Relationship between cash conversion cycle and financial performance of companies listed at the Nairobi Stock Exchange

Abstract

Studies such as Jose et al. (1996) and Soenen (1993) show a strong link between cash conversion cycle and financial performance. However there are hardly such studies on the developing and least developed countries. This study examined the cash conversion cycle and financial performance of firms listed at the Nairobi Stock Exchange for the period 2006 to 201 O. The objective was to establish the relationship between cash conversion cycle and financial performance.

The study used descriptive analysis and the correlation model. The data was obtained from the Nairobi Stock Exchange. A sample of 30 companies selected from the agricultural, commercial and services, and industrial and allied sectors was studied. The Pearson Correlation coefficient was calculated to establish the relationship and a t-test administered to determine the significance of the relationship.

The key finding from the study was that there exists a negative relationship between cash conversion cycle and financial performance of firms listed in the Nairobi Stock Exchange. The correlation coefficient of the association was -0.202. This inverse relationship was found more pronounced in the agricultural sector, which had a correlation coefficient of -0.329. The fmdings suggest that firms with short cash conversion cycle are likely to perform better than those with long cash cycles. The study therefore encourages firms to shorten their cash cycles as much as possible.