WORKING CAPITAL MANAGEMENT AND FIRMS PROFITABILITY: A CROSS SECTION ANALYSIS OF MANUFACTURING FIRMS IN NIGERIA

WORKING CAPITAL MANAGEMENT AND FIRMS PROFITABILITY: A CROSS SECTION ANALYSIS OF MANUFACTURING FIRMS IN NIGERIA BY: ATSANAN, ANGELA NGUNAN Federal Polytechnic, Nasarawa, Nasarawa State, Nigeria. Department Of Banking and Finance, Federal Polytechnic Nasarawa, Nasarawa State, Nigeria Abstract The main objective of this study is to determine the relationship between working capital management and profitability of manufacturing firms in Nigeria. The ex post facto research design was employed in carrying out the study. Ordinary Least square Regression technique was used to analyze the data collected from a sample of 40 (forty) manufacturing firms over a period of 15 years, from 1995 to 2011, to determine the effect of the level of working capital on earnings per share (EPS), Return on Investment (ROI), and Return on Equity (ROE). The result shows that there is a negative and non significant relationship between working capital and EPS, ROI and ROE. The study recommends that Nigerian managers should strive to strike a balance between working capital and earnings per share, Return on Investment and Return on Equity if they must remain profitable over the years, also the corporate governance, due process mechanisms of the firms should ensure that available liquidity be channel strictly to profitable investments and avoid mismanagement and frivolous use of funds. INTRODUCTION One major financial management task faced by management is on how to maintain a trade-off between profitability and liquidity. This trade-off is particularly important since it is a major determinant of the profitability of a firm and also, the ability of a firm to meet its short term financial obligations. Working capital management is concerned with the problems that arise in attempting to manage the current assets, the current liabilities and the interrelationship that exists between them (Pandey 2010). The term current asset refers to those assets which in the ordinary course of business can be, or will be, converted into cash within one year without undergoing a diminution in value and without disrupting the operations of the firm. The major current assets are cash, marketable securities, accounts receivable and inventory. Current liabilities are those liabilities which are intended, at their inception, to be paid in the ordinary course of business, within a year, out of the current assets or earnings of the concern. The basic current liabilities are accounts payable, bills payable, bank overdraft, and outstanding expenses. (Eljelly, 2004) The goal of working capital management is to manage the firm s current assets and liabilities in such a way that a satisfactory level of working capital is maintained. This is so because if the firm cannot maintain a satisfactory level of working capital, it is likely to become insolvent and may even be forced into bankruptcy. The current assets should be large enough to cover its current liabilities in order to ensure a reasonable margin of safety. Each of the current assets must be managed efficiently in order to maintain the liquidity of the firm while not keeping too high a level of any one of them. Each of the shortterm sources of financing must be continuously managed to ensure that they are obtained and used in the best possible way. The interaction between current assets and current liabilities is therefore, the main theme of the theory of working capital management. The basic ingredients of the theory of working capital management may be said to include its need, optimum level of current assets, the trade-off between profitability and risk which is associated with the level of current assets and liabilities. This is most important in the manufacturing industry, since inefficient working capital management might result to illiquidity, which could trigger firm distress. Therefore, the firm s working capital must be 1

efficiently managed in order to safeguard the firm from the dangers of illiquidity and insolvency (Ezra, 2009). There is also the need to invest current assets to boost profitability, while being mindful of illiquidity and risks. According to Pandey (2003), in management of firms, a conflict exists between profitability and liquidity while managing working capital. If a firm does not invest sufficient funds in current assets, it may become illiquid. But it would lose profitability as idle current assets would not earn anything. Thus, a proper trade-off (optimal mix) must be achieved between profitability and liquidity, in order to ensure that neither insufficient nor excessive funds are invested in current assets. Working capital is influenced by many internal and external factors. Among these factors, there is the influence of financing corporate decisions. One of the most relevant theories about capital structure is the Pecking Order Theory from Myers and Majluf (1984). According to these theories, companies will tend to raise capital within, consuming financial slack, before increasing financial leverage by borrowing money from outside or issuing new stocks. The financial slack can be defined by liquidity excess (Stowe in Kim and Srinivasan, 1991), found in form of current assets, securities or current assets options, all above the company s needs to meet current operations (Ang in Kim and Srinivasan, 1991) and, also, in form of riskless borrowing capacity beyond that needed to meet debt serving requirements (Myers and Majluf, 1984). For Brealey, Myers and Allen (2008: 433) financial slack means cash, marketable securities, readily saleable real assets and ready access to the debt markets or to bank financing. For McMahon (2006), financial slack is a joint condition of high liquidity and unused debt capacity. In a situation to raise capital to invest, managers could easily get rid of liquid current assets, adopting an aggressive working capital policy, such as pushing for lower level of inventory and decreasing customers credit terms. Another factor that can influence the decision of a company s working capital level may be related to the conflict of interests between managers and shareholders, explored in the Agency Theory (Jensen and Meckling, 1976). In companies with low level of monitoring and few discipline instruments on management decisions, managers may decide not to invest in projects with positive net present values or even invest in projects with negative net present values. Another agency problem source is the presence of free cash flow in excess, defined by Jensen (1986) as the cash flow in excess beyond that required to finance positive net present value projects. According to the author, in a context of substantial free cash flow, it is likely that managers invest in project with negative net present value, increasing the agency problem between managers and shareholders. Some of these projects and activities may be self gratifying to the managers and may bring them some pecuniary benefits or other personal rewards (Chung, Michael and Kim, 2005, p. 55). In other cases, managers could be careless about investment decisions, adopting a more flexible working capital policy, with high level of inventories or generous credit policy beyond the operational needs. Working Capital Management as part of financial management does not only affect profitability but it also affects solvency, which means the continued ability of a firm to meet maturing obligations (Smith, 1980). (The two are important results of working capital management and can be compared to two legs of a man, he stands on both, but if he should put more weight on one leg, that leg will not suffer alone but the whole body suffer along with it). There is therefore, a need for trade-offs between profitability and liquidity in the management of the firms working capital. Through efficient management of working capital, managers can achieve a high return on investment and improve the lot of shareholders. Managers that focus exclusively on achieving higher liquidity do so at the expense of higher returns on investment. Therefore, this study empirically examines the relationship between working capital management and profitability of firms in the manufacturing industry from 1995-2010, using general least regression as tool for data analysis. 2

