THE EFFECT OF WORKING CAPITAL MANAGEMENT ON THE PERFORMANCE OF LARGE FOOD MANUFACTURING COMPANIES IN ETHIOPIA

Abstract

The purpose of this study is to examine the effect of working capital management on firm profitability among large food manufacturing firms in Ethiopia, Addis Ababa. In order to achieve this goal, the study used an explanatory research design and a quantitative research approach to test a series of research hypothesis. The financial statement of a sample of twelve out of the total of 18 large food manufacturing companies were taken and used. Data was analyzed by using E- views version 10 on quantitative basis using descriptive and regression analysis (ordinary least square) method. The random effect model was used. It examined the components in working capital, such as average collection period, average payment period, cash conversion cycle, inventory conversion period, current ratio and debt ratio in relation to return on asset (ROA). The key findings from the statistical analysis are: first there is a positive link between return on asset and, average payment period, cash conversion cycle, inventory conversion period, current ratio, debt ratio. Second, there is a significant negative relationship between the return on asset and the average collecting period. Therefore, the managers of large food manufacturing companies can maximize the firm’s value and profitability by improving administration of working capital at optimum level. It is also recommended that large manufacturing firms need adopt efficient and effective working capital management polices to keeping working capital at optimum level.