World Research of Business Administration Journal

Vol.1 No.1 November 2021

Inventory Management and Its Impact on the Firm Performance

Heba Srour*
[email protected]
Ahmed Azmy†
[email protected]

Abstract:
Inventory management is a challenging area so this study will illustrate the ways
of managing inventory. The main aim of this study is to examine the impact of
inventory management which will be measured by inventory turnover on firm’s
performance which will be measured by firm’s profitability using return on assets
and return on equity. The data was collected from the Egyptian stock exchange
market. The analysis of this study was done using (Eviews 12) for both descriptive
statistics and multiple regression. The results of this study indicate that there is a
positive correlation between inventory turnover and Return on assets (R2=
0.769321) and also with Return on Equity (R2= 0.669593) which were found to
be statistically significant at 5% level.

Keywords: Inventory management - Inventory turnover - Firm performance -

Profitability.

*
Assistance Professor, Faculty of Commerce and Business Administration - Future University in Egypt
†
Associate Professor, Faculty of Commerce and Business Administration - Future University in Egypt

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Inventory Management and Its Impact on the Firm Performance Tracing the Impact of Cash
Conversion Cycle ……………….. Heba Srour & Ahmed Azmy PP 45-65

Introduction
Inventory management is critical in the financial performance of a business since
it is at the top rank in the most valuable physical assets in the balance sheet. For
this reason, inventory management should be well managed and apply
replenishment rules for each item such as the strategies that will be mentioned.
The right stock should be available in the right place and in the right quantity,
acquired at the lowest price possible. Stock-outs mostly occur when there is
demand in the market and there is little stock for fast selling items, which would
lead to lost sales and customer loyalty. High stock in the company than needed
leads to higher storage costs, handling costs and interests from the short-term
borrowings. Eventually when selling, a loss can be experienced once materials
are sold at a lower price than normal. The main goal of inventory management is
minimizing total inventory costs and maximizing profits in operations. Many
cases have been experienced where inventory management and inventory
planning decisions have been effective with the assistance also of inventory
planning models developed and implemented. A balance has to be achieved
between costs of acquiring and that of holding inventory as they are the ones that
significantly affect the company’s’ profitability. The inventory management
systems make specifications on the order quantity and re-order point with the
intention to make profits. Economic order quantity (EOQ) should be ordered at
once which then affects the inventory ordering and holding cost. This will have
an effect on the profitability of the company. That is if few large orders are made,
annual ordering costs tend to be lower, but the annual holding costs are high.
Conversely, frequent small orders increase the ordering costs, but holding costs
tend to be lower. Hence for a company to be profitable there is needed to increase
the order size and obtain volume discounts and off-set by lowering holding costs.
Profitability of a company would be achieved at optimum level of relevant costs
which are holding and ordering costs.
Inventory is a vital part of current assets mainly in manufacturing concerns. Huge
funds are committed to inventories as to ensure smooth flow of production and to
meet consumer demand. However, maintaining inventory also involves holding
or carrying costs along with opportunity cost. Therefore, Inventory management
plays a crucial role in balancing the benefits and disadvantages associated with
holding inventory. Efficient and effective inventory management goes a long way
in successful running and survival of a business firm, when organizations fail to
manage their inventory effectively they are bound to experience, stock out, the
decline in productivity and profitability, customer dissatisfaction. Thus the study
seeks to investigate the effect of inventory management on the organizational
performance of the selected manufacturing firms. The main aim of this research
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World Research of Business Administration Journal
Vol.1 No.1 November 2021

is to examine empirically the relation between inventory management and

financial performance in Egypt companies for the period ranging from 2013 to
2021.

