Cash Conversion Cycle and Firm Profitability in Malawi Manufacturing Sector

Abstract

The composition of a business current assets and liabilities provides an indication of the business liquidity position. It is advisable for a company to maintain a good amount of readily liquid assets as compared to its current liabilities which may be payable on demand. The business liquidity position determines its ability to survive in the short term and of late most companies have had critical financial problems regardless of posting profits in some cases. Manufacturing companies pile up more current assets in form of inventory which is considered to be an il-liquid asset and therefore liquidity for manufacturing companies differs from that of service organizations, such as banks. The purpose of this study is to establish the relationship between a companys liquidity, measured by the length of the cash conversion cycle, and its profitability, measured by return on capital. Using a correlation and regression test, the study used data from sample of twelve Malawian manufacturing firms from 2007 to 2015. The study finds that there exists an inverse relationship between the cash conversion cycle and the companys return on investment and return on equity, and provides evidence that the cash conversion cycle, a measure of business liquidity, has an impact on a firms performance.