Inventory Conversion Period and Financial Performance of Selected Firms Listed at Nairobi Securities Exchange
Abstract
Managers strive to achieve strategic objectives of firms, which include maximum returns on equity and assets. However, unanticipated macro and micro environmental factors may cause a firm to fall into financial distress which may negatively influence its financial performance. Manufacturing, Construction and Allied sectors play an important role in the implementation of vision 2030 and contribute immensely to the country’s economic growth. Declining returns and repeated losses reported by firms under these sectors have resulted in a slow growth by individual sectors as well as overall national economic growth. Poor performance has been attributed to cycles of financial distress problems affecting firms under manufacturing and construction sectors in the recent past. Identified knowledge gaps prompted the study to mainly determine the effect of financial distress on financial performance of selected firms listed at NSE. Independent variable which form the basis for specific research objective and research hypothesis is inventory conversion period while dependent variable is financial performance. The study which may be of value to financiers, policymakers, investors and researchers was supported by economic order quantity model. Panel research design was employed by the study and census adopted due to the small population size. Secondary panel data collected from published financial statements of the entire 4 financially distressed firms listed under manufacturing, construction and allied sectors covering 10 years (2009-2018) were utilized. Descriptive and inferential statistics was used to analyze panel data with the aid of statistical software (STATA, V.14). Panel regression analysis approach was used to test the hypothesis at 95% confidence level and diagnostic tests was performed before conclusion was drawn. Findings were presented in table format and supported by narrations. Research ethics were observed while conducting the study. The study revealed that inventory conversion period has an inverse and significant effect on the financial performance (return on assets and return on equity) in the selected firms listed at Nairobi Securities Exchange. The study recommends that low inventory conversion periods should be maintained by firms in order to improve profitability which can be done by improving efficiency in the production processes.
Keywords: Inventory, Conversion period, financial performance, Return on Asset, Return on Equity, Listed firms, NSE.
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