Research problem and question:

The paramount matter of the operation management literature for last two decades
has to seek the operations excellence in the organizations.
The firms who applied all the techniques which will be mentioned later to
enhance the efficiency and effectiveness of their operations achieved better
market share, profitability and products of better and superior quality. This study
is inspired to seek support for this hypothesis to visualize results of enhancing the
inventory management. Plethora of research has been perpetrated to estimate the
influence of performance of inventory management over financial performance
has been carried out in developed markets and developed economies. Our study
aims to augment the evidence of inventory management on firm performance in
a developing market environment. (Nawaz et al., 2016) proved that the profit is
one of the main goals of the establishment of every business entity. Without
profit, the company cannot fulfill other objectives, namely concerning corporate
social responsibility.
Profit which is the company's main goal can be achieved by selling goods or
services. The greater the sales volume of goods and services, the greater the profit
generated by the company. The business that is often carried out by companies to
increase profitability is to increase inventory sales so that inventory turnover also
increases. Inventory is one of the most important asset posts because inventory is
a post of current assets which is of considerable value. The higher the turnover of
the inventory, the higher the cost which can be suppressed so that the greater the
profitability of a company. Conversely, if the slower turnover of the inventory,
the smaller the profit gain. (Nasution, 2020). However, Inventory that is well
managed can have some great impact on the profits of a company due to the
ability of the company to recognize areas for reducing the cost of storage of tock
and ensure that there is a smooth flow in production activities (Cheung et al.,
2004). Bourne and (Walter, 2005) state that there is a direct relationship between
proper management of inventory and the performance of a company (Abrams et
al., 2005; Marota, 2017). When companies practice inadequate inventory
management techniques it is obvious that the result there is an increase in waste
due to the increase in the cost of storing inventory and the pronounced risk of
exposing the inventory to damages or losses (Lwiki et al., 2013).
Therefore, effective performance can be achieved if companies can develop
strategies for attaining the maximum possible revenue within the minimum cost.
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Inventory Management and Its Impact on the Firm Performance Tracing the Impact of Cash
Conversion Cycle ……………….. Heba Srour & Ahmed Azmy PP 45-65

(Aljaaidi & Bagais, 2020). Effective inventory management allows an

organization to meet or exceed customer expectations by creating stocks of each
product that maximize net income. Corporate policy that promotes efficient
inventory management is the first component of successful inventory
management (Waddock & Graves, 1997). A study conducted in Kenya by (V.W.
& Namusonge, 2015) identified that inventory management affects competitive
advantage of manufacturing firms. The same study further concludes that the firm
is able to compete based on quality and delivery of customer orders on time.
Competitive advantage comprises capabilities that allow an organization to
differentiate itself from its competitors and is an outcome of critical management
decisions (Li et al., 2006).
The relation between inventory management and firm performance affect the
inventory management decision. Most previously Researches were held in
developed countries. However, limited Research was held in emerging firms.
Emerging firms have different characteristics such as different political,
economic and institutional conditions in general in Egyptian setting in specific to
investigate the effect of Inventory management on firm performance in financial
sector, although research problem can be summarized in the following question:
Does inventory management has an impact on firm performance?

Research Hypotheses:
It’s based on traditional method theory. The study predicts that inventory turnover
negatively affects return on equity (ROE) and return on assets (ROA).
The following hypothesis is:
H1. Inventory Turnover has positive effect on ROE.
H2. Inventory Turnover has positive effect on ROA.

