Influence of Current Asset Structure on Financial Performance of Manufacturing Firms in the Building and Construction Sector in Kenya

Abstract

All business organizations including those in the building and construction sector are always concerned about their financial performance. This is usually with respect to how their operating, investing and financing activities not only help generate revenues but also how to keep the costs of all this operations down so as to optimize on business profitability. Despite the concern for financial performance in general and profitability in particular, it is still not clear how the current assets structure (that reflects business policy on management of current assets) affect the financial performance of companies in the building and construction sector in Kenya. The variations in the asset management policies across the industry is reflected in the variations in the asset structure ranging from very low current asset to total asset ratios to very high of these ratios. Despite the variations in the current asset management policies, there is lack of empirical and theoretical clarity as to how the current asset structure influences profitability of these companies. Empirically, extant research arrives at conflicting findings as to how asset management is related to financial performance. Theoretically, whereas the portfolio theory of Markowtz (1952) recommend optimal asset structuring to minimize risk and therefore boost performance, the agency theory of Jensen and Meckling (1976) on the other hand fail to pinpoint a clear association between the current asset structure and financial performance. The trade-off theory of Gitman (1974) implies inverse relationship between liquidity and profitability. This study is designed as a causal exploratory survey using the largest 44 companies in the building and construction sector in Kenya over a 5 year period covering 2016 to 2021. This forms 220 firm-year observations. Fixed effects bivariate panel regression model was adopted after conducting model specification tests. The test of hypothesis was conducted using the t-statistic at 95% confidence interval. Based on the positivist research philosophy, the findings reveal that current asset structure (CAS) as measured by the current asset to total assets ratio had a negative effect on financial performance as measured by return on equity and net profit margin. This supports the optimal asset structuring to balance off the risk return trade-off. The study was limited to the large firms in the building and construction sector and recommends an enhanced sample for all company sizes to check out if size has an effect on the robustness of the findings.

Keywords: Current Asset Structure; Financial Performance; Profitability

DOI: 10.7176/RJFA/13-4-03

Publication date: February 28^th 2022