Effect of Financial Leverage on Financial Performance of Companies Listed at Nairobi Securities Exchange

Abstract

The choice of financing is vital in the overall survival in the competitive business environment. The main objective of this study was to determine the effect of financial leverage on the financial performance of the companies listed at Nairobi Securities Exchange. This study covered five years from 2013 to 2017. 20 companies which were selected from all the segments at NSE formed the sample for the study. The study utilized descriptive research design in the analysis. Secondary data was analyzed on the basis of the mean and the F test statistic was computed at 5% significance by regression analysis. Analysis of Variance (ANOVA) was conducted. From the findings, the F statistic was 2.723 and was found to be significant, efficiency had a t-value of -0.740, firm size had a t-value of -1.482, liquidity had a t-value of 0.314 which was insignificant and debt ratio had a t-value of 2.634 which was insignificant. The study concluded that financial leverage affects the financial performance of the companies listed at the Nairobi Securities Exchange. The study recommends the prudent use and management of debt financing, this will minimize the exposure of the firms to risks which can negatively affect the performance. Proper use of debt increases the value of the companies. Finally, the study recommends a study be done on informal sectors for example the small and medium enterprises since they are mostly faced with financial challenges which require debt financing to determine whether it affects their performance.