The Relationship Between Liquidity and Profitability of Nonfinancial Companies Listed in Nairobi Securities Exchange

Abstract

Liquidity management and profitability are very important issues in the growth and survival of business and the ability to handle the trade-off between the two is of great concern for financial managers. This study has investigated the relationship between liquidity and profitability of nonfinancial companies listed in the NSE. The objective of the study was to establish the relationship between liquidity and profitability of nonfinancial companies listed in the Nairobi securities exchange. The study adopted a descriptive research design that enabled the researcher to meaningfully describe a distribution of scores or measurements using various statistics. The study covered 39 listed nonfinancial companies in NSE Kenya. Analysis was based on data extracted from audited annual financial statements of listed nonfinancial companies for a period of five years from year 2009 to 2013. Correlation and regression analysis were employed to establish the relationship between liquidity and profitability. The ROA was used as proxy for companies‟ profitability and the companies‟ liquidity was measured using the current ratio, quick ratio and the absolute liquid ratio. Firm size, sales growth and firms‟ leverage were used as the control variables. Findings established a significant weak positive relationship between liquidity and profitability with a Spearman correlation coefficient of 0.398 and R2 of 15.9% among the listed nonfinancial companies in Kenya. However, the findings are based on a study conducted on the nonfinancial companies listed in the NSE; hence the results are not generalizable to non-listed companies. Secondly, the sample only comprises nonfinancial companies. Therefore, the results are not valid for the financial companies. The study recommends the following for policy and investment decisions: The trading companies should maintain an optimal liquidity level so as to maximize company‟s profitability and shareholders‟ wealth. Trading companies should pursue profit maximization since so doing simultaneously enhances liquidity. Investors should be guided by the true liquidity and profitability positions of a company in making their investment decisions.