Effect of Borrowing and Working Capital on Profitability of Manufacturing Firms Listed at Nairobi Securities Exchange

Abstract

Enterprises strategically employ debts and equity to optimize operational efficiency while proficiently managing borrowings and working capital, significantly influencing a company's performance financially. In developed nations, the pivotal role of the manufacturing sector in driving economic growth and fostering international trade has been well-recognized. This study aimed to assess the impact of borrowing and working capital management on the profitability of manufacturing entities listed on the Nairobi Securities Exchange (NSE). Employing a descriptive research design, it explores complex relationships among various variables. Enterprises strategically employ financial instruments such as debts and equity to optimize their operational efficiency. Proficient management of borrowings and working capital plays a pivotal role in shaping a company's performance financially. This influence extends even to the global stage, where developed nations acknowledge the crucial role of the manufacturing sector in propelling economic growth and fostering international trade. The core objective of this study was to scrutinize how the management of borrowing and working capital impacts on the profitability of manufacturing entities that find themselves listed on the Nairobi Securities Exchange (NSE). To accomplish this objective, a descriptive research design was chosen, allowing for a comprehensive exploration of intricate relationships between various variables. The study zeroes in on ten manufacturing entities that held coveted spots on the NSE as of December 31, 2022, with the data analysis spanning a decade, from 2013 to 2022, ensuring a thorough evaluation. However, the researcher managed to assemble data from eight manufacturing firms. The findings of this analysis reveal crucial insights into these intricate relationships. Specifically, liquidity, financial leverage, inventory turnover, and debtor turnover collectively account for 31.1% of the total variations in the profitability of the listed manufacturing entities in Kenya. This conclusion gains support from the coefficient of determination (R-squared) standing at 0.311. In a more detailed analysis, the coefficient for liquidity emerges as both statistically significant and positive (β = 0.17473, p = 0.000 < 0.05). In practical terms, a unit enhancement in the liquidity of the listed manufacturing entities leads to a significant improvement of 0.17473 units in their profitability. On the flip side, the coefficient for financial leverage proves statistically significant and negative (β = -0.0542, p = 0.000 < 0.05), indicating that a unit enhancement in the financial leverage of the listed manufacturing firms results in a significant decline of 0.0542 units in profitability. Moreover, the coefficient associated with inventory turnover is statistically significant and negative (β = 0.01349, p = 0.008 < 0.05), implying that a unit increase in the inventory turnover of the listed manufacturing entities leads to a noteworthy decline of 0.01349 units in profitability. Finally, the coefficient linked to debtor turnover is statistically significant and negative (β = 0.05228, p = 0.027 < 0.05), signifying that a unit increase in the debtor turnover of the listed manufacturing firms results in a substantial decline of 0.05228 units in profitability. In essence, this study delves into the intricate dynamics of borrowing, working capital management, and profitability within the realm of manufacturing entities listed on the NSE. Liquidity is identified as a positive driver of profitability, while financial leverage, inventory turnover, and debtor turnover are associated with adverse impacts on the bottom line. These findings offer valuable insights for enterprises aiming to fine-tune their financial strategies and bolster their profitability.