Literature review:
(Liu et al., 2020) this paper investigated the effect of firm-level operating
flexibility on stock performance during the COVID-19 outbreak in China. The
researchers used all the Chinese A-share listed companies on the Shanghai and
Shenzhen stock exchanges as initial samples. All data and variables are obtained
from the China Stock Market & Accounting Research database. The relevant
financial data are calculated using the reports for the third quarter of 2019. The
firm level operating flexibility was measured by firm level inflexibility and the
stock performance was measured by ROS. Coming up that the sudden outbreak
of COVID-19 has seriously affected the normal production and operating
activities of firms and has induced a massive shock on financial markets, finding
that firms with high operating flexibility have better stock performance than those
with lower operating flexibility because of the risk hedge value of contraction
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options embedded in firm operating flexibility. (Karki, 2020) examined the effect
of inventory management on profitability in Nepal. Listed in Kathmandu from
2071 fiscal year to 2075 fiscal year. The secondary data had been collected from
the annual financial statements using regression technique considering statistical
patterns Minitab 16 version to analyze the data and also finished goods inventory
values were identified and employed as independent variables while net income
was employed as proxy of profitability. Concluded that there is a positive impact
of inventory management upon the profitability of uniliver Nepal. (Nasution,
2020) determined the effect of inventory turnover on profitability in automotive
companies listed on Indonesia stock Exchange from 2015-2017. Profitability is
measured by Return on Assets (ROA) which was the dependent variable. The
data used are the financial statements of each sample company, which are
obtained through ICMD (Indonesia Capital Market Directory) The analytical
method used in this study is a quantitative method The variables of this study are
inventory turnover, and Return On Assets with a total sample per year of 18
companies. The results of this study are inventory turnover has a negative effect
on Return on Assets. (Aljaaidi & Bagais, 2020) investigated the association
between Days Inventory Outstanding (DIO) and firm performance of energy
industry in Saudi Arabia, from 2013-2019. The sample comprises of 21 firm year
observations. Firm performance was measured by 2 dependent variables ROA
and ROE. The Regression results indicated that DIO was negatively associated
with firm performance. (Vikas & Sandeep Malik, 2020) examined the effect of a
well-managed inventory on a manufacturing company as well as to enhance the
performance of inventory management in an organization and to reduce risk those
are facing inventory management. Data used were collected through personal
interviews, discussion with Finance-Executive and from the company for the past
years since 2014-2019. This paper used ABC analysis and economic order
quantity (EOQ) to test the effect. Therefore, implementing advanced inventory
management always sounds good in theory, in practice, the balance of cost and
benefit should be considered. (Golas & Bieniasz, 2016) determined the effect of
inventory management on profitability. Listed in Poland from 2005 to 2017. The
method that was used in this study is inventory-performance relationship analysis
and the regression models (INVIC, RMIC, WIPC, and FGIC) were measured by
ROA. As a conclusion for this study was that the day’s sales of inventory for total
stocks tended to become shorter due to reduction in the days in inventory ratio
for materials and finished products also the improvement that was found in
inventory management efficiency was positively correlated with financial
performance. (Nugroho et al., 2020) investigated the association among supply
chain management (SCM), just in time and quality management and also their
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Inventory Management and Its Impact on the Firm Performance Tracing the Impact of Cash
Conversion Cycle ……………….. Heba Srour & Ahmed Azmy PP 45-65

impact on organizational performance. 650 questionnaires have been received

from the 2780 questionnaires sent to the different corporations in Indonesia.
Corporations lie in the range of 100 to 2000 workforces and the median is 100
personnel. Further to check reliability analysis was conducted by making use of
Cronbach's Alpha in order to make sure that components used to operationalize
just-in-time, total quality management, supply chain management and
performance were evaluated to check that the components are from statistical
errors. Recognizing SC collaborations is not just an emphasis on quality but also
a primary factor of FP. Either through cooperation and assimilation of operations
across the SC or by the acknowledgement of the skills of direct manufacturers,
recognizing the aspects of the SC has a positive effect on FP. Moreover,
policymakers should focus on the encouragement of the firms to introduce
efficient manufacturing through JIT and TQM to improve performance from all
aspects. (Khan et al., 2019) investigated the effect of various inventory
management factors on firm’s efficiency. These factors included capacity
utilization, inventory accuracy, lean inventory, and stock availability. Firm’s
efficiency was measured by firm performance and profitability. Data was
collected by questionnaire from 250 individuals from different departmental
stores in Karachi in Pakistan. Data was analyzed using structural equation
modeling. The results showed inventory accuracy, lean inventory, and stock
availability has positive and significant impact on efficiency. However, Capacity
Utilization doesn’t seem to affect efficiency. Stock availability can lead to
effective inventory management. (Opoku et al., 2020) examined the effect of
different inventory management practices on the operational performance of
manufacturing firms. Listed in Ghana between 2019 and 2020. The methods used
in the study included: research design and approach, population and sample size,
data collection instrument, validity and reliability of data collection instrument
and data processing and analysis. The variables that was used in the study are:
SPP, ABC, VMI, EOQ, and MRP AND JIT. The study concluded that any unit
increase in any of the practices would lead to significant and positive unit increase
in operational performance of the firm’s studied. (George, 2019) analyzed
whether the inventory management has any direct impact on the net profits of the
company. Inventory management was measured by inventory conversion cycle
and inventory turnover ratio; net profits measured the firm performance. Five
years’ financial data of five selected companies were considered for the study.
Tools such as ratio analysis, trend analysis and correlation analysis have been
used for analyzing the data. The study showed that inventory conversion cycle is
directly related to the net profits of the company. (Eveline et al., 2019)
investigated the effect of SAP on inventory management which recommended
using SAP appropriately in managing their procurements for an efficient

