The determinants of Working Capital

Requirements of chemical industry of Bangladesh

Course name:
Submitted by: Business Research Method
The Analysts
Course title:
Solaiman BUS485
Shuborno - 1711102
Section:06
Anjan Kumar Basak -1711140
Submitted Rafi
Mohammad to: Dr. Samiul Parvez Ahmed
– 1721395
Submission
Zareen Haider date: 23rd August 2021
- 1830675
Tayeb Haider - 1711146

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Contents

Letter of Transmittal....................................................................................................................................4
Acknowledgement.......................................................................................................................................5
Introduction.................................................................................................................................................6
Problem Statement......................................................................................................................................7
Literature Review........................................................................................................................................8
Financial Leverage & Working Capital...................................................................................................8
Profitability & Working Capital..............................................................................................................10
Size & Working Capital........................................................................................................................11
Growth Opportunity & Working Capital...............................................................................................14
Age & Working Capital.........................................................................................................................16
METHODOLOGY.........................................................................................................................................19
RESEARCH APPROACH/ DESIGN.............................................................................................................19
OBJECTIVES OF THE RESEARCH..............................................................................................................20
CONCEPTUAL FRAMEWORK..................................................................................................................21
Equation Analysis...............................................................................................................................21
Dependent Variable...........................................................................................................................22
Independent Variables......................................................................................................................22
Hypothesis.............................................................................................................................................23
Sampling or Data Source.......................................................................................................................24
DATA ANALYSIS......................................................................................................................................24
Descriptive Analysis...............................................................................................................................25
Correlation Analysis...............................................................................................................................26
Regression Analysis...............................................................................................................................28
Equation Analysis...................................................................................................................................28
Coefficient Analysis................................................................................................................................29
Hypothesis Testing................................................................................................................................29
Predicting significance level (α) is 5% i.e., 0.05......................................................................................30
Common Variance Analysis...................................................................................................................30
Good Fit model Analysis........................................................................................................................31

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Findings and Analysis.................................................................................................................................31
Discussion and Recommendation..............................................................................................................32
Conclusion.................................................................................................................................................32
Reference..................................................................................................................................................33

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Letter of Transmittal

23rd August 2021

Dr. Samiul Parvez Ahmed

Associate Professor
Department of Finance
School of Business
Independent University, Bangladesh

Subject: Submission of report on “The determinants of Working Capital Requirements of

chemical industry of Bangladesh”.

Dear Sir,

With due respect, it is our pleasure and honor of being your student and giving us this
opportunity to conduct this research on determinants of Working Capital requirements of
chemical industry. We ensure you our best effort and complete sincerity while preparing the
report, keeping account of the things we learned during the lectures as well as the requirements
you are looking for. We thank you for your continued support during the course and in
constructing the report. However, we believe that the shortcomings might not be completely
unavoidable as we are still learning in the field of finance.

Thank You for your Patience.

Yours Sincerely,

The Analyst.

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Acknowledgement

We would extend our sincere gratitude to our faculty Dr. Samiul Parvez Ahmed, Associate
Professor, Department of Finance, School of Business & Entrepreneurship, Independent
University, Bangladesh, for allowing us to do this research and for providing us invaluable
guidance throughout this research. His teachings made us learn the methods of carrying out the
research and the way of presenting the research in the best way possible. We are privileged and
thankful to him for his enthusiasm, knowledge, and motivation.

Lastly, we are thankful to our very own team members for their insights, opinions, ideas, and
dedication towards the completion of this research.

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Introduction

The chemical industry contains various companies that manufacture chemicals. Understanding
that, the chemical industry is massive, using natural resources into approximately 70,000
products for use. There are various types of chemical industry, such as industrial inorganic
chemicals, plastics etc.

Furthermore, Chemicals have been manufactured for ages and beginning of the growth of
chemical industry started from the industrial revolution which became famous from the 19th
century. Efficient transportation system and connections for raw materials across various
countries enabled United Kingdom to trade raw materials throughout the globe and the early
growth of a modern industry made United Kingdom famous in the industry for approximately
three-quarters of the 19th century followed by Germany taking over industry dominance and
from World War I, Germany operated as an independent country in the chemical industry to
produce organic dyes. Since that period economically developed countries established various
prime producers of chemicals such as USA, Japan, Germany, France, United Kingdom, and
Italy. In the 1990s, huge growth of the chemical industry started in developing countries, like
South Korea, Taiwan, and the Middle East. In 1984, an industrial crisis happened when
poisonous chemicals were leaked from a chemical plant in Bhopal, India. The crisis led to a total
chaos which made the public concerned about poor environmental protection for chemical
companies in various developing economies. This crisis led to making new strict policies for
environment protection from chemical pollution.

As modern changes were made by 21st century, the chemical industry grew large containing
large to small chemical firms worldwide. Due to this more jobs were created, and employment
rate gradually increased in the chemical industry in various departments and chemists, engineers,
and technicians grew more. During the period the evolution of chemical industry produced
majority of the world's $3.7 trillion chemical output by various industrialized nations.

