Determining the optimal working capital to enhance firms' profitability

Seeking the optimal level of cement firms' working capital in Pakistan, this study examines the impact of working capital on their operating profit. By employing panel least squares estimation, panel fixed effect and panel generalized method of movement, the research finds a significant curvilinear relation between working capital and profitability. Further, it confirms that a positive working capital yields negative profitability, while a negative working capital affects profitability positively. In each method, the optimal level of working capital is derived as the partial derivative of the Working Capital Rate (WCR), with respect to sales. The research also investigates cement firms' cash level, an important contributor to working capital management efficiency.