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operation. Also recommended EOQ as an important technique in inventory

management that firms should be ensured to order the recommended lot size of
as determined by the EOQ. (Mulandi & Ismail, 2019) investigated the effect of
inventory management practices on performance of commercial state
corporations. Listed in Kenya between 2016 and 2019. The specific objectives
were used to determine the effect of just-in-time inventory system on
performance of commercial state corporations. The variables of the study
included IT based system: JIT, VMI, and ERP system of managing inventories
techniques of forecasting demand. Concluded from this research that MRP has
positive and significant relationship with performance of commercial State
Corporation. (Qu et al., 2019) investigated the effect of inventory management
factors on technical universities. These factors were made up of accuracy,
capacity, investment, shrinkage, performance and turnover. Data was collected
by the use of Likert scale questionnaire from 399 various units in the technical
universities in Ghana. The Smart PLS was employed to analyze the data. A well-
organized inventory control system does not deal in the same way with all
products, but it applies methods of control and analysis in agreement with the
economic importance related to each of the product. Inventory management
derives from the importance of stock for the company, and therefore, the need to
manage and control them is essential to maintain a level of inventory that allows
at a minimum cost and maximum service to customers. The basic reasons for
inventory management are: protect against uncertainties, allow production and
purchase under economically advantageous conditions, cover anticipated changes
in demand and supply and maintain transit between production and storage
points. H1: There is a direct significant relations H2: There is a direct relationship
between inventory turnover and organizational performance H3: There is a direct
relationship between inventory accuracy and organizational performance H4:
There is a direct relationship between inventory shrinkage and organizational
performance H5: There is a negative relationship between inventory investment
and organizational capacity H6: There is a negative relationship between
inventory turnover and organization capacity. H7: There is a negative relationship
between inventory accuracy and organizational capacity. H8: There is a positive
relationship between inventory shrinkage and organizational capacity. (Atnafu &
Balda, 2020) aimed to examine the impact of inventory management practice on
firms’ competitiveness (price, quality and delivery) and organizational
performance. Data for the study were collected from 188 micro and small
enterprises (MSEs) operating in the manufacturing sub-sector in Ethiopia and the
relationships and hypothesis proposed in the conceptual framework were tested
using structural equation modeling (SEM). Inventory management was measured
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Inventory Management and Its Impact on the Firm Performance Tracing the Impact of Cash
Conversion Cycle ……………….. Heba Srour & Ahmed Azmy PP 45-65

