The relationship between inventory turnover and financial performance of supermarkets in Kenya

Abstract

Inventory turnover is a key element of working capital management. Supermarkets being in retail business are greatly affected by the rate of inventory turnover. It is therefore important to determine the relationship between inventory turnover and financial performance. The objective of this study is to determine the relationship between inventory turnover and financial performance of supermarkets in Kenya. Inventory turnover was measured by dividing cost of goods sold by average inventory. Financial performance was measured by return on assets (ROA). ROA is calculated by dividing profit before interest and tax by total assets. Data was collected from financial statements of five supermarkets namely Uchumi, Naivas, Ukwala, Nakumatt and Tuskys. Data was collected for five years between 2008-2012. Descriptive research design was used and convenient sampling method used. Data was analyzed using Ms Excel and presented using tables. Regression and correlation analysis was used to determine the relationship between the variables. The study found out that there is strong positive relationship between inventory turnover and financial performance of supermarkets in Kenya at 0.879. This means that 87.9% of ROA is caused by inventory turnover while the rest is influenced by other factors. It is therefore clear that the higher the inventory turnover the higher the return on assets. Supermarkets should aim at improving the inventory turnover which will greatly improve their financial performance.