Effect of Liquidity on Profitability of Non-financial Firms Listed at Nairobi Securities Exchange.

Abstract

One of the major objectives of a firm is to maximize profit and maintain high liquidity management. The most important part in administration of working capital is maintenance of its liquidity to fulfil its intended objective. The objective of this study was to determine the effect that liquidity has on profitability of listed non-financial firms at NSE. This study incorporated a cross-sectional and descriptive research design. This research design provided both qualitative and quantitative information from all the chosen population. It also enabled the researcher to understand the characteristics of a group; gauge a situation and assemble data around possible change. The researcher looked at 37 listed non-financial firms in Kenya and employed Pearson Correlation and regression analysis to explain the relationship. The dependent variable was measured using ROA, while the independent variables were; current ratio, quick ratio, cash ratio, cash conversion ratio, age and size. All the independent variables had positive correlation against financial performance apart from cash conversion cycle which is negatively correlated. This shows that when liquidity increases then financial performance for non-financial companies listed at NSE also increases. One limitation of the study was though there are 45 non-financial firms in the NSE, only 37 had the available data. Further studies should be undertaken to cover a bigger scope that is, all companies in Kenya, including the SMEs. This would help in determining the effect of liquidity on profitability for companies registered in Kenya. Similar study should be replicated for other countries middle income earning, developing and developed countries. Such studies undertaken in such countries would be compared to the results of this study and conclusions drawn from the possible differences in outcome.