Debt Financing and Profitability of Listed Manufacturing Firms at the Nairobi Securities Exchange, Kenya: An Empirical Analysis
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Date
2025-05
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AESS Publications
Abstract
Declining profitability in NSE-listed manufacturing firms like Mumias Sugar and Eveready East Africa has discouraged investment and hampered Kenya's economic growth. Despite extensive research on capital structure, a gap remains in understanding how debt financing specifically influences profitability, particularly return on assets (ROA), among NSE-listed manufacturing firms. This study examined the impact of debt financing on ROA, focusing on long-term debt, short-term debt, and the debt tax shield. The research was anchored on trade-off theory, agency theory, and Modigliani and Miller’s capital structure irrelevance theory. An explanatory research approach was employed, analyzing financial data from nine listed manufacturing firms from 2010 to 2022. A census sampling technique included all nine firms, and data was analyzed using Stata version 17 with panel regression analysis. Diagnostic tests conducted included multicollinearity, Hausman, heteroskedasticity, and normality tests. Findings revealed that both short-term and long-term debt had a statistically significant negative impact on ROA, indicating that higher debt levels reduced profitability. Conversely, the debt tax shield had an inverse but statistically insignificant effect, suggesting that tax benefits from debt financing did not significantly enhance profitability. The study recommends that financial managers explore alternative financing strategies such as equity financing or internal capital generation rather than broadly reducing debt. Additionally, firms should strategically balance their short-term and long-term debt to optimize financial performance while mitigating financial risks.
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Odula, L. A., & Chege, P. (2023). Data Analytics and Organizational Performance of Kenya Civil Aviation Authority. International Journal of Social Science and Humanities Research (IJSSHR) ISSN 2959-7056 (o); 2959-7048 (p), 1(1), 609–632. https://doi.org/10.61108/ijsshr.v1i1.50