Working Capital Management and Firms’ Profitability: Evidence from Manufacturing S.C. in Addis Ababa, Ethiopia
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Date
2015-05
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
Addis Ababa University
Abstract
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
Description
Keywords
Manufacturing S.C.