The trade-off between liquidity and profitability are important concepts in working capital. The cardinal point in firm management is that of maintaining safety liquidity standards. However, focusing on this alone undermines the potential profitability of the company; since they have inverse relationship, but important for the survival of firms. Illiquidity can lead to insolvency which could result to distress, while a firms needs to make profit in order to remain a going concern. The Nigerian manufacturing industry is dying gradually. Many experts are of the opinion that the contribution of the Nigerian manufacturing sector to the GDP has not been impressive. This study is somewhat peculiar for some obvious reasons. There has been few empirical study on the subject matter for the Nigerian jurisdiction, though Nigeria occupies a place of pride in the West African sub-region. Secondly Nigeria poses a puzzle on the corporate financing pattern and corporate productivity, if viewed from the perspective of liberal tax shield, lavish investment incentives and friendly income tax regime (F.I. R.S, 2002). This is an indication that their going concern is threatened, directly linked with the survival of manufacturing firms in Nigeria is the question of profitability, which to a very large extent is determined by volumes of working capital held by firms. 3

Objectives of the Study The main or broad objective of this study is to determine the relationship between working capital management on the profitability of firms in the manufacturing sector. The specific objectives are as follows; 1. To determine the relationship between working capital and earnings per share of manufacturing companies in Nigeria. 2. To ascertain the link between working capital management and return on equity capital. 3. To examine the relationship between working capital and return on investment of manufacturing companies in Nigeria. Research Questions Based on the objectives of this study, the researcher formulated the following questions. 1. To what extent is the relationship between working capital and earnings per share of manufacturing companies in Nigeria? 2. How far is the relationship between working capital management and return on equity? 3. How is the relationship between working capital and return on investment of manufacturing companies in Nigeria? Hypotheses of the Study In order to achieve the objectives of the study, the following hypotheses will be estimated; 1. There is no significant relationship between working capital and earnings per share of manufacturing companies. 2. There is no significant and positive relationship between working capital and return on equity. 3. There is no significant and positive relationship between working capital and return on investment of manufacturing companies in Nigerian. REVIEW OF RELATED LITERATURE Theoretical Framework The major policy issue encountered in the management of working capital is related to levels of investment and it s financing. The components of working capital investments are categorized in terms of liquidity and stability of balances. Liquidity is a term used to describe the ease with which the assets can be converted into cash within a year during the normal course of business operations. Current assets include cash, marketable securities, accounts receivable, and inventories. Short-term debts or current liabilities are credit falling due within a year, and include accounts payable, accruals, tax payable, dividend payable, short-term loans, and long-term loans maturing within a year. Working capital consists of coins, currency, bank deposits, and negotiable instruments such as money orders, certified checks, cashiers checks, personal checks, and bank drafts. Cash is the most liquid of all assets and it is the medium of exchange that permits management to carry on the various functions of the business organisation. In fact the survival of the firm can depend on the availability of cash (liquidity) to meet financial obligations on time. (Pandey, 2004). Marketable securities consist of short-term investments that a firm makes with its idle cash, which can be sold quickly and converted into cash when needed. A trade credit originates when a firm sells goods or services to another firm with an agreement that cash will be paid in some future period. Firms may also sell goods to final consumers. These consumer credits, make up the remainder of accounts receivable. Inventories consist of raw materials, work-in-process and finished goods. Raw materials are inventories waiting to get into the production process, work-in progress inventories are materials in various stages of production and finished goods inventories are goods whose production process is completed and ready for sale. Inventories in retail and wholesale firms include the merchandise kept for sale. 4