by ABC, EOQ, JIT and vendor managed inventory. Firm performance was
measured by profitability, level of output, cost efficiency and market share. The
results indicate that higher levels of inventory management practice can lead to
an enhanced competitive advantage and improved organizational performance.
Also, competitive advantage can have a direct, positive impact on organizational
performance. (Riza et al., 2016) tested inventory turnover (IT) as a performance
measure in manufacturing processes because IT ratios are critical in the
manufacturing industry and publicly available objective measures. Using the data
of 421 manufacturing companies in Korea from 2010 to 2018, it conducted an
extensive analysis of the factors affecting it by segment and its correlation with
other financial ratios. They Compared performances between the top and bottom
companies determined by Altman’s Z score approach.it found that, for the overall
manufacturing industry, IT ratios were negatively correlated with gross margin
and debt cost, but positively correlated with capital intensity, although the results
varied by segment. (Sunday & Joseph, 2017) examined the inventory
management on SME’s profitability. Listed in Nigeria. Descriptive research
design and stratified random sampling methods were used to investigate the study
and also multiple regression analysis was used to test the model established using
these variables: profitability (PFT), inventory turnover (IT), inventory conversion
period (ICP) and inventory leanness (ILN). They found that the inventory
turnover had a positive relationship with the financial performance of SME’s and
also found that there was a negative relationship between inventory leanness and
profitability. (Thai & Jie, 2018) investigated the influences of total quality
management (TQM) and supply chain integration (SCI) practices on firm
performance (FP) of container shipping industry in Singapore. Methodology used
was survey it was conducted with 159 container shipping companies in Singapore
to examine the interrelationships between SCI and TQM practices and FP. The
results suggested that both TQM and SCI practices have positive effects on
service quality and FP but at different extents, while TQM also contributes
positively to SCI. (Elking et al., 2017) investigated the impact of focal firm and
supplier financial dependence on focal firm financial performance using the lens
of resource dependence theory. Listed in United States of America. They used an
innovative supply chain structure data set provided by Bloomberg, which allows
implementation of unique measures for focal firm and supplier financial
dependence within a supply chain Focal firm financial dependence is calculated
by identifying the percentage of the focal firm’s cost of goods sold spent with
each supplier in 2012. Taking a sample of 3,638 buyer-supplier relationships in
the U.S. manufacturing firms that are presented in both Composted and
Bloomberg’s SPLC supply chain database module during 2012. Their analysis
found that both buyer and supplier financial dependence impact a buyer firm’s

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financial performance. Specifically, they found that higher levels of buyer

dependence on supply chain partners negatively affect the financial performance
of the focal firm, while supplier dependence on the focal firm positively affects
the financial performance of the focal firm. Interestingly, they found that the
buyer’s dependence has a much greater magnitude of impact than the suppliers’
dependence. (Golas & Bieniasz, 2016) determined the relationships between the
results of inventory management and the financial performance of enterprises.
Listed in Poland between 2005 and 2010. The research was based on the
econometric analysis of the influence of the length of inventory cycles on
financial performance of branches measured with return on sales, assets and
equity, although the effectiveness of inventory management was measured with
the length of inventory cycles. Regression analysis was applied to determine the
strength and direction of the influence of the results of inventory management,
measured with the length of cycles. Concluding from this research that the
inventory management was directly correlated with financial effectiveness of
enterprises and it should be subject to optimization. (Elzamly et al., 2019)
examined the relationship between inventory management and company’s
performance. Listed in Malaysia between 2008 and 2012. The relationship was
determined based on inventory days and return on asset (ROA) analysis, and
inventories days can be defined as to measure how many days on average it takes
for the inventory to turnover and also they made sure that the cost of over or under
stocks are always low. Concluded that the company had a few inventory problems
such as unorganized inventory arrangement, large amount of inventory days / no
cycle counting and no accurate records balance due to unskilled workers and also
proved that there was a significant relationship between return on asset (ROA)
and inventory days. (Nawaz et al., 2016) empirically evaluated the impact of
inventory performance on firm performance in Pakistan for non-financial firms
listed on KSE-100 index for the period 2010-2014. Correlation indicated that firm
performance was measured by ROA and ROE and both have weak positive
relationship with Inventory turnover ratio which measured inventory
performance. ROE has a positive weak relationship with Inventory turnover, total
assets and Leverage ratio. Total Asset has positive impact and Financial Leverage
has significant negative impact on ROA. Inventory performance has positive
impact on ROE significantly and Total Asset has positive impact and FLR has
significant negative impact on ROE. (Prempeh, 2015) evaluated the impact of
efficient inventory management on the profitability of manufacturing firms in
Ghana. A cross sectional data from 2004 to 2014 was gathered for the analysis
from the annual reports of four manufacturing firms listed on the Ghana Stock
Exchange. Financial performance was measured by return on assets. And the
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Inventory Management and Its Impact on the Firm Performance Tracing the Impact of Cash
Conversion Cycle ……………….. Heba Srour & Ahmed Azmy PP 45-65

