The Effect of Working Capital and Capital Structure on the Financial Performance of Insurance Companies Listed at Nairobi Securities Exchange

Abstract

The impact of working capital and capital structure on financial performance is a topic that has attracted a great deal of scholarly attention. Nonetheless, much of the research has concentrated on large multinationals, with little attention being paid to the insurance industry. This is particularly true for insurance companies in Kenya, which are still facing the challenge of low penetration. There is, therefore, limited understanding of how Kenyan insurance companies can enhance their financial performance using their working capital and capital structure despite their instrumental position in the Kenyan economy. Focusing on six publicly listed companies, this descriptive study sought to fill this gap in literature. The study particularly sought to examine the impact of capital structure (debt to equity or gearing ratio) and working capital management (current ratio) on the financial performance of Kenyan insurance companies as measured by return on assets (ROA) as well as return on capital employed (ROCE). Following correlation and regression analyses, it was found that 50% and 33% of publicly listed insurances in Kenya companies depicted a strong positive correlation between gearing ratio and ROA, and between gearing ratio and ROCE, respectively. It was further found that 33% and 83% of the companies portrayed a strong positive correlation between working capital ratio and ROA, and between working capital ratio and ROCE, respectively. While it was found that both gearing ratio and working capital ratio may have a positive impact on ROA and ROCE, gearing ratio was found to have a greater impact. Generally, the study established that insurance companies in Kenya can capitalise on their debt-equity mix and working capital management policy to enhance their financial performance, especially with respect to ROA and ROCE. The study has important implications for both practice and policy in the Kenyan insurance industry.