Working capital management involves the administration, within policy guidelines of current asses and current liabilities (Brigham E. and Gapenski, L. 1997), Pandey (2004) elucidated that there are two concepts of working capital namely, Gross working capital and net working capital. Gross working capital consists of accounts receivable (debtors), stocks (of raw material work-in-progress and finished goods), cash and short term securities. The net working capital refers to current assets minus current liabilities, which represent claims of outsiders that are expected to mature within one accounting year. According to Brigham and Ehrhadt (2001) the term working capital originated with the old Yankee Peddler, who load up his wagon with goods and then go off on his route to peddle his wares. The merchandise was called working capital because it was what he actually sold or turned over to produce his profits. The wagon and horse were his fixed assets. He generally owned the horse and wagon, so they were financed with equity capital but he borrowed the funds to buy the merchandise, these borrowings were called working capital loans; and they had to be repaid after each trip to demonstrate to the bank that the credit was sound. EMPIRICAL REVIEW Cash Cycle and Corporate Profitability The cash conversion cycle is the length of the time between sales of finished goods and the collection of cash thereon, and payment for purchases of raw materials. A generous credit policy extends the cash cycle and might increase corporate profits as a result of higher sales. But Deloof (2003) argued that it might decrease the firm s profitability if the rise in cost of investment in working capital is faster than the benefit. Shin and Soenen (1998) using the cash conversion cycle as a popular measure of working capital management to examine the relationship between the firm s working capital and its overall profitability confirms the traditional view in finance that a short conversion cycle increases corporate profitability. He put it that, a longer cash conversion cycle hurts the profitability of a firm. The link between the firm s cash cycle and its profitability can be easily seen. One of the basic determinants of profitability and growth for a firm is its total assets turnover, which is defined as sales/total assets. The higher this ratio, the greater the firms accounting return on assets (ROA) and return on equity (ROE) (Ross, 1996). Thus, the shorter the cycle is, the lower is the firm s investment in inventories and receivables. Total assets would be lower and total turnover would be higher as a result (Deloof, 2003). Marc Deloof (2003) investigated whether working capital management affects profitability of Belgian firms. He used a sample of 1009 large Belgium non-financial firms for the 1992 1996 period. The result suggested that managers can increase corporate profitability by reducing the number of days accounts receivable and inventories. Seeking to provide more empirical evidence about the effect of working capital management on the profitability of small and medium size Spanish firms, Gracia and Martinez-Solano (2006) used a sample of 8872 SMES covering the period (1996 2002). The result demonstrated that managers could create value by reducing their firm s number of day s accounts receivable and inventory. Equally, shortening the cash conversion cycle also improves the firm s profitability. Shin and Soenen (1998) analyzed the relation between the cash conversion cycle and profitability using a large sample of 58,985 firms (listed on US stock exchange) during the period 1975 1994. Their result shows that, reducing the cash conversion cycle to a reasonable minimum increases firm s profitability, and it is one way to create shareholder s value. He found a strong negative association existing between the firms net trade cycle and its profitability. With the sample of 30 Pakistani firms, and applying Pearson s correlation coefficient and fixed effects estimation model, Khan, Hijazi and Kamal (2005) found a negative relation between firm s gross profit and the number of days inventory, account Payables and cash conversion cycle. Imege and Ngerebo (2004) examined the maneuverings of working capital management in Rivers State owned enterprises with special focus on cash, marketable securities and account receivables 5

optimization. They established that cash flow predictability and growth rate were significant working capital indicators. Relationship between Profitability and Working Capital Management Mathuva (2011) examined the influenced of working capital management components on corporate profitability by using a sample of 30 firms listed on the Nairobi Stock Exchange (NSE) for the periods 1993 to 2008. He used Pearson and Spearman s correlations, the pooled ordinary least square, and the fixed effects regression model to conduct data analysis. The key findings of his study were that there exists a highly significant negative relationship between the time it takes to collect cash from their customers (accounts collection period) and profitability. There exists a high significant positive relationship between the period taken to convert inventories into sales (the inventory conversion period and profitability. There exist a highly significant positive relationship between the time it takes the firm to pay the creditor (average period and profitability). Ghosh and Maji, (2003) made an attempt to examine the efficiency of working capital management of the Indian cement companies during 1992 1993 to 2001 2002 for measuring the efficiency of working capital management, performance, utilization and overall efficiency. Indices were calculated instead of using some common working capital management ratios setting industry firms as target efficiency levels of the individual firms. Findings of the study indicated that the Indian cement industry as a whole did not perform remarkably well during this period. Shin and Soenen (1998) highlighted that efficient working capital management (WCM), massively important for creating value for the shareholders. The way working capital was managed has a significant impact both profitability and liquidity. The relationship between the length net trading cycle, corporate profitability and risk adjusted stock return was examined using correlation and regression analysis, by industry and capital intensity. They found a strong negative relationship between lengths of the firms nettrading cycle and its profitability. Lazaridis and Tytonidis (2011) conducted a cross sectional study by using a sample of 131 firms listed on the Attens stock exchange for the period of 2001 2004 and found statistically significant relationship between profitability measured through gross operating profit, and the cash conversion cycle and its companies (account receivables, account payables and inventory). Based on the results analysis of annual data by using correlation, and regression tests, they suggest that managers can create profits for their companies by correctly handling the cash conversion cycle and keeping each compound of the conversion cycle (account receivables, account payables and inventory) at an optimal level. Raheman and Nasr (2000) studied the effects of different variables of working capital management, such as industry average, payment period, cash conversion cycle and current ratio on the net operating profitability of Pakistani firms. They selected a sample of 95 Pakistani firms on Karachi stock exchange for a period of six years from 1999 2004 and found a strong negative relationship between variables of working capital management and profitability of the firm. They found that as the cash conversion cycle increase, it leads to decreasing profitability of the firm and managers can create a positive value for the shareholders by reducing the cash conversion cycle to a possible minimum level. Garcia Teruel and Martinez-Solano (2003), collected a panel of 8,872 small to medium-sized enterprises (SMES) from spain covering the period of 1996 2002. They tested the effects of working capital management on SME profitability using the panel data methodology. The results, which are robust to the presence of endogencity, demonstrated that managers could create value by reducing their inventories and the number of days for which, their accounts are outstanding, moreover, shortening the cash conversion cycle also improves the firm s profitability. 6

