The relationship between tea value addition and profitability of exporting companies in the Kenyan tea industry

Abstract

Company profitability, liquidity and shareholder's wealth are affected by how the managers allocate the available resources they have been entrusted with. The Food and Agriculture Organization (FAO) United Nations committee on commodity problems (2005) advises that value added market offers new opportunities, business prospects and incomes. Therefore the question arising are, does it make financial prudence to engage in value addition instead of the traditional bulk tea exports. The mam literature sources include a number of studies in Asia and the Pacific on commodity issues by Jalan (2001), who advocates for legislation and strong policies in the wake of factors like poor yields to increase post-quality competition, volatile prices and barriers like sanitation. Also Mohanty (2006) indicates that profit margins from processed food exports are more than those for semi-processed food products and primary food products in that order. This particular study used data covering a five year period from 2001 to 2005 derived from the Nairobi Stock Exchange (NSE) and end of year published financial reports for those companies which were not listed. Returns on equity and asset were determined by net income divided by average equity and average total assets respectively. Security returns were determined using the market model on monthly basis. The study revealed that profitability from companies that engaged in value addition is higher compared to those of companies that did not engage in value addition. The study concluded that there exists a strong relationship between value addition and profitability for tea exporting companies in Kenya.