Effect of Financial Leverage on Financial Performance of Manufacturing and Allied Firms Listed at the Nairobi Securities Exchange

Abstract

Financing choice is vital to every firm as the optimal capital structure between debt and equity impacts on the value of the firm as well as its stock prices in the securities market. However, the optimal capital structure has attracted attention over the past due to its role in economic growth of a company. This study sought to determine the effect of financial leverage on financial performance of manufacturing and allied firms listed at the Nairobi Securities Exchange. To accomplish this objective the study used a descriptive research design. The population of the study was made up of the 10 manufacturing and allied firms listed at the Nairobi Securities Exchanges as at 31st December 2016. The study obtained data from the 10-listed manufacturing and allied firms. This study used secondary data for a period of 5 years from 2012 to 2016. The secondary data collected from the annual report of the manufacturing and allied firms was be analyzed using descriptive statistics, correlation analysis and using the multiple regression method. The study established there was an insignificant positive relationship between financial leverage and ROA of the manufacturing and allied firms listed at the NSE. The findings revealed that the relationship between firm size and ROA was negative and significant while the relationship between assets structure and ROA is positive and significant. Further, the research found that the relationship between capital intensity, sales growth and ROA was negative and insignificant. The study concluded that financial leverage does not significantly affect the financial performance of manufacturing and allied firms listed at the NSE.