The relationship between tea value addition and profitability of exporting companies in the Kenyan tea industry
Abstract
Company profitability, liquidity and shareholder's wealth are affected by how the
managers allocate the available resources they have been entrusted with. The Food and
Agriculture Organization (FAO) United Nations committee on commodity problems
(2005) advises that value added market offers new opportunities, business prospects and
incomes. Therefore the question arising are, does it make financial prudence to engage in
value addition instead of the traditional bulk tea exports.
The mam literature sources include a number of studies in Asia and the Pacific on
commodity issues by Jalan (2001), who advocates for legislation and strong policies in
the wake of factors like poor yields to increase post-quality competition, volatile prices
and barriers like sanitation. Also Mohanty (2006) indicates that profit margins from
processed food exports are more than those for semi-processed food products and
primary food products in that order.
This particular study used data covering a five year period from 2001 to 2005 derived
from the Nairobi Stock Exchange (NSE) and end of year published financial reports for
those companies which were not listed. Returns on equity and asset were determined by
net income divided by average equity and average total assets respectively. Security
returns were determined using the market model on monthly basis.
The study revealed that profitability from companies that engaged in value addition is
higher compared to those of companies that did not engage in value addition. The study
concluded that there exists a strong relationship between value addition and profitability
for tea exporting companies in Kenya.
Citation
Masters of business administrationSponsorhip
University of NairobiPublisher
School of business,University of Nairobi