Effect of working capital management on firm profitability: Evidence from PP woven Sacks (Bags) manufacturing companies in Addis Ababa, Ethiopia

Abstract

The main purpose of this study is to test empirically the effect of working capital management onprofitability in the case of PP woven bags manufacturing companies in Addis Ababa. The study adopted the explanatory research designed, comprised with sixteen companies selected as the sample by using convenience and purposive sampling technique, and quantitative approach will be applied to meet the objective of the study and answer the research hypothesis under it. The study used secondary data obtained from audited financial statement of sixteen PP woven bags manufacturing companies in Addis Ababa, Ethiopia for the period of 2008 to 2017. To determine the effect of working capital, account receivable days, account payable, cash conversion cycle and inventory holding period are used as independent variables and return on assets (ROA) used as measure of profitability , moreover, debt ratio, current liabilities to total assets ratio and current assets to total assets ratio are used as control variables. Data was analyzed on quantitative basis using descriptive, correlation and regression analysis (Ordinary Least Squared),The data was analyzed by using E-View (version 8.0), The key finding from the study are; Firstly, there exist a significant positive relationship between account receivable period and firm profitability, it implied that decrease in number of days a firm receive payment from sales affects the profitability of the firm positively, secondly, there exist significant negative relationship between account payable period and profitability and insignificant negative relationship between inventory conversion period and profitability, Thirdly, there exist insignificant positive relation relationship between cash conversion cycle and profitability of the firm, Finally, there exist positive relationship between current liabilities to total assets ratio and a positive relationship between current assets to total assets ratio. In general the study recommended that PP woven bags manufacturing companies must try to keep reduce number of day’s cash conversion.