Measures of profitability were examined and related to proxies for efficient

inventory management by manufacturers. The study revealed that the main
variable raw materials inventory management designed to capture the effect of
efficient management of raw material inventory by a company on its profitability
is significantly strong and positive and impacts on the profitability of the
manufacturing firms in Ghana. (Lwiki et al., 2013) examined the impact of
inventory management practices on the financial performance of sugar
manufacturing firms in Kenya. The research survey was conducted in all the eight
operating sugar manufacturing firms from the period 2002- 2007. The primary
data was collected using structured and semi- structured questionnaires
administered to key informants in the organizations. Secondary data was obtained
from annual financial performance statements available in the year Book sugar
statistics. Descriptive statistics was used to test the impact of inventory
management practices and Correlation analysis was used to determine the nature
and magnitude of the relationship among inventory management variables. The
results indicate that there exists a positive correlation between inventory
management and financial performance which was measured by Return on Sales
and with Return on Equity. (Panigrahi, 2013) examined the relationship between
inventory conversion period & firms profitability. The dependent variable, gross
operating profit is used as a measure of profitability & the relation between
inventory management & profitability is investigated for a sample of five top
Indian cement companies over a period from 2001-2010. This study employs
regression analysis to determine the impact of inventory conversion period over
gross operation profit taking current ratios. The relation between firm size &
production was positive so as firm size increases profitability increases. The
relative between current ratio & GOP was negative. (Sahari et al., 2012) this study
empirically examined the relationship between inventory management and firm
performance and capital intensity on a sample of financial data for 82 construction
firms in Malaysia for the period 2006–2010. By employing regression and
correlation techniques. Inventory management is measured by JIT and inventory
days’ techniques, firm performances measured by ROA. It was found that
inventory management is positively correlated with firm performance. In
addition, the results indicate that there is a positive relationship between
inventory management.
According to our literature review that was constructed from the previous studies,
we concluded that 56% of the articles estimated the relationship between
inventory management and firm performance including only one negative
relationship which was examined by (Aljaaidi & Bagais, 2020). Also we found
that 28% of the articles estimated the relationship between inventory management
and profitability we conducted that the ratio of negative relationships to positive

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relationships is 2:4. The remaining percentage is 16% which belongs to the

impact of inventory management on financial performance which was the least
percentage. According to the previous percentage, the impact of inventory
management on financial performance is the most suitable topic to be examined
in our research.
Data Analysis:
The analysis was done for both descriptive statistics and multiple regression
models using the (Eviews 12). The first section presents the descriptive statistics
for some selected variables which are: the minimum (Min), maximum (Max),
mean (M), standard deviation (SD), and coefficient of variation (CV). In the
second section, we provided guidelines for reporting the results of hypothesis
testing using the multiple linear regression analysis including regression
coefficients and coefficient of determination and that was carried out by
investigating the effect of Debt to Assets Ratio, Inventory Turnover, log assets
on ROA, and ROE.
Descriptive Statistics
Some descriptive statistics for the selected variables were calculated and reported
in table (1). These statistics are the minimum (Min), maximum (Max), mean (M),
standard deviation (SD), and coefficient of variation (CV).

Table (1): Descriptive statistic for the selected variables

Variable Symb. Min Max Mean SD CV
ROE Y1 0 0.55 0.2395 0.14397 60.11%
ROA Y2 0 0.28 0.1233 0.08396 68.09%
Debt To Assets Ratio X1 0.02 0.86 0.3678 0.25421 69.12%
Inventory Turnover X2 0.1 9.86 4.3193 3.22836 74.74%
Log Assets X3 16.47 23.78 20.7621 1.62268 8.13%

