Relationship between Inventory Holding and Financial Performance of Manufacturing Companies in Pakistan

Abstract

This study investigates the effect of inventory holdings on the financial performance (operating profit to sales and gross profit to sales) of 233 manufacturing firms of Pakistan for the period 2014–2018. It specifically examines how raw material inventory to sales (RMIS), work-in-process inventory to sales (WIPIS), and finished goods inventory to sales (FGIS) affect firm performance. Unlike previous studies, this research disaggregates inventory to assess the distinct effects of each component on firm performance. Using the system generalized method of moments for estimation, the empirical findings show significant negative association between total inventory and operating profit to sales and gross profit to sales. Moreover, RMIS and WIPIS also appear negatively associated with firm performance, emphasizing the significance of efficient inventory management in improving the firm profitability.