Working Capital Management and Firms’ Profitability: Evidence from Manufacturing S.C. in Addis Ababa, Ethiopia

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Addis Ababa University


The main purpose of this study is to test empirically the impact of working capital management on profitability .To investigate this relationship between these two, the author collected secondary data from 19 manufacturing share companies in Addis Ababa, Ethiopia for the period of 2010 to 2014. Accounts receivable period, inventory holding period and accounts payable period are used as independent working capital investment policy variables. Moreover, cash conversion cycle and current assets to total assets ratio are used as comprehensive measures of working capital investment policy. On the other hand, current liabilities to total assets ratio is used as measure of working capital financing policy. The regression results show inverse relationship between accounts receivable and inventory holding periods with profitability. However there is statistically insignificant relationship between accounts payable period and profitability. The results also show that there exists significant negative relationship between cash Conversion cycle and profitability of the sampled firms. In addition to that there is significant positive relationship between current assets to total assets ratio and profitability measures has been observed. On the other hand, results show that a significant positive relationship between current liabilities to total assets ratio and profitability. To be profitable, firms must try to keep these numbers of days account receivable and inventory turnover days to minimum level. This also helps to minimal the cash conversion cycle also. Since aggressiveness of working capital management investment policies is inversely related to profitability, and aggressive investment policy positively manufacturing related sector with should profitability, the follow conservative financial investment aggressive financing policy in their working capital management



Manufacturing S.C.