Leverage and Financial Performance of Companies Listed in the Energy and Petroleum Sector of the Nairobi Securities Exchange

Abstract

Problems that finance managers face include decisions that guide on how a firm’s operations will be financed. A key indicator of an organization that is achieving the objective of shareholder wealth maximization is improvement of financial performance. To improve financial performance of an organization, managers may consider the increment of the debt component of the company. The study determined the impact of leverage on the financial performance of four listed Energy and Petroleum Kenyan firms at the NSE from 2011 to 2020. Data retrieved from firm’s annual reports was utilized and descriptive research was conducted. Leverage was assessed by employing the debt ratio and interest coverage ratio (ICR) while financial performance was estimated by return on Equity (ROE). Pecking Order Theory and Trade Off Theory are the theories on which this research was anchored. Regression and correlation analysis identified the influence of leverage on the financial performance of study population. The interest coverage ratio and the debt ratio’s influence on ROE was positive while the increment of firm size resulted in a decrease in ROE. This study concluded that a positive influence of leverage on financial performance was found. As firms continue to rely on debt financing, their income and financial performance improves. This research recommends that finance managers should strive to achieve a balance between benefits of debt as a result of tax savings and costs of bankruptcy that are linked to borrowing when deciding on the leverage levels to adopt.