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Currently, the chemical industry in the country heavily depends on importing. During the fiscal
year 2017-18, the import of chemicals crossed over $2.0 billion, according to analysis done by
the central bank. The data indicates import of chemicals amounted to $1.26 billion during the
first half of 2018-19 indicating 10.66 percent growth compared to the previous year. In 2018-19
ministry of agriculture planned to import 1.75 million from abroad. The feedstock, preservatives,
pesticide industry mostly depend on imports.

It is unwise to depend on foreign products on an emergency basis because sometimes the import
may be supported by conditions. Furthermore, the ingredients in the animal and fish feeds are
injurious to health, leading to a milk ban crisis.

On the other hand, the chemical sectors are growing abroad. Moreover, they sometimes reduce
their equity, which is fatal for our market holding. Compared to foreign countries Bangladesh
middle-class families are increasing and may become a big market for the country regarding the
chemical industry. At the same time, many places are growing through industrialization too.
Large quantities of industries can also be a good market for chemical industries in the country.
These may grow the GDP and make the government rich. Hence further research must be
conducted to improve exports of chemical products to compete with the chemical industry
abroad.

Problem Statement

In the above introduction, the main problem regarding the industry has been stated. Our research
has been developed to find the main cause of the problem and help build a hypothesis. We have
used various research models in identifying the problem.

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Literature Review

Financial Leverage & Working Capital

There are two kinds of leverage in Finance, Operating Leverage and Financial Leverage.
Financial Leverage demonstrates the use of debt to purchase assets with the expectation to earn
returns from the use of the asset and that the return from the asset will exceed the cost incurred
from borrowing. When a firm purchase an asset, they are most likely to use either equity, debt or
lease out. In case of leasing out and debt purchase, there will always be an amount of fixed cost
associated with it. Only when equity is being used, there are no fixed cost involved. Financial
leverage deals with the debt of the company and debt to equity ratio is most widely used to
determine the financial leverage of the company. Other commonly used ratios are debt to
EBITDA ratio and interest coverage ratio. Although financial leverage has its own benefits,
there are certain consequences associated with it. A higher financial leverage can lead to a higher
risk of bankruptcy. A company in an unstable environment can find the cost of debt
overwhelming and might not be able to meet its debt obligation with high operating overheads.
Moreover, a higher financial leverage implies that the company will be in dilemma when looking
for more debt in the future and therefore funding future projects will be more difficult for firms
with a higher financial leverage. However, an opposing theory could be a firm with a steady
future prospect can still attract debt to finance their future projects, as lenders can charge high
interest rates to a firm with more leverage.

Working capital is what firms use to run their day-to-day obligations. It is the difference between
the current asset and the current liabilities. A few components of the working capital are the
cash operating cycle, accounts receivable and inventory.

Baidoo et al. (2020) stated that there is a very strong relationship between financial leverage and
working capital management. According to the author efficient usage of working capital is
strongly related to the efficient usage of debt instruments. Mismanagement of debt directly
hampers the working capital efficiency of the firm. This article examines that there is a
significant negative relationship between financial leverage and working capital. This study is

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based on the nonfinancial listed firms of the Ghana and Nigerian stock exchange. An increase in
leverage is most likely to reduce efficiency of the working capital management in both the
scenarios. The result of the study shows that there is a S-curve relationship between financial
leverage and working capital. The findings in this study can be used in both domestic and
international aspects. There were three different variables used in this study, dependent variable
(Working capital), independent variable (like debt to equity, total debt, international
involvement, and payout ratio), and control variable like (firm size and inflation rate). However,
both the countries used in this study were in a similar economical state and therefore a more
credible research will be if these studies were conducted on countries with different economic
condition to justify the findings in a more practical way.

In another Journal, Hilal (2016) stated that there is strong evidence to support the theory that the
cash conversion cycle, one of the most important determinants of working capital, is crucial to
measure a firms liquidity position. All the variables used in his study shows that working capital
is highly dependent on the financial leverage and all the variables used shows a positive relation.
On the other hand, he has based his research on four different firms and for each case he has
received a positive feedback. Moreover, the cases have proven to be the same for different
organizations in different countries with different political and business environment.

Sangi et al. (2015) In his journal stated many hypotheses among which the first one was that
there is no solid relationship between the financial leverage and working capital management has
no significant relationship. They have clearly proven through their research that no matter how
much debt is taken it is very less likely to affect working capital management. However, in the
second hypotheses the results are completely different from the first hypothesis. In the second
hypotheses it clearly shows that there is a strong positive relationship between working capital
and financial leverage.

Khalfan et al. (2020) stated in his journal that internal cashflow of the firm, which is directly
related to the working capital has an inverse relationship with debt and financial leverage. This
study is based on the time of where the economy was going through distress and firms were also
in financial distress. Moreover, during financial and economic distress, banks lack loanable
funds, and the equity market is also at its lowest. Internally generated funds tend to have a
stronger impact on leverage during non-crisis years.

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Goel et al. (2015) stated in his article that there is a significant relation between operating
liquidity and financial leverage. The study reflects that there the more the debt a firm holds the
more liquid assets and long-term source of fund it has so that it can finance its current operations.

