Relationship Between Working Capital and Profitability of Listed Companies in the Nairobi Stock Exchange

Abstract

The aim of the study is to assess the relationship between working capital and profitability. The corporate finance literature has traditionally focused on the study of long-term financial decisions. Researchers have particularly examined investments, capital structure, dividends or company valuation decisions, among other topics. However, short-term assets and liabilities are important components of total assets and needs to be carefully analyzed. Management of these short-term assets and liabilities warrants a careful investigation since the working capital management plays an important role for the firm's profitability and risk as well as its value .The optimal level of working capital is determined to a large extent by the methods adopted for the management of current assets and liabilities. It requires continuous management to maintain proper level in various components of working capital that is cash, receivables, inventory and payables. The researcher studied 23 firms, a sample of firms listed at Nairobi Stock Exchange (NSE) for a period of2003-2008. The return on assets has been used as the dependant variable whereas cash conversion cycle, accounts receivable period, accounts payable period, inventory period and leverage were used as independent variables. Multiple regression analysis and descriptive statistics were used to analyse the collected data. Empirical findings of the study show that accounts receivable period, accounts payable period, inventory period and cash conversion cycle affect the firm profitability negatively. Finally, the study suggests some policy .•. implications for the managers and investors of Kenyan market