An Empirical Analysis of the Relationship between Working Capital Management and Profitability: Panel Evidence from Listed Manufacturing Companies in East Africa

Abstract

This paper assesses the relationship between working capital management and profitability of manufacturing companies listed in East African stock exchange markets in the period (2005-2012). Profitability which was the dependent variable was represented by Return on Assets (ROA) and Operating Margin (OM) while the independent variable, working capital management was represented by Current Ratio, Quick Ratio, Cash Cover Ratio, Inventory Holding Period, Receivables’ Collection Period, Payables’ Deferral Period and Cash Conversion Cycle. The study also used Sales Growth, Debt Ratio and Company Size as the control variables. Data analysis was conducted using Pearson Correlation and Multiple Regression Analysis and it was observed that there exists a significant relationship between the components of working capital especially cash conversion cycle  and profitability. Cash conversion cycle was negatively related to operating margin (OM) hence it is recommended that companies should shorten the cash conversion cycle by keeping the receivables’ collection period, payables’ deferral period and inventory holding period o the optimum level.

Keywords: Working Capital Management, Profitability, Listed Manufacturing Companies