Profitability & Working Capital

A firm’s primary goal is to maximize its profits and to do so, taking correct decisions to enhance
profitability would be their first step. The decisions would take assets and liabilities into account
and how they are being managed, which in other words mean how the working capital is
handled. Working Capital Management (WCM) means how easily the current assets can be
changed from one type to another in operating day to day functions. Changes in assets and
liabilities can significantly affect the WCM and in result can affect the profitability of the firm.
The following report will be providing the relationship of profitability and working capital
management and its effect on the firm.

In most of the cases, the impact of profitability on WCM is positive. Rimsha Khalid et al. (2018)
carried out a research on this subject in the electronic equipment sector of KSE listed companies
in Pakistan by taking variables such as inventory turnover, current ratios, debt to equity ratios
and operating cash flow to debt ratio. The correlations and coefficients of these variables were
calculated and analyzed, and it was proven that the profitability had a positive relationship with
the working capital management.

Abdul Reheman et al. (2007) also carried out a research on Pakistan to see the relationships of
these two variables where they took the date of 6 years (1999 to 2004). Their key objective was
to find out the net operating profit and the average collection period of these years and see if
there is any connection between them. Correlations were analyzed, followed by a quantitative
and descriptive analysis. Furthermore, the regression model investigated that the changes in
assets would be high if there were significant changes in profitability. The research paper
concluded that although there is a positive relation between profitability and WCM, there is a
negative relationship of average collection period and liquidity with profitability in case of
Pakistani Firms.

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Ntui Ponsian et al. (2014) carried out a similar research on the firms listed on Dar es Salaam
Stock Exchange. Quantitative analysis included the analysis of the correlations while regression
analysis determined the effect of profitability on WCM. They concluded, that if assets and
liabilities are properly managed, profitability eventually increases and so does the liquidity
remain well.

Lucia Rey-Ares et al. (2021) investigated the Spanish Fish Canning companies to know about
the relationship between WCM and profitability. Based on the market research and the analysis
of the data available, it could be concluded that with higher profitability, liquidity and assets
could be management in a more proper way, which means that the working capital management
could be improved. It also concluded that increase in inventory would also enhance economic
profitability.

Size & Working Capital

Firm Size

Firm size is a measure that measures a firm's total assets, total sales, and market capitalization.
Each firm's primary goal is to increase its size to have a competitive advantage over its rivals.
Therefore, more significant assets, total sales, and market capitalization can generate more
considerable the firm becomes and vice versa.

Market Capitalization is the total value of a company in the stock market. Market capitalization
is equal to the number of the company's outstanding shares times the current market price of a
share. A firm's market capitalization is created using IPO (Initial Public Offering). After that, the
firm starts selling its shares in the stock market, determined by demand and supply. If company
shares demand rises among investors, the market price of the firm's shares rises. Generally, a
large market capitalization is worth $10 billion or more. Therefore, firms with such amount of
market capitalization are comparatively large since they have been trading for the longest time.
A market capitalization ranging from $2 and $10 billion is a rapidly growing firm. These firms
have greater risks than many larger firms because they fail to develop like large firms.

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Moreover, firms with a market capitalization amounting from $300 million to $2 billion are
small firms. These types of firms maybe can be brand new, and mostly operate in markets that
are small in nature and brand-new industries. These firms bear greater risk due to being unique,
their market operation, and size.

A firm's total assets are the fixed and current assets owned by the company with an economic
where their total assets can be advantageous for the firm in the future. Assets belong in the
statement of financial position. Total assets are classified into various categories which are
highly liquid and not liquid assets in terms of their liquidity position. A liquid asset can easily be
sold and transformed to cash. Assets which are quite the opposite are known as illiquid assets
because comparatively they are harder to transform into cash. Current assets are those which
generally do not stay in the business longer than a period of one year, whereas long-term assets
are those that the firm uses for more than a year. Total Assets can be found by adding Liabilities
+ Owner's Equity and subtracting Revenue from operating expenses and Drawings. Assets play a
crucial role in the financial world. Firms having more Assets and lower liabilities improves the
market value and sustainability for the company’s future. Hence, firms having greater assets to
pay their debts are larger in size and vice versa.

The Relationship of firm size and Working Capital

Firm size and working capital have both positive and negative patterns. Firms that are large have
comparatively better investment in working capital because of adequate daily operations.
Moreover, larger firms tend to have a reliable distributor with better terms compared to small
firms requiring less working capital because large firms can pay its debts later to its distributors.
Empirical existing studies agree with these findings [Mongrut et al. (2014)] [Nazir (2009)].
Therefore, the dimensions of the firm can directly affect working capital requirements.

Further findings showed that Valipour et al. (2012) researched the impact of the various firm
features on working capital requirements. He used panel data from 83 non-financial listed firms
in Tehran stock exchange from 2001 to 2010. The study was divided into various stages. One of
the stages divided firms into three categories in terms of size such as large, medium, and small.
Average size firms were affected by performance, size, development, and influence, while the
factors affecting small firms were performance, current and quick ratio growth, as well as
leverage. Moreover, Zariyawati (2016) studied small and large firms enlisted at the Bursa

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Malaysia stock exchange and that various component such as profitability, leverage, operating
cash flow, and capital expenditure severely damage the working capital. The analysis includes
performance, cash flow, influence, and growth of large firms.

