Effect of Liquidity on Financial Performance of Firms Listed at the Nairobi Securities Exchange, Kenya

Liquidity refers to the ability of a firm to meet its obligations as and when they fall due. In order to meet their obligations, firms are expected to hold a certain percentage of their total finance in cash. However, majority of the institutions especially financial institutions tend to focus only on profit maximization at the expense of liquidity management. It is therefore the role of financial managers to establish effective mechanisms of meeting a firms obligations and profit maximization. The objective of the study was to establish the effect of current ratio, cash reserves and debt ratio on financial performance of firms listed at the Nairobi Securities Exchange (NSE). Causal research design was adopted. Purposive sampling technique was used to select 30 firms. The data was analyzed using descriptive and inferential statistics It was found that current ratio and cash reserves have a significant effect on ROA with a p value of less than 0.05. The debt ratio was found to have no significant effect on ROA as it had a significance level of 0.571.