Effect of Capital Structure on Financial Performance of Non-financial Firms Listed at the Nairobi Securities Exchange

Abstract

Non-financial companies listed at the NSE have a crucial role to play in the enhancement of economic growth of a country. The lack of a vibrant non-financial sector will limit the growth of the economy of a country. By having an optimal and beneficial capital structure, firms in the sector will experience growth in benefits such as cost reduction. The goal of the study was to see how capital structure affected the performance of NSE-listed non-financial companies. The study's population included all 42 NSE-listed non-financial companies. Capital structure, defined as the total debt to total assets ratio in a particular year, was used as a predictor variable in this study. Liquidity was assessed by the current ratio, total assets natural log measuring company size, and management efficiency was measured by the ratio of total revenue to total assets per year. Return on assets served as the response variable for financial performance. Secondary data was collected on a yearly basis for five years (January 2016 to December 2020). The research variables were analyzed using a descriptive design. SPSS software being utilized to conduct the analysis. The conclusions yielded a 0.294 R-square value, indicating that variations in the chosen independent variables account for 29.4 percent of changes in financial performance amongst non-financial firms, whereas other factors accounting for 70.6% of variance in financial performance amongst NSE listed non-financial firms. Independent variables had a good relationship with company performance (R=0.542) in this study. The F statistic was significant at 5% with p<0.05, according to the ANOVA results. This demonstrated that the overall model was effective in establishing the variables' relationships. Capital structure had a negative as well as statistically significant impact on financial performance, but liquidity as well as management efficiency had a positive as well as statistically significant impact on the performance of the NSE listed non-financial companies. In this research, the size of the firm had no statistical significance. This study recommends that NSE-listed non-financial companies should focus on achieving the best degree of capital structure, improving liquidity positions, and improving management efficiency, as the three factors has a substantial impact on their financial performance.