An in-depth research conducted by Serrasqueiro et al. (2008) was agreed by many analysts in
various areas of the economy that size of a firm is an important variable in showing strong
profitability. The formula for firm size is the natural logarithm of total assets (Titman &Wessels,
1998; Jairo, 2008) (Mansoori &Muhammad, 2012) (Saarani &Shahadan, 2012) (Wasiuzzaman
&Arumugam, 2013).

Furthermore, findings in Palestine (Abbadi&Abbadi,2013) found out various factors influencing

working capital, The research included various industrialized firms from the Palestinian stock
market ranging from 2004-2011with many observations. The findings considered working
capital as dependent variable and firm size as independent variables. The research outcome show
that size of the firm was one of the important factors of working capital requirements.

Haron R. et al. (2015) conclude working capital management depends on six variables. Out of
six variables, firm size was one of the variables that heavily affect working capital during the
financial crisis of 2008. Atseye, F. A. et al. (2015) say that effective Working Capital
management depends on management of many variables. Among those, firm size was one of the
important components. Firm size is one of the crucial independent components that directly
impact Working Capital. Overall, firm size is positively correlated with the amount of working
capital required. However, Campello and Weisbach (2004) deduce that famous firms have fewer
working capital because of having favorable terms from their suppliers.

Further study by an analyst (1993) studied the patterns of the cash conversion cycle and business
size and cash flows that included a large sample of retail firms. The research was conducted from
a period of 1971 to 1990. Net sales and total assets predicted the firm size. The study includes
five groups of retail companies analyzed in terms of size. The outcome of the research showed
larger retail firms are comparatively better in working capital management, shown by the
prolonged cash conversion cycle for 20% of the sample companies. Furthermore, smaller firms
had larger amounts of inventory, accounts receivables and accounts payables comparatively than
larger firms.

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Moreover, Moussawi et al. (2006) studied the quantity of financing in working capital and
factors affecting corporate working capital. The study used a panel data from a sample of U.S.
public corporations between 1990 to 2004. Regression methods was conducted for investigation.
Their research indicated that U.S. firms, on average, have excess investment in the working
capital, which means more investment in the working capital reduces firm value. Besides they
researched the factors that influence the management of the working capital. Regression methods
results revealed inefficiency of a firm's working capital management has a positive correlation
with firm size and no relationship with its area of industry.

Growth Opportunity & Working Capital

Working capital is the difference between current assets and current liabilities of an organization.
Working capital supports the running financial operations of an organization, like investment in
stocks, paying the salaries and wages & other expenditures as well as financing the credit sales.
It can also be said the capital for running the day-to-day operations, called as the net current
asset. The assets which can be easily liquidate are known as the current asset, liquidate within a
financial year. The liabilities which must be paid off within a financial year are known as the
current liabilities.

Growth opportunity is the potential of a project to generate high return and good prospects.
Growth opportunity is what encourages an investor to invest in any new project.

Bundala (2014) stated a study which determined the relationship between working capital and
growth opportunity with the listed of Tanzania, consisted of 3 objectives. The first objective was
to determine how the listed companies responds to their capital structure, working capital
intensity, and growth opportunity. The second objective was to determine how the capital
structure affects the working capital intensity, and growth opportunity. The third objective was to
investigate the effectiveness of working capital (current assets) in promoting Tanzanian listed
companies’ growth opportunities. The listed companies were found unleveraged as per the study
on the first objective. In their capital structure, equity to debt was preferrable by the companies.
They had a higher average growth rate of 33.3 percent. It resulted on a higher growth rate

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because the companies depend on their equity which helps them have a stable growth rate. The
companies which are unleveraged rely on their internal funding (retained earnings). This study
states that unleveraged enterprises have lower liquidity as they are not subject to creditors
interest covenants. The study on the second objective couldn’t find any significant relationship
among capital structure, working capital and growth of the company. The study concluded that
growth opportunity doesn’t depend on capital structure but on investing opportunities available
in the company. The working capital intensity depends on the availability of shorter project
opportunity available in a company. The study on the third objective says the listed companies
has a positive tendency to generate sales with the help of their current assets.

Wajo (2021) in the journal stated that the growth opportunity calculated based on the changes on
company’s total assets has decreased from the previous period which indicates the company
hasn’t grown significantly. Results in decreased profitability. On the other hand, there was a
higher cash turnover and higher percentage of rotating account receivable which implies greater
profitability chance. And the company costs were lower which results in higher profit. So, it can
be deduced that the other instruments of the working capital were in a good shape.

Wulandari et al. (2019) stated a study that determine the effect of net working capital, cash
conversion cycle, growth opportunity, and dividend payout on cash holding property and real
estate companies listed on the Indonesia Stock Exchange. The data that is used in this study is
secondary data. The study found out that growth opportunity and dividend payout had no
significant impact on cash holding. On the other hand, cash conversion cycle and net working
capital had a significant impact on cash holding.

