| dc.description.abstract | This Study sought to investigate the relationship between gearing and profitability of
listed firms on the Nairobi Stock Exchange (NSE) during a six-year period.
Data was collected from Nairobi Stock Exchange, Capital Markets Authority and from
the Registrar of Companies. The data was extracted from the financial statements of those
companies that were consistently listed in NSE for the years 2000 to 2006. The data that
was extracted were revenue (sales), gross profit, reserves, total shareholders equity, EBT,
EBIT, net income, minority interest, long term liabilities, long term liabilities (interest
bearing). It was only the basis of these data that paid up capital, capital employed and
return on capital employed were derived. The secondary data collected was then used to
compute profitability and gearing ratios. Regression analysis was used in the estimation
of functions relating the operating profit margin (OPM) with measures of gearing.
This finding can be considered as an indication that firms generally finance their
activities following the financing procedure implied by the pecking order theory. The
findings were thus consistent with the pecking order theory that denotes that firms prefer
internal financing from external. The results reveal an insignificant negative relation
between gearing ratios and profitability. The research suggests that profitable firms
depend less on debt as a financing option. In the Kenyan case, there seems apparent that
there are other factors that determine the firm gearing levels other than profitability. | en |