The Relationship between Profitability and Liquidity Eljelly, (2009) empirically examined the relationship between profitability and liquidity as measured by current ratio and cash gap (cash conversion cycle) or a sample of 929 joint stock companies in Saudi Arabia, using correlation and regression analysis, results shown that there is a significant negative relationship between the firm s profitability and its liquidity level, as measured by current ratio. Kesseven P. (2006) examined the relationship between profitability and liquidity with a sample of 58 small manufacturing firms, using panel data analysis for the period 1998 2003. The regression results show that high investment in inventories and receivable is associated with lower profitability. Abdul R. and Mohammed N. (2007) examined the relationship between working capital management its effect on liquidity as well as profitability of the firm, they selected a sample of 94 Pakistani firms listed on Karachi stock exchange for a period of 6 years from 1999 2004, using Pearson s correlation and regression analysis (pooled) least square and general least square, their results show that there is a strong negative relationship between variables of the working capital management and profitability of the firm. Data andmethodology The study adopted the ex-post facto research design. The justification for the use of ex-post facto research design is that it is a systematic empirical study in which the researcher does not in any way control or manipulate independent variables because the situation for the study already exists, or has already taken place (Asika, 2010). The study relied on secondary data collated from the annual reports and statement of accounts of the various companies. The formulated hypotheses are estimated using the generalized least square or ordinary least square regression method. The study made use of firm level data on working capital management and profitability of manufacturing companies in Nigeria for the period: 1995-2010. Description of Research Variables In line with the work of (Deloof, 2003, Mathuva, 2011) and the objectives of the study, the variables for the study are Earnings per share (EPS), return on investment (ROI), Return on Equity (ROE). The variables will be described along dependent and independent variables. Independent Variable The working capital management of a firm is the function of the following variables; Working capital (WRKCPT) = (1 Dependent Variables The following are the dependent variables used in this study. a. Return on investment (ROI) = (2) b. Return on Equity (ROE) =.. (3) c. Earnings Per Share (EPS) =.. (4) Technique for Analysis The study will employ the Ordinary Least Square regression technique in estimating the hypotheses formulated for the study. To achieve this, the study will adopt the standard form of the simple regression which is represented thus; Y = a + b 1 x+ u.. (5) 7

Where, Y =dependent variable x =explanatory variable a=intercept of Y b 1 =slope coefficients U =stochastic variables (Gujarati, 1995). The justification for adopting this analytical technique is based on the following premise; the ordinary least square is assumed to be the best linear unbiased estimator (Gujarati, 2009) and has minimum variance (Onwumere, 2006). Model Specification In order to present the models in functional form in line with the objectives of the study, equation 5 will be re-written as follows; Hypothesis One There is no significant relationship between working capital and earnings per share of Nigerian manufacturing companies. EPS = a + b 1 (WRKCPT)+ u.. (6) Hypothesis Two There is no significant relationship between working capital and return on investment of manufacturing companies in Nigeria. ROI = a + b 1 (WRKCPT)+ u.. (7) Hypothesis Three There is no significant relationship between working capital and return on investment. ROE = a + b 1 (WRKCPT)+ u.. (8) The above models will be estimated with the use of STATA and E-View software. RESULTS In this chapter the data collected for the study is presented and analysed. The data presented in this section are those deemed necessary to aid in the analysis and the achievement of the study objectives. The data is presented in such a manner as to address the different objective sub-heads. Thereafter some analyses will be attempted following the set out objectives of the study. In this chapter also, the hypotheses postulated for the study will also be tested for their validity. Below therefore are the data presentations. Components of Working Capital and EPS (1995-2010) Year CA CL EPS 1995 271,901,420 5,146,687 5.95332266 1996 75,636,853 31,427,917 3.87749858 1997 366,171,735 207,212,963 7.5014279 1998 435,963,744 183,945,155 10.2064201 1999 542,895,360 154,616,519 15.802723 2000 53,430,209 164,922,325 12.7642081 2001 67,870,684-78,197,719 10.9922446 2002 89,755,556-91,508,131 6.78119282 2003 102,011,004 91,353,360 2.05732997 2004 122,508,030 91,795,948 1.49979585 8

