The Relationship Between Working Capital Investment Policy and Profitability of Manufacturing Firms in Kenya

Abstract

The way in which working capital is managed has an impact on the profitability of the firm and the return to shareholders. Holding optimal levels of current assets and current liabilities can result into increased profitability and an increase in shareholders’ wealth. The purpose of this study was to determine the relationship between working capital investment policy and profitability of manufacturing firms in Kenya. The study used secondary data in the form of current assets, current liabilities, owners’ equity and net profit after tax, obtained from annual reports and financial statements of manufacturing firms both listed and non-listed. A sample of 30 companies was studied for a five (5) year period from 2006-2010, to determine the effect of long term financing of current assets on the profitability of manufacturing firms. Simple linear regression was used for the analysis. The results show that no relationship exists between the working capital investment policy and profitability. This means that managers can choose to adopt either an aggressive or a conservative working capital investment policy or a combination and achieve the same level of profitability.