Effect of Financial Risk Management Practices on Profitability of Listed Companies in Rwanda: A case of CIMERWA PLC (2020-2022)

Abstract

The main objective of the study was to analyze the effect of financial risk management practices on profitability of listed companies in Rwanda with a reference to Cimerwa Plc. The study is based on the following specific objectives to examine the effect of liquidity risk management practices on profitability at Cimerwa Plc; to explore the effect of foreign exchange risk management practices on profitability at Cimerwa Plc and to determine the effect of market risk management practices on profitability at Cimerwa Plc. To achieve these objectives; the study adopted a correlational research design whereby the total population was 224 employees in marketing, production and operations, legal, sales and finance departments. The sample size was 144 respondents selected by stratified sampling technique. Data were collected from both primary and secondary data using a structured questionnaire and documentary reviews. Data were analyzed by descriptive and inferential statistics, presented using frequency tables and percentages, mean and standard deviations as well as regression analyses. The findings confirmed that Cimerwa Plc effectively assesses its liquidity risk exposure (µ=4.0909; STD=0.53936); the liquidity risk management practices at Cimerwa Plc positively influence its profitability (µ=4.1818; STD=0.601442). The foreign exchange risk management tools used by Cimerwa Plc are appropriate in mitigating currency fluctuations (µ=4.4545; STD=0.68755); the Cimerwa Plc's foreign exchange risk management practices contribute positively to its profitability (µ=4.6364; STD=0.50452); Cimerwa Plc actively hedges against foreign exchange risks to protect its profitability (µ=4.0000; STD=1.0000). Cimerwa Plc effectively assesses market risks associated with its operations and investments (µ=4.4545; STD=0.68755); Cimerwa Plc uses financial instruments to hedge against market risks effectively (µ=4.2727; STD=0.78625); Cimerwa Plc actively monitors and manages its exposure to market volatility (µ=4.7273; STD=0.46710). The Cimerwa Plc effectively communicates its market risk management strategies to relevant stakeholders (µ=4.4545; STD=0.68755) and the market risk management practices at Cimerwa Plc adapt well to changing market dynamics (µ=4.6364; STD=0.50452). Regarding the profitability, there were improvement in profitability indicators as the Return on Asset (ROA) changed from 1.7% in 2020 to 3.8% and 11.4% in 2021 and 2022. The Return on Equity (ROE) improved from 3.4% in 2020 to 6.7% and 17.6% in 2021 and 2022 while Net Profit Margin changed from 100% in 2020 due to previous credit taxes to 76% and 78% in 2021 and 2022 respectively and the Earning per Share (EPS) improved from 2.78 in 2020 to 5.86 and 18.74 in 2021 and 2022. These results imply that the profitability indicators in Cimerwa Plc have depicted improving trends in last three years under consideration. Besides, the value of adjusted R squared was 0.608, an indication that there was variation of 60.8% on profitability of Cimerwa Plc due to changes in liquidity risk management practices, foreign exchange risk management practices and market risk management practices at 95% confidence interval. We also recommended that CIMERWA Plc's liquidity risk management practices should be well aligned with industry best practices and the liquidity risk management practices at CIMERWA Plc should be well transparent and well-communicated across the organization.