Operational Cash Flow and Return on Asset of Listed Manufacturing Firms in Kenya: A Panel Analysis

Abstract

The contribution of the manufacturing sector to the Kenyan economy has, over time, portrayed a declining trend when compared to the growth of other economies and the volume of exports. The average growth in value of manufacturing exports to other countries in Africa shows Kenya ranked the last below 10%. Rwanda ranked the highest at 35%, Nigeria secured 30%, while in East Africa, Tanzania topped the list with 23%. Cash flow has posed a challenge to the listed firms in this sector. The trend analysis across the firms in the sector shows that none has a consistent cash flow raising doubt if cash is properly managed among the firms. These companies reported negative operational cash flows, reduced sales volume, extreme losses, and complications in paying suppliers. These firms reported circles of increase and decrease in cash inflows and cash outflows which later had an impact on their Return on Asset. The reviewed studies revealed mixed results and adopted different methodologies. Some revealed positive relationships, while others showed negative relationships. Locally, the majority of the studies were carried out in different sectors like Sacco and Small and Medium Enterprises using either time series data or cross-section data. In contrast, the studies on listed manufacturing companies were done in other countries. Furthermore, none of the studies reviewed has attempted to incorporate operational cash flow management and return on an asset using panel data to study listed manufacturing firms within the same study period. The study employed a correlational research design. The target population was all the 9 companies listed, out of which 8 companies were purposively sampled. The study period was seven years: 2013-2019, yielding 56 data points. The collection of secondary data was aided by data collection sheets. The test for unit root indicated order zero (p=.000) after integrating the variables. Pooled regression analysis revealed that the panel model shows a good fit with an R squared of above 85.4%. Operational cash flow is a significant predictor of performance (β=341.508), (p=0.000) meaning a unit change in operational cash flow leads to an increase in ROA of 341.508. The study concludes that operational cash flow positively affects Return on assets.