A Comparative Empirical Analysis of Working Capital Ratios and Profitability in India's Manufacturing and Services Sectors

Abstract

This research investigates the influence of working capital components and financial ratios on the profitability of companies in the manufacturing and services sectors.  Manufacturing sectors deal with production and sales of goods, whereas services sectors deal with different types of services. In the manufacturing sector, purchase of inventories is one of major components of the input cost and this will not be relevant to services sector. Cost of goods sold is treated differently in services sectors as the costs are incurred for the service operations and not for manufacturing operations. By examining a 10-year financial dataset of ten companies, five from each sector, the study identifies correlation patterns between working capital and key profitability indicators. Statistical tools, including Pearson correlation and two-sample Z-tests were employed to assess the relationship and similarity between sectors. Findings revealed a stronger positive correlation in manufacturing firms between the working capital and the profitability as compared to service firms. Despite sectoral operational differences, average financial metrics such as current ratio and net profit ratio were found to be statistically similar. The study concludes with targeted recommendations to improve working capital efficiency and profitability.