Relationship Between Liquidity and Profitability of Companies Listed at the Nairobi Securities Exchange

Abstract

According to Padachi (2006), a firm is required to maintain a good balance between liquidity and profitability while conducting its daily operations. Liquidity is the availability of funds, or assurance that funds will be available, to honor all cash outflow commitments as they fall due (Bank of Jamaica, 2005). Pandey (2006) suggested that a company should earn profit to survive and grow over a long period of time. The study sought to investigate the relationship between liquidity and profitability for companies listed at the NSE. This research was conducted through a diagnostic research design. The diagnostic research design was considered appropriate as it tries to determine the association of the subject matter with something else. This study used secondary data. The secondary data was obtained from the annual financial reports of the sampled listed firms in Kenya over a period of 5 years (2009-2013). The data was collected based on the information about the variables. Quantitative data was analyzed by descriptive analysis while qualitative data was analyzed through content analysis. The study may provide information to policy makers, scholars, academicians, finance managers and investors on the relationship between liquidity and profitability for companies listed at the NSE. From the findings, the study established that cash conversion period and the current ratio as liquidity measures negatively affected the profitability of the firms listed in the NSE over the 5 year period while the quick ratio as a liquidity measure did not significantly affect the profitability of the firms listed in the NSE over the 5 year period. The study concludes that there exists a significant relationship between liquidity and profitability of listed firms in Kenya. The study recommends that the management of the firms listed in the NSE should institute efficient cash management techniques that would help reduce the cash conversion period. Further, the study recommends that the management of the firms listed in the NSE should strive to achieve and maintain an optimal liquidity position that holds adequate cash/liquid resources for operational needs while the surplus liquid resources are invested in existing viable projects. In addition, the management of the listed firms should focus on identifying viable investment opportunities within the firm’s operating environment to enhance the growth and profitability of the firms rather than paying too much attention on the liquidity position of the firms.