2005 89,254,564 186,608,534 1.4322876 2006 113,814,105 199,035,992 22.7841753 2007 849,320,972 111,293,530 19.9437684 2008 126,436,229 156,727,298 5.36473359 2009 119,703,570 92,952,878 59.1714138 2010 133,331,397 85,018,086 10.2180988 Source: NSE Factbook (Various Years) The above table 4.1.1 shows a pooled data of the sampled quoted manufacturing industries in Nigeria, totaling forty (see appendix for details). From the above table it could be seen that there is no particular pattern of time serial movement between the three variables presented above (the current assets, the current liabilities and the earnings per shares). This could be seen from the phenomena in the different years of the study. Descriptive Statistics Mean Std. Deviation N EarngsPS 7.909062 53.4640053 563 RtnonEquity 7.336441 53.5330519 562 Rtn_onInvst 2.595770 25.0577200 560 W.Capt 16.190557 184.0553598 549 From the above descriptive statistic table, it will be noticed that mean values of the different variables are as follows, for the different observations: EPS is about 7.91 for 563 observations (using 15 years data range), having a standard deviation of about 54; meaning that there was a noticed difference in the individual observations for the period of the study. It should be noted that about 48 manufacturing firms were used as samples over a fifteen-year period. ROE also exhibited the same phenomenon as EPS. However, ROI had a smaller mean value which was clustered around the mean (measured by the standard deviation, which is about 0.25). The working capital for all the firms during the period under study (1995-2011) showed a very wide dispersion about the mean (a standard deviation of about 1.84 0r 184 percent). The differences in the number of observations were due to some missing values of the variables during the period under study. 9

Correlations EarngsPS RtnonEquity Rtn_onInvst W.Capt EarngsPS Pearson Correlation 1.756 ** -.010 -.009 Sig. (2-tailed).000.811.837 N 563 562 559 548 RtnonEquity Pearson Correlation.756 ** 1 -.001 -.007 Sig. (2-tailed).000.978.872 N 562 562 559 547 Rtn_onInvst Pearson Correlation -.010 -.001 1 -.006 Sig. (2-tailed).811.978.880 N 559 559 560 546 W.Capt Pearson Correlation -.009 -.007 -.006 1 Sig. (2-tailed).837.872.880 N 548 547 546 549 **. Correlation is significant at the 0.01 level (2-tailed). OBJECTIVE ONE To Determine the Relationship between Working Capital and Earnings Per Share of Manufacturing Companies in Nigeria. To achieve the above objective the researcher will be relying on table 4.1.1 (renamed table 4.2.1), table 4.2.2 and table 4.2.3 (showing the correlation between EPS and working capital). Components of Working Capital and EPS (1995-2010) Year CA CL EPS 1995 271,901,420 5,146,687 5.95332266 1996 75,636,853 31,427,917 3.87749858 1997 366,171,735 207,212,963 7.5014279 1998 435,963,744 183,945,155 10.2064201 1999 542,895,360 154,616,519 15.802723 2000 53,430,209 164,922,325 12.7642081 2001 67,870,684-78,197,719 10.9922446 2002 89,755,556-91,508,131 6.78119282 2003 102,011,004 91,353,360 2.05732997 2004 122,508,030 91,795,948 1.49979585 2005 89,254,564 186,608,534 1.4322876 2006 113,814,105 199,035,992 22.7841753 2007 849,320,972 111,293,530 19.9437684 2008 126,436,229 156,727,298 5.36473359 2009 119,703,570 92,952,878 59.1714138 2010 133,331,397 85,018,086 10.2180988 10

Source: NSE Factbook (Various Years) As could be noticed from the above table 4.2.1 (as mentioned in section 4.1 above) there appears to be no regular time series pattern of movement between the current assets, current liabilities and working capital for the period under study. This is further elucidated by the diagram below showing the time series relationship between CA and CL. Pooled CAs and CLs of the sampled firms (1995-2010) When the working capital figures were normalised (scaling it by the normal logarithm), as to bring it to the same scale measurement with EPS (see table 4.2.2 below), it was also noticed that that there were no regular time series pattern of movement between the EPS and working capital. This is better appreciated by the adjourning diagram below. Normalised Pooled Working Capital and EPS (1995-2010) Year EPS LOGW.CAPT 1995 5.95332266 8.42611213 1996 3.87749858 7.64551006 1997 7.5014279 8.2012845 1998 10.2064201 8.40143258 1999 15.802723 8.58914372 2000 12.7642081 8.04724416 2001 10.9922446 8.16455628 2002 6.78119282 8.25831081 2003 2.05732997 7.02766121 2004 1.49979585 7.48730926 2005 1.4322876 7.98835367 2006 22.7841753 7.93055115 2007 19.9437684 8.86807251 2008 5.36473359 7.4813146 2009 59.1714138 7.42733502 2010 10.2180988 7.6840668 Source: Source: NSE Factbook (Various Years) 11