Moussa (2019) According to the research, Growth opportunities were found to have a strong
negative association with working capital behavior. These data suggest that enterprises with
faster growth rates are more concerned with WCM, as evidenced by lower WCR and shorter
CCC.

Sardo et al. (2019) it states that due to growth opportunities there is an increase in wealth of the
firm, which could imply an increase in working capital for the business.

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Age & Working Capital

According to research, it is quite possible to define the age of a company by counting the number
of years since its beginning, corporate. The three definitions reflect an intriguing trend in the life
cycle of a company The expansion of a company is the initial step in its existence. Afterwards,
the company is incorporated and listed on a stock exchange if it fills the exchange's listing
principles each of the three stages of a company's life has an impact on its financial structure.
Age and leverage may have a link depending on the term used. According to Gwatidzo and Ojah
(2009), they didn’t find any impact for the age of the company by counting the age of the
company which didn’t affect company’s working capital requirements. A substantial negative
effect is also shown by Pfaffermayr et al.

However, they don't seem to grasp the fact that a firm's expansion or incorporation has little
impact in the first year. These companies do not take into account that there might be a
considerable difference between incorporated and listed companies in some instances. Firms in
South Africa are classified in different ways based on their age; therefore, we use a different
definition of age that takes into consideration the firm's age from creation and incorporation.
This research does not include the number of years that a company has been listed, since it would
have disqualified many companies.

According to Gwatidzo and Ojah (2009), In a cross-country research, age has no substantial
impact on loan financing. This means that age is not considered while analyzing the capital
structure variables in this study. According to Loderer and Waelchli, as well as Sakai et al.
(2010), the average age of a business is calculated as the sum of the number of years since
incorporation and creation.

"Cash flow from operating activities" is defined by Hertenstein and McKinnon (1997) cash flows
from a company's main business line of activity as a financial statement, this is one of the most
significant. The balance sheet may offer insight on a company's receivables and payables, growth
plan, and other financial management concerns, among other things.

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Relationship between Firm Age & Working Capital Requirements

According to the research, there are extreme connection exist between firm characteristics,
market and capital structures, and the structure of the firm. A business's size, age, and ownership
are the most common structural features of a company. These variables consider the kind of
industry, the level of uncertainty in the environment, and the market circumstances. Also covered
in the capital-related criteria are liquidity and investment intensity (Wang, 2017).

According to the Souha et al. (2016); Doha, Mohammed et al. (2018) The assets and number of
workers of a company, as well as its income, define the age of the company. Organizational
stakeholder numbers are higher in large organizations. As a result, in the business world, they are
more closely investigated This leads them to seek legitimacy from other stakeholders who
control the resources they need to operate their organizations. The size of a business, in terms of
assets, employees and overseas presence, can have a significant impact on its sustainability
reporting and profitability.

According to Charles A company's liquidity depends on its cash, their assets that can be quickly
converted back into cash, whether they are generating money or losing it, their obligations that
will need to be paid off soon, and their ability to obtain additional cash by issuing securities or
borrowing money....

To optimize profitability, an enterprise's cash position must be organized so that cash is

accessible when it's needed, and idle cash is spent to maximize profit. One or two companies
invest all their capital in government securities and/or money market funds to optimize
investment returns. It is going to be better for the firm to maximize profitability to increase the
working capital in the shortest time (Engler, 1993,).

Financial risks faced by Slovak enterprises were explored by Valaskova et al. (2018) Using
multiple regression, they concentrated on identifying the most important economic risk variables

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that may affect the country. Empirical studies have shown that future firm failure is most likely
to be predicted by net return on capital, cash ratio, quick ratio, current ratio, and net working
capital. RE/TA ratio, current debt ratio, financial debt ratio, and current asset turnover can be
used to predict future firm failure. This has a significant influence on the profitability and growth
of the firm.

Banos-Caballero et al. (2014) Examined for a sample of non-financial British firms, the
relationship between working capital management and corporate performance Investing in
working capital has been found to have a high negative correlation with business performance,
which suggests that there is an ideal amount of working capital investing that balances costs and
benefits while maximizing a firm's value.

Maintaining a proper balance between working capital requirement and age is important to the
overall financial health of a business and in this study. We also show how through decreasing the
amount of liquid assets an S.M.E. can improve profitability.

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METHODOLOGY

RESEARCH APPROACH/ DESIGN

Category Selected Explanation

Methods
Structure of Formal According to our research, we are not going to use formal
Research study because our goal is not to test hypothesis or creating
Questions new questions for future research because formal study's
prime goal is to test hypothesis, developing new studies.
As we are not planning to create hypothesis rather, we are
going to take proper measurement to test our hypothesis.
Data Monitoring Monitoring is a data collection method by observing. We
Collection are going to monitor the annual reports of our given
Method Chemical companies. We will be analyzing the variable
and relationship between them and how the variables
affect chemical industries profitability. Hence, Monitoring
is mainly our data method collection because it is an
easier method for data collection.
Researcher’s Ex-Post Facto We are going to use Ex-Post Facto study as we don’t have
Influence any control over our variable. Our variables will be
Over uniform based on historical data and articles we have
Variables studied.
Study Causal We are going to use causal study to find the relationship
Purpose between dependent and independent variables and will try
to find out the reason.
Time Period Cross-Sectional Our research will be regulated within the time span of
2016 to 2020. Our goal is to survey data in our given time
frame.
Scope of Statistical Study Through statistical study we have surveyed selected 5
Topic and chemical companies of Bangladesh. This study also
Depth study helped us to research our report which accommodates

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 quantitative data analysis.
Research Simulation Study We have done our research based on a simulation study,
Environment all the research and the information have been collected
from the secondary source.

