Impact of Working Capital Management on Profitability of Manufacturing Share Companies in Ethiopia
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Date
2016-04
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Addis Ababa University
Abstract
The purpose of this study is to examine the impact of working capital management on
profitability of manufacturing share companies in Ethiopia with special reference to large tax
payers. In light of this objective the study adopted quantitative approaches to test a series of
research hypotheses. Financial statements of a sample of sixteen (16) manufacturing share
companies is used for a period of seven years (2008-2014) with the total of 112 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 capitalsuch as accounts receivable period, inventory holding period,
accounts payable period, and cash conversion cycle in relation to return on asset (ROA).In
addition the study used current ratio, used as liquidity indicator; firm size, as measured by
logarithm of sales; firm growth rate as measured by change in annual sales and financial
leverage, 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 andpositive 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. Finally, positive relationships between liquidity and profitability measures
have also been observed.In general the study recommended that firms should minimize
working capital management components in order to maximize profitability
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Keywords
Manufacturing share, Companies in ethiopia