Time Serial Relationship between EPS and Normalised Working Capital (1995-2010). Based on the above descriptive analysis, a further correlation test was carried out to consider the relationship between working capital and earnings per share. The result is reported on table 4.2.3 below. From the summary table it could be seen that there is a negative relationship between working capital and earnings per share (having a negative 0.009 value), however it is not statistically significant meaning that there is no time series relationship in the result also (thus validating earlier observations. Summary of the computations of the research variables Year EPS ROE ROI 1995 5.95332266 0.819712468 0.02815912 1996 3.87749858 2.668822158 0.11525958 1997 7.5014279 3.47516503 0.084961187 1998 10.2064201 6.216145289 0.096043747 1999 15.802723 11.79107642 0.177631243 2000 12.7642081 16.51657078 0.269221422 2001 10.9922446 15.7222946 0.286884351 2002 6.78119282 9.043249049 0.1266354 2003 2.05732997 5.713307533 0.106899143 2004 1.49979585 16.49859849 0.345382491 2005 1.4322876 1.972744184 0.051456289 2006 22.7841753 26.66002679 3.838679669 2007 19.9437684 1.944944611 0.087989087 2008 5.36473359 6.149961554 1.330266433 2009 59.1714138 68.85467873 3.22806277 2010 10.2180988 14.71278473 0.341254868 Source: computations for the various companies (various years) 12

Correlations1 W.Capt EPS Pearson Correlation W.Capt 1.000 -.009 EPS -.009 1.000 Sig. (2-tailed) W.Capt..837 EPS.837. N W.Capt 548 548 EPS 548 548 Source: NSE Factbook (Various Years) Calculated using SPSS 17.0 for Windows OBJECTIVE TWO To Ascertain The Link Between Working Capital And Return On Equity Capital. To achieve the above stated objective, the researcher relied on the data presented on tables 4.2.4 and 4.2.5 below. As could also be noticed, there appears to be no regular pattern of time series movement between ROE and working capital. This could be seen on the pattern of movement noticed in the return on equity, which though fluctuating for the different years, did not report the same in the pattern of movement for the normalised figures of working capital. This could be appreciated further when diagrammatical view of the phenomena is taken, as is shown on figure 4.2.4 below. Relationship between Working Capital and ROE year ROE LOGW.CAPT 1995 0.819712 8.42611213 1996 2.668822 7.64551006 1997 3.475165 8.2012845 1998 6.216145 8.40143258 1999 11.79108 8.58914372 2000 16.51657 8.04724416 2001 15.72229 8.16455628 2002 9.043249 8.25831081 2003 5.713308 7.02766121 2004 16.4986 7.48730926 2005 1.972744 7.98835367 2006 26.66003 7.93055115 2007 1.944945 8.86807251 2008 6.149962 7.4813146 2009 68.85468 7.42733502 2010 14.71278 7.6840668 Source: Source: NSE Factbook (Various Years) 13

From the diagram below, it could be seen that ROE had wide fluctuations in movement, while the working capital was more stable in movement; often times going in the opposite direction with ROE. Relationship between Working Capital and ROE The above noticed phenomenon could be further elicited when the correlation matrix of ROE and working capital is considered. It shows a negative correlation of (-0.007), though not statistically significant. Therefore it could be said that there is a slight negative but none significant relationship between ROE and working capital of Nigerian quoted manufacturing firms in the period of study. Correlations2 W.Capt ROE Pearson Correlation W.Capt 1.000 -.007 ROE -.007 1.000 Sig. (2-tailed) W.Capt..872 ROE.872. N W.Capt 547 547 ROE 547 547 Source: NSE Factbook (Various Years) Calculated using SPSS 17.0 for Windows OBJECTIVE THREE To Examine The Relationship Between Working Capital And Return On Investment Of Manufacturing Companies In Nigeria. To achieve the above stated objective, the researcher relied on the data presented on tables 4.2.6 and 4.2.7 below; which have to do with the data on the relationship between working capital and ROI and the correlation between working capital and ROI, respectively. As could also be noticed, there appears also to be no regular pattern of time series movement between ROI and working capital, as was noticed previously analysed cases. Though both the working capital figures and that of ROI appear to be fluctuating over time, they were however not time serially the same. This could be appreciated further when diagrammatical view of the phenomena is taken, as is shown on figure 4.2.6 below. 14

