Effect Of Working Capital On Financial Performance Of Service Firms Listed At The Nairobi Securities Exchange

Abstract

A descriptive research was done on the effect of working capital on financial performance of service firms listed at the Nairobi Securities Exchange. Data for a 5-year period (2012-2016) was collected for 24 service firms listed at the NSE. The data was obtained from CMA, CBK and websites of the firms under study. The data was analyzed annually giving a total of 120 data points. Multiple regression, correlation and descriptive analysis was done. From the descriptive analysis, ROA displayed a mean of 4.2669, Net working capital ratio 12.3066, inflation rate 6.9720 and firm size 9.6874. The value of adjusted R2 was 0.657 indicating a significant variation of 65.7% on ROA due to changes in net working capital ratio, inflation rate, and firm size. A weak positive correlation was found between net working capital ratio and ROA (correlation coefficient=0.370). A weak positive relationship was also established between inflation and ROA (correlation coefficient=0.155). Firm size and ROA were found to have a strong positive relationship (correlation coefficient=0.651). The study concludes that net working capital ratio, inflation rate, and firm size affect financial performance of listed service firms in Kenya. It was recommended that the government though the CMA establish policies that would increase the working capital in listed service firms in order to increase financial performance. The Management of these firms should also take note and ensure that firm size is boosted in order to increase the financial performance.