Relationship between working capital management and profitability of cement companies in Kenya

Abstract

Working capital is an important issue during financial decision making since it forms part of investment in asset that requires appropriate financing investment. The objective of the study was to establish the relationship between working capital management and profitability in cement companies in Kenya. A review of the relevant literature was undertaken in order to eliminate duplication of what has been done. The research was a casual study. The population of interest was all the cement companies operating in Kenya as at 30th December 2010. The study incorporated data for the last five years (2006 – 2010). In order to analyze the effects of working capital management on the firm’s profitability, i.e. (operating income + depreciation)/total asset as measure of profitability was used as the dependent variable. The independent variable (working capital management) was measured by cash conversion cycle. Spearman’s Correlation analysis was used to establish the relationship between working capital management and profitability. Findings of the study indicated that working capital management increases profitability, and hence a negative relationship existed between the working capital management and profitability variables. The conclusion of the study was that when efficient working capital management increases profitability, then one should expect a negative relationship between the measures of working capital management and profitability variables.