The Effect of Capital Structure on the Financial Performance of Manufacturing Firms in Kenya

Abstract

The research objective was to establish effects of capital structure on the performance in financial perspective of Kenyan manufacturing firms. Theoretically it is assumed that the capital mix a firm uses to finance its operations does not matter and that its future operating income generated by its asset is what determines its value. Multiple linear regression which included return on equity as independent variable, capital structure, liquidity, size and growth as the independent variables. These variables were used to establish whether capital structure decisions affect profitability of manufacturing firms in Kenya. Secondary data was collected from 2009 to 2015 and analyzed with the aid of statistical tools. Descriptive study research design was used to determine frequency of occurrence or extent to which variables were related. The population used in this study was ten manufacturing and allied companies which are all listed at the NSE. The study used mainly secondary data from the NSE hand book, data relating to the research question was also obtained from audited financial statements of respective firms. The correlation coefficient and coefficient of determination were used to test whether the expected values of quantitative variables differed from each other. The results obtained from the regression equations established a negative relation between total debt, size and financial performance which indicates using more of debt or assets are linked to a decrease in performance in financial perspective. The study further found out that financial performance increased with increase in liquidity and sales growth. From the findings outlined above, the study recommends that companies, should consider borrowing less funds and use internal funds economically so that they can consequently reap from such funds and increase their financial performance. Secondly the firm management should take into account their liquidity which is significant and growth as this also turned to be critical factors in determining financial performance.