0.1133792 0.581095 1.000000

0.0084 0.4515 0.0000 -----

INVDAYS -0.407089 0.922904 0.607004 0.071398 1.000000

0.0050 0.0000 0.0000 0.6373 -----

36
Appendix 3: Eviews Regression Analysis of Construction Sector

Dependent Variable: GOP

Method: Least Squares
Date: 12/14/17 Time: 17:19
Sample: 1 46
Included observations: 46

Variable Coefficient Std. Error t-Statistic Prob.

INVDAYS 0.011091 0.020919 0.530166 0.5989

ARDAYS 0.011093 0.020920 0.530261 0.5988
APDAYS -0.011385 0.020925 -0.544103 0.5893
CCC -0.011188 0.020920 -0.534807 0.5957
C 0.195829 0.018479 10.59741 0.0000

R-squared 0.297183 Mean dependent var 0.134601

Adjusted R-squared 0.228616 S.D. dependent var 0.078812
S.E. of regression 0.069219 Akaike info criterion -2.400760
Sum squared resid 0.196442 Schwarz criterion -2.201994
Log likelihood 60.21747 Hannan-Quinn criter. -2.326301
F-statistic 4.334175 Durbin-Watson stat 1.954008
Prob(F-statistic) 0.005141

37