Capital Structure Decisions and Financial Performance of Sugar Manufacturing Firms in Kisumu County, Kenya
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Date
2018
Authors
Ongombe, Kennedy Otieno
Mungai, John
Journal Title
Journal ISSN
Volume Title
Publisher
International Academic Journals
Abstract
The sugar factories in Kisumu County are
performing badly and this is as a result of the
fact that most of these sugar manufacturing
factories are riddled with a heavy debt burden
and continuous poor performance (KSB
2013). This poor state has resulted to loss of
employment opportunities and delay in
payment to cane suppliers thus has garnered a
lot of concern from the Government, the
sugar cane growers and the companies’
employees. This predicament led to the
placement of Muhoroni Sugar Company
under receivership in the year 2001. Poor
state of the sugar firms has persisted despite
the fact that the sugar manufacturing
companies in Kisumu County have well
branded commodities, sufficient trained
personnel and a huge domestic demand that
they are unable to fully satisfy. The factors
affecting the operations of sugar firms have
been studied and analysed from diverse
dimensions and hardly on the influence of
capital structure decisions on financing
decisions. Capital structure decisions are vital
since the financial performance of an entity is
directly affected by such decisions. Capital
structure has attracted a strong debate and
scholarly attention in the corporate finance
literature for a long period of time. However,
in the context of sugar industries, the topic
has received inadequate research attention.
This study therefore, investigated the
influence of the choice of capital structure
decision on financial performance of sugar
milling firms in Kisumu County. The specific
objectives of the study were to investigate the
effect of financial debt-ratio, debt-equity ratio
and weighted average cost of capital on the
financial performance of sugar milling firms.
The financial performance of the three sugar
milling factories in Kisumu County were
analysed from the perspective of the indicator
of return on equity. The study was conducted
based on the Trade-off theory, the Pecking
order theory and the Agency cost theory. The
units of analysis were individual firm to
determine the effect of capital structure on
financial performance. The population of the
study consisted of all the three sugar
manufacturing firms in Kisumu County. The
study involved financial analysis and thus
used descriptive survey design. The study
used secondary data which was obtained from
published financial statements from the
period 2011-2015 and collected using the
secondary data collection sheets. Data was
analysed quantitatively using statistical
package for social science (SPSS) version 21.
Additionally, correlation analysis, simple and
a multiple regression analysis was done to
determine the extent of influence of each of
the autonomous variable. To check whether
there was colinearity, multicollinearity was
carried out using tolerance and variance
inflation factor and the normality was
indicated by a PP plot of regression
standardized residual. Data was presented
using table and written discussions. The
findings indicated that debt-ratio had a
negative insignificant statistical relationship
while debt-equity ratio had a significant
negative effect on monetary performance of
sugar manufacturing firms in Kisumu County
as measured by ROE. It also revealed that
WACC had positive significant effects with
financial performance of the sugar firms. The
study recommended that Sugar firms that are
in position to finance their operations using
equity should reduce debt financing so as to
lessen the risks connected to borrowing hence
improve on their financial performance. It
also recommended that firms’ management
should therefore strike a balance between
their choice of capital structure and the
effects on its performance as it affect the
shareholders risks, returns and cost of capital.
Description
A research article published in International Academic Journal of Economics and Finance
Keywords
capital structure decisions, financial performance, sugar manufacturing firms, Kisumu County, Kenya
Citation
Ongombe, K. O. & Mungai, J. (2018). Capital structure decisions and financial performance of sugar manufacturing firms in Kisumu County, Kenya. International Academic Journal of Economics and Finance, 3(2), 336-356