Relationship between Working Capital and ROI year ROI LOGW.CAPT 1995 0.028159 8.426112134 1996 0.11526 7.645510063 1997 0.084961 8.201284499 1998 0.096044 8.401432576 1999 0.177631 8.589143725 2000 0.269221 8.047244158 2001 0.286884 8.164556281 2002 0.126635 8.25831081 2003 0.106899 7.027661209 2004 0.345382 7.487309259 2005 0.051456 7.988353666 2006 3.83868 7.930551146 2007 0.087989 8.86807251 2008 1.330266 7.4813146 2009 3.228063 7.427335021 2010 0.341255 7.684066802 SOURCE: NSE FACTBOOK(VARIOUS YEARS) From the diagram below (fig. 4.2.6), it could be seen that ROI had wide fluctuations in movement from the years 2005 to 2010, while the earlier years had mild fluctuations. In the case of working capital the fluctuations appear to have been averagely spread. However both never synchronized time-serially, rather in some cases they appear to move in mild opposite directions. Relationship between Working Capital and ROI The above noticed phenomenon could be further elicited when the correlation matrix of ROI and working capital is considered. It shows a negative correlation of (-0.006), though not statistically significant having a significant value of (0.880). As earlier mentioned, the issue of statistical significant is premised on the time series relationship. Therefore it could be said that there is a slight negative but none 15

significant relationship between ROI and working capital of Nigerian quoted manufacturing firms in the period of study. 16

Correlations3 W.Capt ROI Pearson Correlation W.Capt 1.000 -.006 ROI -.006 1.000 Sig. (2-tailed) W.Capt..880 ROI.880. N W.Capt 546 546 ROI 546 546 Source: NSE Factbook (Various Years) Calculated using SPSS 17.0 for Windows Test of Hypothesis In this section the various regression results were used in validating the hypotheses set forth for the study. Three hypotheses were postulated for the study, which were validated using the OLS simple regression and the ANOVA tests. Below are the hypotheses tests. Hypothesis One Ho: There is no significant relationship between working capital and earnings per share of manufacturing companies. Ha: There is significant relationship between working capital and earnings per share of manufacturing companies. Regression Model Summary Mode Adjusted R Std. Error of l R R Square Square the Estimate Change Statistics R Square Change F Change df1 df2 1.009 a.000 -.002 54.2230096.000.043 1 546.837 a. Predictors: (Constant), W.Capt ANOVA b Model Sum of Squares df Mean Square F Sig. 1 Regression 124.976 1 124.976.043.837 a Residual 1605313.586 546 2940.135 Total 1605438.562 547 a. Predictors: (Constant), W.Capt b. Dependent Variable: EarngsPS Sig. Change F Summary Result R = 0.009 R 2 =.000 Adjusted R 2 = -.002 Relationship between Working Capital and Earnings per Share 17

The relationship between working capital and earnings per share at first sight appear to be positive (R = 0.009), however to draw a conclusion based on this small value will be misleading, for this reason the other results shown above will also be considered. The R 2 which is the coefficient determination and the Adjusted R 2 will be used. The R 2 which is the goodness-of-fit measure of a linear model, sometimes called the coefficient of determination, is the proportion of variation in the dependent variable explained by the regression model. It ranges in value from 0 to 1. Small values indicate that the model does not fit the data well. While the Adjusted R 2 is the Sample R 2 tends to optimistically estimate how well the model fits the population. The model usually does not fit the population as well as it fits the sample from which it is derived. The Adjusted R 2 therefore attempts to correct the R 2 to more closely reflect the goodness-of fit of the model in the population. From the above explanations it could be seen that EPS is not explained by working capital. Validation of Hypothesis One To validate the above hypothesis the F- test in the regression result will be used. F is the ratio of two mean squares. Usually, when the F value is large and the significance is small (typically smaller than 0.05 or 0.01) the null hypothesis can be rejected (reject Ho if F > Fα). In other words, a small significant level indicates that results probably are not due to random chance. The hypothesis model is stated thus: W.Capt = b 0 + b1esp + u Summary Result F =.043 Fα = 3.39 Sig. =.837 df = (numerator) = 1 and (denominator) = 546 Decision Rule: reject Ho if F > Fα. Decision Since F < Fα we accept Ho which states that there is no significant relationship between working capital and earnings per share of manufacturing companies in Nigeria. Hypothesis Two Ho: There is no significant and positive relationship between working capital and return on equity. Ha: There is significant and positive relationship between working capital and return on equity. Regression Model Summary Model R R Square Adjusted R Square Std. Error of the Estimate Change Statistics R Square Change F Change df1 df2 Sig. F Change 1.007 a.000 -.002 54.2917262.000.026 1 545.872 a. Predictors: (Constant), W.Capt ANOVA b Model Sum of Squares df Mean Square F Sig. 1 Regression 76.415 1 76.415.026.872 a 18

