THE EFFECT OF WORKING CAPITAL MANAGEMENT ON THE PROFITABILITY OF MANUFACTURING COMPANIES IN ETHIOPIA

Abstract

The purpose of the study is to test the impact of working capital management on the profitability of manufacturing companies in Ethiopia, with a target on medium tax payers. In light of this goal, the study used quantitative methods to assess a number of research hypotheses. For a total of 135 observations, financial statements from a sample of 27 (twenty-seven) manufacturing share companies were used throughout a five-year period (2017-2021). The data was quantitatively evaluated using descriptive and regression analysis. Non-probability purposive sampling was employed. It investigated working capital components such as cash conversion cycle, average collection period, inventory conversion period, average payable period, and in relationship with profitability as a measure of return on asset (ROA). In addition, the study employed current ratio as a liquidity indicator; financial leverage, volume of sale as assessed by change in yearly sales; and firm size as defined by natural logarithm of sales; as control variables. The research main results are as follows: first, there is a negative association between the cash conversion cycle and business profitability. second, there is a negative relationship between average collection period and profitability. Third, there is a negative relationship between inventory holding period and profitability, and a positive relationship between accounts payable period and profitability. Finally, positive relationships between control variable {liquidity, leverage, volume of sales and firm size) and profitability measures have been revealed. In general, the research recommended that company’s employed adequate working capital management components policy in order to enhance profitability.