Effects of Working Capital Management on the Profitability of Listed Manufacturing Companies at the Nairobi Securities Exchange

Abstract

The study sought to examine WCM effect on profitability of NSE listed manufacturing firms for periods 2012 to 2021.The study was anchored on 3 theories; theory of working capital management, cash conversion cycle theory and rent theory of profitability. Secondary data utilized was sourced from annual reports from company’s websites as well as from NSE and CMA websites. Panel data analysis was employed in the study on a population of eight NSE listed manufacturing firms as at 31st December 2021. The analysis revealed a statistically significant positive correlation between Profitability and ICP, a significant negative relationship between profitability and ACP and lastly firm size and profitability were also established to be significantly and positively related. CCC and Debt ratio were established to be positively associated to profitability while PDP was established to relate negatively with profitability. However, the relationship was not statistically significantly. Fixed effects (FE) model was the most appropriate model for analysis of data under investigation. Study findings established that firm size and debt ratio had a significant effect on profitability. However, all other variables were not statistically significant. Utilizing firm size and debt ratio as moderating variables study results indicated that ICP, ACP, PDP and CCC explained 22.11% of any change that may occur in profitability. When the independent variables interacted with firm size the predictive power of the model improved by 0.64% to 22.75%, further when debt ratio was introduced to the model the explanatory power rose by 0.57% to 22.68%.This findings indicate that firm size and debt ratio slightly moderated the relationship between WC and profitability.