The Effect of Capital Structure on Financial Performance of Small and Medium Enterprises in Dairy Sector in Kiambu County
Abstract
The purpose of this study was to establish the effect of capital structure on financial performance
of small and medium enterprises in dairy sector in Kiambu County. The SMEs in Kiambu have
undergone tremendous growth over the last four years. Despite the undeniable importance of
capital structure, its effect on financial performance is not always obvious since there are
reported cases of reverse causality between capital structure and financial performance.
The causal research design was used to carry out this study. The population of study was all the
71 dairy SMEs in Kiambu County as at 31st December 2013. Probability sampling techniques
was employed in this research to select a sample of 50 (70%). The study used secondary data
from the SMEs annual reports and newsletters. The study used multivariate regression and
correlation analysis for data analysis and results presented in tables. The independent variable
was capital structure (debt equity ratio; debt asset ratio and liquidity) while dependent variable
was dairy SMEs financial performance (ROA).The results indicate that Debt equity ratio was
significant at 5% level of significance (0.009). The estimate of coefficient value for Debt equity
ratio was -0.179; Debt asset ratio was significant at 5% level of significance (0.006) with
estimate of coefficient value of 0.195 whereas liquidity ratio was significant at 5% level of
significance (0.01) with coefficient value of 0.012 which indicates that the three factors are
predictors of financial performance of small and medium enterprises in dairy sector in Kiambu
County. The study recommended that the SMEs to use more of equity in financing its operations
and firms to ensure there is adequate current asset for them to remain liquid at all times.
Publisher
University of Nairobi