Effect of capital structure on the financial Performance of listed cement manufacturing Companies in Kenya
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Date
2014-07-03
Authors
Muya, John E. Kihumba
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Abstract
The purpose of this study was to establish the relationship between capital structure and financial
performance of listed cement manufacturing companies in Kenya. Capital structure has attracted
intense debate and scholarly attention across industries in the corporate finance literature over
the past decades. However, in the context of the Cement manufacturing industry, the subject has
received limited research attention. Capital structure decision is a vital one since profitability of
an enterprise is directly affected by such decision. The objectives of the study were to examine
the relationship between debt to equity ratio and Net profit margin of listed cement
manufacturing plants in Kenya.to examine the relationship between debt to equity ratio and
Return on Capital Employed of listed cement manufacturing plants in Kenya, to examine the
relationship between debt to equity ratio and Return on Equity of listed cement manufacturing
plants in Kenya, to examine the relationship between debt to total funds and Net profit margin of
listed cement manufacturing plants in Kenya, to examine the relationship between debt to total
funds and Return on Capital Employed of listed cement manufacturing plants in Kenya and to
examine the relationship between debt to total funds and Return on Equity of listed cement
manufacturing plants in Kenya. The study used longitudinal research design with target
population being listed cement manufacturing firms in the NSE.
For this purpose all the three cement manufacturing firms listed in Nairobi Securities Exchange
was used. Secondary data from published financial statements for the period 2006 - 2011 was
collected. Empirical data on capital structure and financial performance was analyzed using
SPSS to establish relationships between the variables selected for the study. Pearson's
correlation coefficient was determined and Regression analysis was also used to determine the
relationship between capital structure and financial performance of listed cement manufacturing
companies in Kenya. Using various measures of financial performance, results indicated that
capital structure influences financial performance, although not exclusively. Total debt was
found to be significant in determining net profit and return on capital employed in the cement
manufacturing industry in Kenya. The mean values of debt/equity ratio and debt to total funds
were 825.15% and 88.68% respectively. The mean value of debt/equity ratio suggests that debt is
8.25 times higher than equity capital. The mean value of debt to total funds ratio indicates 89%
of the total capital of listed cement companies in Kenya is made up of debt. Long term debt and
total debt were found to be insignificant in determining return on equity in Cement
manufacturing industry. The R2values were found to be significant for the impact of debt to total
funds on net profit. But no significant impact was found on the remaining dependent variables.
Total debts impact on net profit 'was found to be 50.5%. The effect of total debt 0;, return on----
equity as the least (R" = 6%). This reveals that the remaining 94% is influenced by other factors
other than total debt. This means that other factors are probably a better predictor of return on
equity than total debt. The study recommends that cement manufacturing firms should make
their finaneing decisions prudently in order to remain competitive in the industry and thereby
make higher profits. Further it would be desirable to extend the study and examine capital
structure and profitability of non listed cement manufacturing companies.
Description
Department of Accounting and Finance, 37p. 2013, HD 9622 .K4M8