The Impact of Working Capital Management on Profitability of Construction Firms in Ethiopia: The Case of Category a Construction Companies
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Date
2018-02
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Abstract
The purpose of this study is to examine the impact of working capital management on profitability of construction firms in the case of category A Construction companies. In light of this object the study adopted quantitative approaches to test a series of research hypothesis. Financial statement of a sample of seventeen (17) construction companies is used for a period of eight years (2008-2015) with the total of 136 observations. Data was analyzed on quantitative basis using descriptive and regression analysis (ordinary least square) method. Proportionate random stratified sample was used. It examined the components in working capital such as accounts receivable period, inventory holding period, account payable period, and cash conversion cycle in relation to return on assets (ROA). In addition the study used current ratio and quick ratio, used as liquidity indicator; firm size , as measured by logarithms of sales ; sales growth rate as measured by change in annual sales, as control variables. The key findings from the study are: firstly, there exists a significant negative relationship between average collection period and profitability indicating that an increase in the number of days a firm receives payment from sales affects the profitability of the firm negatively; secondly, there exists a negative relationship between inventory holding period with profitability and positive relationship between accounts payable period and profitability. But, both inventory holding period and accounts payable period was found to be insignificant in affecting profitability of the firms. Thirdly, there exists a negative relationship between cash conversion cycle and profitability of the firm. Which indicates that as the cash conversion cycle decreases it leads to an increase in profitability of the firm, and managers can increase profitability of their firms by shortening the time lag between a firm’s expenditure for purchases of raw materials and the collection of sales of finished goods. In general the study recommended that firms should minimize working capital management components in order to maximize profitability.
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A Research Project Submitted In Partial Fulfillment of the Requirement for the Award of Masters of Business Administration in Finance
Keywords
Liquidity, Profitability and construction firms, Working capital management