OBJECTIVES OF THE RESEARCH

This research goals to survey how the aspects affect the working capital requirements of the
chemical industries of Bangladesh from 2016 to 2020. Our research paper will also signify the
following aspects and their important effects on the chemical industry, which will help us to
adapt to those factors. Moreover, this research paper will also highlight the following factors:

-The relationship between working capital requirements to Age.

- The relationship between working capital requirements to Size.

-The relationship between working capital requirements to Growth Opportunity.

-The relationship between working capital requirements to Profitability.

- The relationship between working capital requirements to Leverage.

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CONCEPTUAL FRAMEWORK

The multiple regression model is used to identify the relationship between the profitability
(ROA) of the chemical company sectors and the age of the chemical companies, size of the
chemical companies, growth opportunity of the chemical companies, profitability of the
chemical companies, and financial leverage of the chemical companies. In our report, we have
used one dependent variable and five independent variables to survey our data. To understand
how our dependent variables are affected by the independent variables, we can simply form a
mathematical equation that will make our understanding even better. This mathematical equation
is also known as linear regression equation, and this is simplified below:

Equation Analysis

Y=β0+β1X1+β2X2+β3X3+β4X4+β5X5
Given,

Y= Working Capital (Dependent Variable)

β0= Constant

β1 = Coefficient of independent variable: Age

β2 = Coefficient of independent variable: Size
β3 = Coefficient of independent variable: Growth of Opportunities
β4 = Coefficient of the independent variable: Profitability
β5 = Coefficient of the independent variable: Leverage

X1= Age (Independent Variable)

X2= Size (Independent Variable)

X3= Growth Opportunities (Independent Variable)

X4= Return on Assets/ Profitability (Independent Variable)

X5= Leverage (Independent Variable)

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For our research work, the equation will be like this:
Working Capital Requirements= + β1* Age + β2* Size
+ β3*Growth Opportunities + β4*Profitability + β5*Leverage

We have prepared a formula chart to describe the dependent and independent variables of our
research study:

Variables Indicator
Dependent Variable

Working Capital Requirements [(Cash and Cash

Equivalents + Accounts
Receivable + Marketable
Securities+ Inventories) –
(Account Payable+ Short-
Term Loans)/Total Asset]
Independent Variables

Age [Natural logarithm of Age]

Size [Natural Logarithm of Total Assets]
Growth Opportunities [Sales1 - Sales0)/Sales0]
Return on Asset (ROA)/Profitability [EBIT/Total Assets]
Leverage [Total Debt/Total Assets]

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Hypothesis

As per our research paper, reestablishing the hypothesis will be a significant task. We found that
the hypothesis has two outcomes in terms of the relationship between the Dependent Variable
(DV) and Independent Variable (IV). Our first hypothesis is the null hypothesis and the outcome
of the reverse one will be an alternative hypothesis. The null hypothesis presents the relationship
of the variables to be negative (false).

In this Hypothesis, Xn = Individual Independent Variable (IV), and in total we have five
Independent Variables.

 X1: AGE

H0: No significant relationship between Working Capital and Age.

H1: Significant relationship between Working Capital and Age.

 X2: SIZE

H0: No significant relationship between Working Capital and Size.

H1: Significant relationship between Working Capital and Size.

 X3: GROWTH OPPORTUNITIES

H0: No Significant relationship between Working Capital and Growth Opportunities.

H1: Significant relationship between Working Capital and Growth Opportunities.

 X4: RETURN ON ASSETS (ROA)

H0: No significant relationship between Working Capital and ROA.

H1: Significant relationship between Working Capital and ROA.

 X5: Leverage

H0: No significant relationship between Working Capital and Leverage.

H1: Significant relationship between Working Capital and Leverage.

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Sampling or Data Source

The researchers use sampling to analyze all part of the real / theoretical set of occurrences.
Sampling is also used to study the set of trends. We have selected 5 companies from the
chemical industry. While conducting our research we have used secondary data to validate our
research hypothesis. We have collected all the required data from the company’s annual report
on their website. We have taken the data from the years 2016 to 2020. The companies we have
selected are as follows:

1. Kohinoor Chemical
2. ACI
3. Beximco
4. Far Chemical
5. Marico

DATA ANALYSIS

This study is based on panel data that consists of 5 companies in the chemical industry in
Bangladesh with 25 observations as per the variables and a total of 125 observations, for a period
of 5 years ranging from 2016-2020. Panel data analysis method means the data will be collected
for different individual entities over an equal interval of time and then analyzed using the
regression model.