The basic descriptive statistics for the dependent variables were as follows: for
“ROE” we have 0.2395, 0.14397, 60.11% , and for the
“ROA” we have 0.1233, 0.08396, 68.09% . The descriptive
statistics for the independent variables were as follows: for “Debt To Assets
Ratio” we have 0.3678, 0.25421, 69.12% , for “Inventory
Turnover” we have 4.3193, 3.22836, 74.74% , and for the
“Log Assets” we have 20.76, 1.623, 8.13% .
Regression Analysis
Researchers provided guidelines for evaluating and reporting results of
hypothesis testing, including regression coefficients and coefficient of
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Inventory Management and Its Impact on the Firm Performance Tracing the Impact of Cash
Conversion Cycle ……………….. Heba Srour & Ahmed Azmy PP 45-65

determination (R2). Regression coefficients refer to the estimates of the

relationships between the model’s constructs. Those coefficients range from +1
to -1, where +1 means a strong positive relationship, 0 means a weak or non-
existence relationship, and -1 means a strong negative relationship. Coefficient
of determination ( ) refers to the effect of independent variables on the
dependent variables which is one of the quality measures of the regression model.
Estimates vary from 0 to 1, in which 0 means low explained variance and 1
means high explained variance.
First Hypothesis: Effect of Debt to Assets Ratio, Inventory Turnover, and
log of Assets on ROE
The multiple linear regression analysis was carried out to investigate the effect of
Debt to Assets Ratio ( ), Inventory Turnover ( ), and log of Assets ( ) on
ROE. The regression equation to be estimated is as follows:

The value of F-statistic, which measures the common importance of the

explanatory variables, is statistically significant at the 5% level, according to the
corresponding value of probability 0.000007. Results show that the coefficient
inventory turnover is statistically significant at the 5% level with a probability of
0.0000 and implies a positive correlation between the variables. Keeping all other
coefficients constant, an increase of 1 unit in the variable inventory turnover will
lead to an increase in the variable ROE by 0.040295 units.
Table (1): Results of the first hypothesis
Variable Coefficient Std. Error t- Prob.
Statistic
DEBT TO ASSETS
RATIO 0.062484 0.082965 0.4597 0.4597
INVENTORY
TURNOVER 0.040295 0.006501 0.0000 0.0000
LOGASSETS 0.002799 0.024134 0.9088 0.9088
C 0.017259 0.219296 0.9380 0.9380
R-squared 0.710894 Mean dependent var 0.239520
Adjusted R-squared 0.669593 S.D. dependent var 0.143972
S.E. of regression 0.082757 Akaike info criterion -2.000172
Sum squared resid 0.143823 Schwarz criterion -1.805152
Log likelihood 29.00216 Hannan-Quinn criter. -1.946082
F-statistic 17.21257 Durbin-Watson stat 1.731626
Prob (F-statistic) 0.000007

The regression analysis shows that the probability of both debts to assets ratio
coefficient and log assets is 0.4597 and 0.9088 respectively. Based on the fact
that the level of significance is 5 percent, a probability greater than 5 % indicates

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that the two variables are not statistically significant. Adjusted R2 0.669593
(66.96%) suggests that 67% of the total variation in ROE is explained by the
variations in the independent variables. In conclusion the results of the regression
analysis show that the correlation between ROE and both debt to assets ratio
coefficient and log assets is statistically insignificant and the correlation between
ROE and inventory turnover is significant statistically and this correlation is
positive.
Second Hypothesis: Effect of Debt to Assets Ratio, Inventory
Turnover, and log of Assets on ROA
The multiple linear regression analysis was carried out to investigate the effect of
Debt to Assets Ratio ( ), Inventory Turnover ( ), and log of Assets ( ) on
ROA. The regression equation to be estimated is as follows:

