The Effect of working capital management practices on the risk-return trade off of companies listed on the Nairobi Securities Exchange

Abstract

The purpose of this study was to investigate the impact that working capital has on risk return trade-off of firms on the Nairobi Securities Exchange. The study also explored whether the different industries of the firms had any effect on the trade-off between risk and return. This topic had not been widely explored since many studies have focused on the impact of working capital management on accounting profit of firms rather than on risk return trade-off. The study analysed the risk levels of different firms in comparison to their returns to determine the trade-off that the firms were exposed to. Risk was determined using the current ratios of these firms as well as using the current assets to fixed assets ratios. On the other hand, return was analysed using the rate of return on total assets. The risk vis-a-vis the returns helped determine the trade-off that exists in each situation. To come up with answers to this research, quantitative research was used and data was collected from the companies listed on the Nairobi Securities Exchanges' annual reports and financial statements. A database with all numbers was then constructed in Excel to easily transform the numbers for analysis. The data was then input into the Statistical Package for Social Sciences (SPSS) for analysis. There was a negative relationship between the cur:ent liabilities and the return on assets whereas a positive relationship existed between current assets and the return on assets. An increase in the current labilities resulted in a decrease of the returns on assets while an increase in the current assets brought about a corresponding increase in the return on assets.