This section will show the analysis of the data with various methods such as descriptive analysis
and correlation analysis which will then fit a proper regression model. We used the least square
method to come up with the model.

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Descriptive Analysis

The Table above shows the descriptive analysis of the data for five different chemical firms,
located in Bangladesh, ranging from the year 2016 to 2020. For analyzing, several statistical data
such as mean, median, mode, standard deviation, probability and so on are calculated.

WCR-The average value of WCR is 0.298108, while the maximum and minimum values are
0.748900 and -0.231300, indicating that the WCR greatly differs from one another. Another
evidence of this difference can be seen in the standard deviation valuing is 0.194475, which is
also significantly high. The skewness is -0.327445 with a probability of 0.462805

Size- The mean value of size is 21.83841. The maximum and minimum values are 22.51770 and
20.98050 while the skewness is negative, -0.153622 with a probability of 0.559355.

Age- The mean age of the five firms is 3.328928. The maximum age is 4.158900 while the
minimum age is 2.200000. The standard deviation is quite high, 0.658752 with a skewness of
-0.197219 and probability of 0.362537.

Return on Asset- The mean value of ROA is 0.156448 while the median is 0.112000.
Furthermore, the maximum value being 1.001500 and a minimum value of -0.617100 indicates a
significant difference. The standard deviation is 0.315483 and the skewness is positive 0.605083
with a probability of 0.117645.

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Leverage- The maximum and minimum values of leverage, 1.128800 and 0.013200 are quite
widely ranged. The mean leverage of these five firms is 0.507808 and the skewness is negative,
-0.164828 with a high probability of 0.944335.

Growth- The average growth value is 0.132356 with a median of 0.00. The maximum value,
2.016700 and the minimum value, -0.912700 shows the value vary to a great extent. The
skewness is quite high, 2.117872 and the probability here is 0.00.

Correlation Analysis

Size of Correlation  Interpretation

.90 to 1.00  A very strong positive correlation

.70 to .90  Strong positive correlation

.50 to .70  Moderate positive correlation

.30 to .50  Weak positive correlation

.00 to .30  A very weak positive correlation

0  No relationship

-.90 to -1.00  Very strong negative correlation

-.70 to -.90  Strong negative correlation

-.50 to -.70  Moderate negative correlation

-.30 to -.50  Weak negative correlation

-.00 to -.30  Very weak negative correlation

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The dependent variable for this analysis is the working capital requirement (WCR) and the
independent variables are size, age, return on asset (ROA), growth and leverage. As mentioned
in the table above, the correlation values define how strongly or weakly two variables are related.
Based on the values found, the relationship between the dependent variable and independent
variables are as follows:

WCR and Size: The correlation coefficient between WCR and Size is -0.437421, which shows
that these two variables have a weak negative relationship. Hence, an increase in size may
decrease the WCR.

WCR and Age: The correlation coefficient between WCR and Age is -0.059239, which is a
very low value, indicating that there is a very weak negative relationship between these variables
so an increase in age may decrease the WCR.

WCR and ROA: The correlation coefficient between WCR and ROA is 0.254184, which shows
a very weak positive relationship. Therefore, if there is an increase in ROA, the WCR might
increase as well.

WCR and Growth: The correlation coefficient between WCR and Growth is -0.104029, which
interprets that these two variables have a very weak negatively related. Hence, the increase in
growth may decrease the WCR.

WCR and Leverage: The coefficient of correlation between WCR and Leverage is -0.302564,
showing a weak negative relationship between these two variables. So an increase in Leverage
may cause a decrease in WCR.

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Regression Analysis

Table: Regression Model

Equation Analysis

Y= β 0 + β 1 X 1 + β 2 X 2 + β3 X 3 + β 4 X 4 + β 5 X 5

Given,

Y= Working Capital (Dependent Variable)

β0= Constant

X1= Age (Independent Variable)

X2= Size (Independent Variable)

X3= Growth Opportunities (Independent Variable)

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X4= Return on Assets/ Profitability (Independent Variable)

X5= Leverage (Independent Variable)

Working Capital = 6.555338 + 0.140695* Age - 0.299225* Size - 0.014185* Growth

opportunities + 0.420580* Profitability - 0.502002* Leverage

Coefficient Analysis

1. We can say that if Age increases by one unit, working capital will increase by 0.140695
because they are positively correlated.
2. We can say that if Size increases by one unit, working capital will decrease by 0.299225
because they are negatively correlated.
3. We can say that if Growth Opportunities increases by one unit, working capital will
decrease by 0.014185 because they are negatively correlated.
4. We can say that if Profitability increases by one unit, working capital will increase by
0.420580 because they are positively correlated.
5. We can say that if Leverage increases by one unit, working capital will decrease by
0.502002 because they are negatively correlated.

