The relationship between working capital management and financial performance of energy and petroleum companies listed at the Nairobi securities exchange

Abstract

The objective of the study was to establish the relationship between working capital management and financial performance of energy and petroleum firms listed at the Nairobi Securities Exchange in Kenya. The data analysis was carried on four energy and petroleum firms for a period of 10 years between 2003 and 2012. Secondary source of data was used in measuring both aspects of the variables which are working capital and financial performance of energy and petroleum firms. Data was analyzed using Statistical Packages for Social Sciences (SPSS) version 16. Regression and correlation analysis was used to determine the nature and strength of the relationship between independent and dependent variables. The relationship of average collection period, inventory conversion period and average payment period with return on equity was analyzed in this study. Based on the regression and correlation analysis of each of the companies, the findings indicate that the energy and petroleum firms’ performance is influenced by the variables relating to working capital. There is a positive relationship between profitability and average collection period and inventory conversion period. Average payment period shows a negative relationship with profitability. Most of the profits in Energy and Petroleum firms in Kenya is attributable to working capital management. The study concludes that there exist a relationship between WCM and financial performance of Energy and Petroleum firms in Kenya. The study recommends that for the Energy and Petroleum firms to remain profitable, they should employ working capital management practice that will help in making decisions about investment mix and policy, matching investment to objective, asset allocation for institution and balancing risk against profitability