Effect of Working Capital Management on Profitability of Manufacturing Firms Listed at the Nairobi Securities Exchange

Abstract

The manufacturing industry is one of the significant sectors of Kenya’s economic development. However, the manufacturing sector has witnessed a slow pace of industrial growth and weak performance by majority of the enterprises that has derailed the contribution to the Kenya’s economy. In recent years, companies quoted in the manufacturing segment at NSE have posted mixed outcomes. The majority of the quoted manufacturing companies’ market share reveals a drop in shares’ prices leading to a reduction in the entities market capitalization. In addition, most companies such as the Flame Tree Group and the Unga group have recorded very strong negative percentages for their ROA and ROE. This study sought to investigate how working capital management influences the profitability of listed manufacturing firms at the NSE. The independent variable for the research was WCM measured using DIO, DSO and DPO. Leverage and firm size were the control variables while the dependent variable was profitability measured using ROA. The study was guided by free cash flow theory, trade off theory and liquidity preference theory. Descriptive research design was utilized in this research. The 9 Kenyan listed manufacturing firms as at December 2021 served as target population. The study collected secondary data for five years (2017-2021) on an annual basis from CMA and individual firms annual reports. Descriptive, correlation as well as regression analysis were undertaken and outcomes offered in tables followed by pertinent interpretation and discussion. The research conclusions yielded a 0.351 R square value implying that 35.1% of changes in listed manufacturing firms ROA can be described by the five variables chosen for this research. The multivariate regression analysis further revealed that individually, DIO, DSO and DPO exhibited negative and not significant effect on ROA of listed manufacturing firms as shown by (β=-0.265, p=0.082); (β=-0.026, p=0.857) and (β=-0.247, p=0.112) respectively. Firm size exhibited a positive and significant influence on ROA of Kenyan listed manufacturing firms (β=0.332, p=0.026) while leverage has a negative and significant effect on ROA of listed manufacturing firms (β=-0.317, p=0.030). The study recommends that management of listed manufacturing firms should focus on enhancing their asset base as this will enhance profitability. The study further recommends the need to for listed manufacturing firms to set debt limits as high debt levels might have a negative effect on profitability. The study recommends the need for further studies focusing on other listed firms at the NSE.