Hypothesis Testing

Variable P-Value Greater/Less α (Significance Decision Pattern with

(Probability) than Level) Working Capital
Age 0.0097 < 0.05 Reject null Statistically Significant
hypothesis Relationship exist
Size 0.0001 < 0.05 Reject null Statistically Significant
hypothesis Relationship exist
Growth 0.7308 > 0.05 Cannot Reject No Statistically
Opportunities null Significant Relationship
hypothesis exist
Profitability 0.0003 < 0.05 Reject null Statistically Significant
hypothesis Relationship exist
Leverage 0.0002 < 0.05 Reject null Statistically Significant
hypothesis Relationship exist
Table: Hypothesis Analysis

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Predicting significance level (α) is 5% i.e., 0.05

 Age: The probability of age is 0.0097 which is lower compared to the significance level
of 5%. Therefore, we can reject the null hypothesis and there is enough statistical
empirical evidence to show a statistically significant relationship exist between working
capital and age.
 Size: The probability of size is 0.0001 which is lower compared to the significance level
of 5%. Therefore, the null hypothesis can be rejected to show there is enough statistical
empirical evidence that a statistically significant relationship exists between working
capital and size.
 Growth Opportunities: The probability for growth opportunities is 0.7308 which is
more than the significance level of 5%. Therefore, we fail to reject the null hypothesis
and there is enough statistical empirical evidence to show a statistically significant
relationship do not exist between working capital and growth opportunities.
 Profitability: The probability for profitability is 0.0003 which is lower compared to the
significance level of 5%. Therefore, the null hypothesis can be rejected to show there is
enough statistical empirical evidence that a statistically significant relationship exists
between working capital and profitability.
 Leverage: The probability for leverage is 0.0002 which is less compared to the
significance level of 5%. Therefore, we can reject the null hypothesis to show there is
enough statistical empirical evidence that a statistically significant relationship exists
between working capital and leverage.

Common Variance Analysis

Provided in the Regression model the r-squared is valued at 0.683792. Therefore, approximately
68% variance of dependent variable working capital can explain jointly by the independent
variables which are age, size, growth opportunities, profitability, and leverage. R-squared means
the coefficient of determination or coefficient of multiple determinations for a multiple
regression model. Theoretically, if the R-squared value is 80% or higher it is considered a
desirable model that fits with the data.

30 | P a g e
Good Fit model Analysis
From the regression model the probability of F statistics is valued at 0.000284. Comparing this
probability with the significance level of 0.05/ 5%, we can say that the probability of F statistics
is less than the significance level. Therefore, this is a good fit model. The F statistic measures
whether the regression model is a good fit model or vice versa and how it fits the hypothesis.

Findings and Analysis

Working Capital Requirements & Size: From the observation of correlation analysis, we have
learned that these two variables have a weak negative relationship. And from the hypothesis
analysis we have learned that the P-value is less than the significance level, so it is a reject null
hypothesis as there is an existence of statistically significant relationship.

Working Capital Requirements & Age: The correlation analysis states that the two variables
have a very weak negative correlation. Observing the hypothesis analysis, we found that the P-
value is 0.0097 which is less than the significance level 0.05, it is a reject null hypothesis as there
is an existence of statistically significant relationship.

Working Capital Requirements & Profitability (ROA): These two variables have a very weak
negative correlation. The hypothesis analysis states that the P-value is less than the significance
level, it is a reject null hypothesis as there is an existence of statistically significant relationship.

Working Capital Requirements & Growth Opportunities: From the correlation analysis, we
can state that the variables have a very weak negative relationship. The hypothesis analysis states
that the P-value is higher than the significance level. Thus, cannot reject the null hypothesis as
there is no existence of statistically significant relationship.

Working Capital Requirements & Leverage: The correlation analysis of these two variables
states that they have a weak negative relationship. And the hypothesis analysis states that the P-

31 | P a g e
value is less than the significance level. So, it is a reject null hypothesis as there is an existence
of statistically significant relationship.

Discussion and Recommendation

Based on the analysis in previous segment of the research paper, we can conclude that
independent variables size, age, profitability, and leverage has a statistically significant
relationship with our dependent variable working capital requirements whereas the independent
variable Growth opportunities does not show any signs of a statistically significant relationship
with our dependent variable. The correlation analysis portrays that the independent variables
Age, Profitability and Growth opportunities have a weak negative correlation with working
capital requirements and the independent variables Size and Leverage have a weak negative
relationship with working capital requirements. It means that there is an inversely proportional
relationship among the dependent and independent variables, and some are stronger than the
other.

According to these deductions, we can advice the firms in the chemical industry to be more
aware of their external environment and manage their working capital more effectively and
efficiently. Even though there are weak relationship with the independent variables, firms
shouldn’t take it lightly and focus on continuous improvements and should constantly look for
innovative business modules. Worker morale is also very vital when it comes to the success of a
company and thus maintaining a higher worker morale may prove to be very efficient.

32 | P a g e
Conclusion

Our research paper aims to define the relationship between the working capital requirements of
the firms in the chemical industry of Bangladesh. In our research, we extracted the information
form the annual reports of the companies, which portrays that some variables do not reject the
null hypothesis indicating the model used in the research was correct to some extent.

On the contrary, we have only used a sample size of 5 years for 5 companies. This might not be
sufficient as there are far more companies in the industry, and they have been operating for a
much longer period so it would have been possible to work with a larger sample size. A larger
sample would have provided us with a more valid data to support our research.

33 | P a g e
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