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Working Capital Management, Liquidity and Corporate Profitability Among Quoted Firms in Nigeria Evidence from the Productive Sector

Author

Listed:
  • Sebastian Ofumbia Uremadu

    (College of Agribusiness and Financial Management MOUAU)

  • Ben-Caleb Egbide

    (Covenant University)

  • Patrick E. Enyi

    (Covenant University)

Abstract

Working capital management is very crucial in this period of global financial turmoil. This is because illiquidity is prevalent world wide necessitating that effective and efficient management of any available cash will be needed to ensure that company breaks even and survives this distressed time since credit is not easily come by. This article presents empirical evidence of the effect of working capital management and liquidity on corporate profits using a cross- sectional time series data for the period 2005-2006. This micro-data were analyzed using descriptive statistics and an OLS methodology. The authors find a positive effect of inventory conversion period (ICP), debtors collection period (DCP); and a negative effect of cash conversion period (CCP), creditors payment period (CPP), on return on assets (a mirror of corporate profitability). We discover that CCP with a wrong sign is the most significant precision variable in influencing profits and leads corporate profitability in Nigeria. It is closely followed by ICP and then CPP is third in importance in affecting profitability and liquidity in Nigeria. The paper therefore recommends (1) that firms should promptly collect cash from credit sales, (2) that excess cash should be reinvested in short-term securities (assets) to generate profits and (3) that since there exists high sales turnover in the Nigerian emerging markets, government policy should target multinational companies (MNCs) for invitation to participate in investing in Nigeria by creating the right legal and regulatory framework to enable them enter the market for possible FDI, IPI, and FPI injections into the Nigerian domestic economy.

Suggested Citation

  • Sebastian Ofumbia Uremadu & Ben-Caleb Egbide & Patrick E. Enyi, 2012. "Working Capital Management, Liquidity and Corporate Profitability Among Quoted Firms in Nigeria Evidence from the Productive Sector," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 2(1), pages 80-97, January.
    • Handle: RePEc:hur:ijaraf:v:2:y:2012:i:1:p:80-97
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    References listed on IDEAS

    as
    1. Marc Deloof, 2003. "Does Working Capital Management Affect Profitability of Belgian Firms?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 30(3‐4), pages 573-588, April.
    2. Marc Deloof, 2003. "Does Working Capital Management Affect Profitability of Belgian Firms?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 30(3-4), pages 573-588.
    3. Pandey I M, 1988. "Financial Management Research in India," IIMA Working Papers WP1988-02-01_00807, Indian Institute of Management Ahmedabad, Research and Publication Department.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Basman Al Dalayeen, 2017. "Working Capital Management and Profitability of Real Estate Industry in Jordan: An Empirical Study," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 7(2), pages 1-3.
    2. Abdalla Geth Abdussalam, 2017. "Exploring the Relationship between Working Capital Management, Profitability and Capital Structure," GATR Journals afr126, Global Academy of Training and Research (GATR) Enterprise.
    3. Lyndon M. Etale & Paymaster F. Bingilar, 2016. "Liquidity Management and Profitability: A Study of Selected Food and Beverage Companies in Nigeria," International Journal of Management Sciences, Research Academy of Social Sciences, vol. 7(4), pages 217-225.
    4. Matthew Adeolu Abata & Stephen Oseko Migiro, 2016. "Does Liquidity Management Affect Profitability in Selected Nigerian-Quoted Manufacturing Firms?," Journal of Economics and Behavioral Studies, AMH International, vol. 8(4), pages 41-51.
    5. Yusuf Aminu, 2012. "An Analysis of Proposed Framework on Impact of Working Capital Management on the Profitability of Selected Manufacturing Companies Listed on the Nigerian Stock Exchange," Journal of Economics and Behavioral Studies, AMH International, vol. 4(12), pages 730-736.
    6. Sebastian Ofumbia Uremadu & Rapuluchukwu Uchenna Efobi, 2012. "The Impact of Capital Structure and Liquidity on Corporate Returns in Nigeria: Evidence from Manufacturing Firms," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 2(3), pages 1-16, July.
    7. Tanveer Bagh & Muhammad Imran Nazir & Muhammad Asif Khan & Muhammad Atif Khan & Sadaf Razzaq, 2016. "The Impact of Working Capital Management on Firms Financial Performance: Evidence from Pakistan," International Journal of Economics and Financial Issues, Econjournals, vol. 6(3), pages 1097-1105.
    8. Furkan Baser & Soner Gokten & Guray Kucukkocaoglu & Hasan Ture, 2016. "Liquidity-Profitability Tradeoff Existence In Turkey: An Empirical Investigation Under Structural Equation Modeling," Copernican Journal of Finance & Accounting, Uniwersytet Mikolaja Kopernika, vol. 5(2), pages 27-44.
    9. Odunayo Magret Olarewaju & Mishelle Doorasamy & Titilayo Moromoke Oladejo, 2017. "Nexus of Working Capital Management and Firm Performance in Nigerian Food and Beverages Industries: A Link with Risk-Return Theory," Journal of Economics and Behavioral Studies, AMH International, vol. 9(1), pages 90-98.

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    More about this item

    Keywords

    Working capital; liquidity; profitability; return on assets; inventory management; debtors management; creditors management; cash management;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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