Application of Net Working Capital to Total Asset in Signalling Financial Distress of Non-Financial Firms Listed on Nairobi Security Exchange

Financial distress has been a serious challenge to the existence of not only small firms but also big public companies and private firms both locally and internationally. Corporate financial distress is an ongoing issue in Kenya affecting even giant companies with a national outlook. The study aimed at establishing application of net working capital to total asset in signalling financial distress of non-financial firms listed on NSE. The study focused on the period from 2010 to 2014 since there data could be obtained both from the organization and the company/ NSE websites. This study employed a descriptive research design. The target population was all 42 non-financial companies consistently listed on NSE. The study conducted a census on all the 42 companies. The researcher gathered the secondary data by reading audited financial statements for the period 2010-2014 of all the 42 companies. Secondary quantitative data derived from audited financial statements of the companies were recorded on the data collection sheet. The researcher also used primary data by use of questionnaire to gather general information about managers who helped in the retrieval of the financial statements of their respective companies. Data collected was analysed in light of the study objectives using both descriptive and inferential statistics. A linear regression model was used to find out the significance of the independent variables on status of selected companies. The result showed that out of 42 consistent listed firms studied, seven firms were out rightly distressed since their Z-score values fell either in the lower limits of the grey zone or in the financially distressed zone. The study established that comparatively, the net working capital for these firms ranged between low and negatives throughout the five year period implying that these companies either struggle to meet or could not meet its immediate demands. The study recommends it to the regulators such as NSE and CMA among other users to integrate or use along with other analytical tools to aid in their decision as to whether to delist a company or not.