Effect of Borrowing and Working Capital on Profitability of Manufacturing Firms Listed at Nairobi Securities Exchange
Abstract
Enterprises strategically employ debts and equity to optimize operational efficiency while
proficiently managing borrowings and working capital, significantly influencing a company's
performance financially. In developed nations, the pivotal role of the manufacturing sector in
driving economic growth and fostering international trade has been well-recognized. This study
aimed to assess the impact of borrowing and working capital management on the profitability of
manufacturing entities listed on the Nairobi Securities Exchange (NSE). Employing a descriptive
research design, it explores complex relationships among various variables. Enterprises
strategically employ financial instruments such as debts and equity to optimize their operational
efficiency. Proficient management of borrowings and working capital plays a pivotal role in
shaping a company's performance financially. This influence extends even to the global stage,
where developed nations acknowledge the crucial role of the manufacturing sector in propelling
economic growth and fostering international trade. The core objective of this study was to
scrutinize how the management of borrowing and working capital impacts on the profitability of
manufacturing entities that find themselves listed on the Nairobi Securities Exchange (NSE). To
accomplish this objective, a descriptive research design was chosen, allowing for a comprehensive
exploration of intricate relationships between various variables. The study zeroes in on ten
manufacturing entities that held coveted spots on the NSE as of December 31, 2022, with the data
analysis spanning a decade, from 2013 to 2022, ensuring a thorough evaluation. However, the
researcher managed to assemble data from eight manufacturing firms. The findings of this analysis
reveal crucial insights into these intricate relationships. Specifically, liquidity, financial leverage,
inventory turnover, and debtor turnover collectively account for 31.1% of the total variations in
the profitability of the listed manufacturing entities in Kenya. This conclusion gains support from
the coefficient of determination (R-squared) standing at 0.311. In a more detailed analysis, the
coefficient for liquidity emerges as both statistically significant and positive (β = 0.17473, p =
0.000 < 0.05). In practical terms, a unit enhancement in the liquidity of the listed manufacturing
entities leads to a significant improvement of 0.17473 units in their profitability. On the flip side,
the coefficient for financial leverage proves statistically significant and negative (β = -0.0542, p =
0.000 < 0.05), indicating that a unit enhancement in the financial leverage of the listed
manufacturing firms results in a significant decline of 0.0542 units in profitability. Moreover, the
coefficient associated with inventory turnover is statistically significant and negative (β = 0.01349,
p = 0.008 < 0.05), implying that a unit increase in the inventory turnover of the listed
manufacturing entities leads to a noteworthy decline of 0.01349 units in profitability. Finally, the
coefficient linked to debtor turnover is statistically significant and negative (β = 0.05228, p = 0.027
< 0.05), signifying that a unit increase in the debtor turnover of the listed manufacturing firms
results in a substantial decline of 0.05228 units in profitability. In essence, this study delves into
the intricate dynamics of borrowing, working capital management, and profitability within the
realm of manufacturing entities listed on the NSE. Liquidity is identified as a positive driver of
profitability, while financial leverage, inventory turnover, and debtor turnover are associated with
adverse impacts on the bottom line. These findings offer valuable insights for enterprises aiming
to fine-tune their financial strategies and bolster their profitability.
Publisher
University of Nairobi
Rights
Attribution-NonCommercial-NoDerivs 3.0 United StatesUsage Rights
http://creativecommons.org/licenses/by-nc-nd/3.0/us/Collections
- School of Business [1421]
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