Financial Leverage and Performance of the Agricultural Companies Listed at Nairobi Securities Exchange, Kenya

Abstract

The purpose of this study was to establish the effects of financial leverage on financial performance of the agricultural companies listed at Nairobi Security Exchange market in Kenya. Precisely, this research emphasized on the effects of debt financing, debt-equity finance, long terms debts and short terms debts on financial performances of agricultural firms listed at Nairobi security market in Kenya. The research utilized panels data as obtained from secondary source including yearly financial records of agricultural companies listed in the securities market at Capital Market Authority website, Nairobi Security Exchange handbooks for the periods of reference and library materials. This research study assumed explanatory and non-experimental research designs to analyze the relationship between financial performances and leverage for agricultural organizations trading at the security markets in Kenya. Various attributes of financial leverage were described using descriptive analysis. The study used panel regression method to examine data as a model. Both correlation and regression analysis were applied to examine the link involving the study variables. The study findings revealed that debt equity financing had a positive and significant effect on return on asset. The study further found that long term debt and shortterm debt had a negative and significant effect on return on asset. In addition, the study found that debt financing had a positive albeit insignificant effect on return on asset. The study concluded that debt equity financing had a positive and significant effect on return on asset. The implication is that increase in debt equity financing makes it easy for companies to effectively manage their assets. Further, the concluded that long term debt and short-term debt had a negative and significant effect on return on assets. The implication is that the more firms depend on debts, the lower the return on assets. This could be associated with the fact that instead of using its returns for reinvestment, it uses it to meet liabilities of the creditors. The study recommends that managers of the agricultural companies listed at Nairobi Security Exchange market in Kenya should employ minimal debt level which will not affect the firms’ performance due to the adverse effect of short term debt on return on asset.