EFFECTS OF CAPITAL STRUCTURE ON FINANCIAL PERFORMANCE: A CASE OF SELECTED MANUFACTURING COMPANIES ON THE NAIROBI SECURITIES EXCHANGE
Abstract
Whether a business is a startup or a going concern, it requires funds to carry out its activities as no success is achievable in the absence of fund. The needed fund may be for daily running or business expansions. This tells how important in the life of a business. Capital of firms when sourced, it becomes a burden on enterprises simply because it is other persons' resources which they are to compensate as they derive maximum benefits from it. Therefore, the firm capital structure is intended to provide maximum performance for the cost capital and the profitability for the business. The ability of the organization to carry out their stakeholders need is closely related to the capital structure. The determination of a company’s capital structure is a difficult task to achieve. The general objective of this study was to investigate the relationship between capital structure and financial performance of manufacturing firms listed in the Nairobi Securities Exchange. Specifically, the study aimed to evaluate long term debt to asset ratio, short term debt to asset ratio, debt equity ratio, liquidity ratio and firm size, of manufacturing firms listed in the Nairobi Securities Exchange. The study used panel data of selected manufacturing Companies including BOC, British American Tobacco, CarbAcid Kenya, East African Breweries Ltd, Eveready Kenya, Mumias Sugar and Unga Group limited for a period of 9 years. Thus the groups were 7 and the time period was 9 years. All the independent variables are statistically significant. The coefficient of Long-term Debt to Asset ratio is positively related to performance meaning that the higher the Debt to Asset ratio, the greater the profitability. The short-term Debt to Asset Ratio is negatively related to profitability and hence performance of the manufacturing firm. Debt to equity ratio has a positive relationship with performance of a firm. The higher the debt to Equity ratio, the more the profitability hence higher performance of the firm. From the results a high long-term debt to asset ratio increases profitability of a firm whereas a high short-term debt to asset ratio and a high debt to equity ratio lower the performance of a manufacturing firm.
Key Words: Long Term Debt to Asset Ratio, Short Term Debt to Asset Ratio, Debt Equity Ratio, Liquidity Ratio, Firm Size
CITATION Omuhaya, M. N., & Malenya, A. (2020). Effects of capital structure on financial performance: A case of selected manufacturing companies on the Nairobi Securities Exchange. The Strategic Journal of Business & Change Management, 7(3), 609 – 530.
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DOI: http://dx.doi.org/10.61426/sjbcm.v7i3.1698
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