Effect of Financial Leverage on Financial Performance of Energy and Petroleum Firms Listed at the Nairobi Securities Exchange

Abstract

Firms apply a combination of both borrowed capital and equity capital but the optimum level or mix of the two that maximizes returns remains a puzzle to date since the works of Modigliani and Miller who suggested that various sources of business finance have no impact when determining firm’s market value. The goal of the study was to see how financial leverage affected the performance of NSE-listed energy and petroleum companies. The study's population included all four NSE-listed energy and petroleum companies. Financial leverage, defined as the ratio of total debt to total assets in a particular year, was used as a predictor variable in this study. Liquidity was measured by the current ratio, company size was measured by the total assets natural log, and managerial 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 an annual basis for ten years (January 2010 to December 2019). The research variables were analyzed using a descriptive cross-sectional design. SPSS software was used to conduct the analysis. The results yielded a 0.448 R-square value, indicating that variations in the chosen independent variables account for 44.8 percent of changes in financial performance amongst energy and petroleum firms, whereas other factors accounting for 55.2 percent of variation in financial performance amongst NSE listed energy and petroleum firms. Independent variables had a good relationship with company performance (R=0.699) in this study. The F statistic was significant at 5% with p0.05, according to the ANOVA results. This demonstrated that the overall model was effective in determining the variables' relationships. Financial leverage had a negative as well as statistically significant impact on financial performance, but liquidity and management efficiency had a positive and statistically significant impact on the performance of the NSE listed energy and petroleum companies. In this research, the size of the firm had no statistical significance. This suggestion is that NSE-listed energy and petroleum companies should focus on achieving the best degree of financial leverage, improving liquidity positions, and improving managerial efficiency, as the three factors have a substantial impact on their financial performance.