Residual 1606437.387 545 2947.592 Total 1606513.802 546 a. Predictors: (Constant), W.Capt b. Dependent Variable: RtnonEquity Summary Result R = 0.007 R 2 =.000 Adjusted R 2 = -.002 19

Relationship between Working Capital and Return on Equity Capital The relationship between working capital and return on equity capital at first sight appear to be positive (R = 0.007), however to draw a conclusion based on this small value will be misleading, for this reason the other results shown above will also be considered, just as was done in hypothesis one. The R 2 which is the coefficient determination and the Adjusted R 2 will be used. The R 2 which is the goodness-of-fit measure of a linear model, sometimes called the coefficient of determination, is the proportion of variation in the dependent variable explained by the regression model. It ranges in value from 0 to 1. Small values indicate that the model does not fit the data well. While the Adjusted R 2 is the Sample R 2 tends to optimistically estimate how well the model fits the population. The model usually does not fit the population as well as it fits the sample from which it is derived. The Adjusted R 2 therefore attempts to correct the R 2 to more closely reflect the goodness-of fit of the model in the population. From the above explanations it could be seen that ROE is not explained by working capital. Validation of Hypothesis One To validate the above hypothesis the F- test in the regression result will be used. F is the ratio of two mean squares. Usually, when the F value is large and the significance is small (typically smaller than 0.05 or 0.01) the null hypothesis can be rejected (reject Ho if F > Fα). In other words, a small significant level indicates that results probably are not due to random chance. The hypothesis model is stated thus: W.Capt = b 0 + b1roe + u Summary Result F =.026 Fα = 3.39 Sig. =.872 df = (numerator) = 1 and (denominator) = 545 Decision Rule: reject Ho if F > Fα. Decision Since F < Fα we accept the H0, accepting and stating that there is no significant relationship between working capital and return on equity of manufacturing companies in Nigeria. Hypothesis Two Ho: There is no significant and positive relationship between working capital and return on investment of manufacturing companies in Nigerian. Ha: There is significant and positive relationship between working capital and return on investment of manufacturing companies in Nigerian. Regression Model Summary Model R Change Statistics R Square Adjusted R Square Std. Error of the Estimate R Square Change F Change df1 df2 Sig. F Change 1.006 a.000 -.002 25.3980080.000.023 1 544.880 a. Predictors: (Constant), W.Capt Summary Result R = 0.006 R 2 =.000 Adjusted R 2 = -.002 20

Relationship between Working Capital and Return on Equity Capital The relationship between working capital and return on investment at first sight appear to be positive (R = 0.006), just as afore-times, to draw a conclusion based on this small value will be misleading, for this reason the other results shown above will also be considered, just as was done in hypothesis one. The R 2 which is the coefficient determination and the Adjusted R 2 will be used. The R 2 which is the goodness-offit measure of a linear model, sometimes called the coefficient of determination, is the proportion of variation in the dependent variable explained by the regression model. It ranges in value from 0 to 1. Small values indicate that the model does not fit the data well. While the Adjusted R 2 is the Sample R 2 tends to optimistically estimate how well the model fits the population. The model usually does not fit the population as well as it fits the sample from which it is derived. The Adjusted R 2 therefore attempts to correct the R 2 to more closely reflect the goodness-of fit of the model in the population. From the above explanations it could be seen that ROI is not explained by working capital. Validation of Hypothesis Three To validate the above hypothesis the F- test in the regression result will be used. F is the ratio of two mean squares. Usually, when the F value is large and the significance is small (typically smaller than 0.05 or 0.01) the null hypothesis can be rejected (reject Ho if F > Fα). In other words, a small significant level indicates that results probably are not due to random chance. The hypothesis model is stated thus: W.Capt = b 0 + b1roi + u Summary Result F =.023 Fα = 3.39 Sig. =.880 df = (numerator) = 1 and (denominator) = 545 Decision Rule: reject Ho if F > Fα. Decision Since F < Fα we accept the H0, accepting and stating that there is no significant relationship between working capital and return on investment of manufacturing companies in Nigeria. CONCLUSION AND RECOMMENDATIONS Based on the findings, the following recommendations are proffered: i. Government should embark on policies that will encourage stability so as to increase capacity utilization in the manufacturing sector, so as to reduce the dying rate of most of the manufacturing companies in Nigeria. ii. Nigerian managers should strive to strike a balanced between working capital and earnings per share, ROI and ROE this is an important way of promoting Nigerian quoted companies in the manufacturing sector. iii. The place of corruption in public office is central in Nigeria, most often working capital rules are not obeyed, funds are either misapplied or embezzled or stock or inventory are out rightly stolen. In this regard, government effort at curbing corruption should be sustained if manufacturing sectors are to remain a going concern. References Asika, N. (2010), Research Methodology in the Behavioural sciences: Nigeria, Estorise Ltd. Brigham, E. F., Gapenski, L.C., Ehrhaatc (2001). Financial Management theory and practice. Harcourt Asia PTE Limited, Singapore. 21

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