The value of F-statistic, which measures the common importance of the

explanatory variables, is statistically significant at the 5% level, according to the
corresponding value of probability 0.000000. Results show that the coefficient
inventory turnover is statistically significant at the 5% level with a probability of
0.0000 and implies a positive correlation between the variables. Keeping all other
coefficients constant, an increase of 1 unit in the variable inventory turnover will
lead to an increase in the variable ROA by 0.020784 units.
Table (2): Results of the second hypothesis
Variable Coefficient Std. Error t- Prob.
Statistic
DEBT TO ASSETS -
RATIO -0.047835 0.040426 1.183272 0.2499
INVENTORY
TURNOVER 0.020784 0.003168 6.561414 0.0000
LOGASSETS 0.008142 0.011760 0.692368 0.4963
C -
-0.022342 0.106855 0.209084 0.8364
R-squared 0.798156 Mean dependent var 0.123256
Adjusted R-squared 0.769321 S.D. dependent var 0.083958
S.E. of regression 0.040324 Akaike info criterion -3.438073
Sum squared resid 0.034147 Schwarz criterion -3.243053
Log likelihood 46.97592 Hannan-Quinn criter. -3.383983
F-statistic 27.68029 Durbin-Watson stat 1.558140
Prob (F-statistic) 0.000000

The regression analysis shows that the probability of both debts to assets ratio
coefficient and log assets are 0.2499 and 0.4963 respectively. Based on the fact
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Conversion Cycle ……………….. Heba Srour & Ahmed Azmy PP 45-65

that the level of significance is 5 percent, a probability greater than 5 % indicates

that the two variables are not statistically significant. Adjusted R2 0.769321
(76.93%) suggests that 77% of the total variation in ROA is explained by the
variations in the independent variables. In conclusion the results of the regression
analysis show that the correlation between ROA and both debt to assets ratio
coefficient and log assets is statistically insignificant and the correlation between
ROA and inventory turnover is significant statistically and this correlation is
positive.
0.6
0.5
0.4
0.3
0.2
0.1
0

Figure (1): Bar chart for ROE for the selected companies

0.3
0.25
0.2
0.15
0.1
0.05
0

Figure (2): Bar chart for ROA for the selected companies

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1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0

Figure (3): Bar chart for debt to assets ratio for the selected companies

12
10
8
6
4
2
0

Figure (4): Bar chart for inventory turnover for the selected companies

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Inventory Management and Its Impact on the Firm Performance Tracing the Impact of Cash
Conversion Cycle ……………….. Heba Srour & Ahmed Azmy PP 45-65

12
10
8
6
4
2
0

Figure (5): Bar chart for Log Assets for the selected companies

Figure (6): Scatter plot for the relationship between ROE and debt to assets ratio

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Figure (7): Scatter plot for the relationship between ROE and inventory turnover

Figure (8): Scatter plot for the relationship between ROA and debt to assets ratio

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Inventory Management and Its Impact on the Firm Performance Tracing the Impact of Cash
Conversion Cycle ……………….. Heba Srour & Ahmed Azmy PP 45-65

Figure (9): Scatter plot for the relationship between ROA and inventory turnover
Conclusion
After investigating the statistics of both descriptive and multiple regression
models, the data analysis showed that we have two dependent variables: ROE and
ROA (Y1/Y2) respectively and three independent variables: debt to assets ratio,
inventory turnover and long assets (X1/X2/X3) respectively. The value of F-
statistic that measures the common importance of the explanatory variables is
statistically significant at the 5% level according to the corresponding value of
probability 0.000007. Results show that the coefficient inventory turnover is
statistically significant at the 5% level with a probability of 0.000007and implies
a positive correlation between the variables. Keeping all other coefficients
constant, an increase of 1 unit in the inventory turnover variable will lead to an
increase in the ROE variable by 0.040295 units and an increase in the ROA
variable by 0.020784 units. Concluding that the results of the regression analysis
show that the correlation of the dependent variables; ROA and ROE with both
coefficient of debt to assets ratio and log assets is statistically insignificant and
the correlation between these dependent variables and inventory turnover is
statistically significant and correlation is positive.
According to these results, we proved that our hypothesis fully accomplishes our
estimations which were:
H1. Inventory Turnover has positive effect on ROE.
H2. Inventory Turnover has positive effect on ROA.
Since we came up with these positive relations, then the answer of our question
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which was “Does the inventory management have an impact on firm

performance?” is yes inventory management which was measured by inventory
turnover, has positive impact on firm performance which was measured by ROA
and ROE using the control variables log assets and debt to assets ratio.

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