WORKING CAPITAL MANAGEMENT AND FIRM PERFORMANCE: EVIDENCE FROM PANEL DATA ANNALYSIS OF SELECTED PUBLIC ENTERPRISES

Abstract

Findings in previous researches show, there is strong association between firms' working capital management and firms’ profitability. Unfortunately most of the researches were undertaken on private firms that operate in developed and organized economies that have money market and capital market. Thus, this study examined the working capital management and performance association of public enterprises of Ethiopia using five year data from 2008 to 2012 which is collected from ten selected public enterprises financial statements located in Addis Ababa. The study used 14 variables: (1) Working capital management measured by the number of days accounts receivable, number of days inventory, number of days accounts payable, cash conversion cycle, current ratio and quick ratio as proxy of liquidity, the ratio of the current assets to total assets as a proxy of the working capital investing policy and the ratio of the current liabilities to total assets as a proxy of the working capital financing policy. (2) Profitability measured by operating profit margin, return on asset and return on equity. (3) Other variables measured by the size of the firm, sales growth and total debt to total assets as proxy of financial leverage. The research methodology is limited to quantitative approach with descriptive, correlation and regression analysis tools. The results show that shorter number of days accounts receivable and number of days inventory are associated with higher profitability, however, the results show that the relationship between return on asset and return on equity with number of days inventory are statistically insignificant. There exist positive significant relationship between number of days accounts payable with return on asset and operating profit margin. But, no statistically significant relationship found between number of days accounts payable and return on equity. The results also show that there exists significant negative relationship between cash conversion cycle and profitability measures of the sampled Enterprises, but no statistically significant relationship was found between cash conversion cycle and return on equity. The two traditional measure of liquidity (current ratio and quick ratio) affect return on asset and operating profit margin negatively and significantly, but both do not affect return on equity significantly. No statistically significant relationship between current assets to total assets ratio and profitability measures has been found. The findings also reveals that current liabilities to total asset ratio affect positively and significantly return on asset, return on equity and operating profit margin. As per the findings the researcher concludes that Managers can increase public enterprises’ profitability by improving the efficiency of working capital management.