Effect of Capital Intensity on Financial Performance of Manufacturing and Allied Firms Listed at the Nairobi Securities Exchange

Abstract

The most crucial part of financial management is capital structure decisions. As a result, financial managers must always ensure that the cost of capital is as low as possible in order to maximize shareholder wealth. When it comes to capital structure considerations, one important factor to examine is the firm's capital intensity, which plays a critical role in limiting the firm's operating leverage. The general responsibility of firm managers in such situations is to properly handle firm financing in order to keep the firm's capital intensity under control. The financial performance of several NSE-listed companies has been worsening dramatically over the previous few years. The failure of these companies to keep their capital intensity under control has been blamed for their poor financial performance. Financial managers have been focused more on financial restructuring and working capital management without paying attention to their firm's degree of capital intensity, which has resulted in poor performance for listed corporations on the NSE. The main aim of this research was to examine the impact of capital intensity on the financial performance of NSE-listed companies in the manufacturing and allied sector. The study utilized a non– experimental explanatory research design. The study's target demographics were all NSE-listed companies between 2015 and 2019. The study used a census to include all firms listed on the NSE between 2015 and 2020. This analysis relied on secondary data obtained from the NSE. SPSS was used to code the data (V.20). To analyze quantitative data, descriptive statistics and frequency distribution tables were used. To determine if there is a link between capital intensity and financial performance of firms listed on the NSE in the manufacturing and allied sector, Pearson Correlation and ANOVA tests was used. The data was found to be regularly distributed using a normality test. Multicollinearity was not detected in the investigation since three VIF values were less than ten. The results show that p-values for the Chi-square statistic are less than 0.05, indicating that the empirical model's residuals are not auto correlated. All of the variables employed in this study exhibited a positive significant link with ROA, according to the findings. The study also discovered that increasing the variables employed in this study by one unit results in improved financial performance. The parameters examined contributed 73.8 percent to the manufacturing NSE-listed firms’ financial performance. According to the study, the financial performance of manufacturing enterprises listed on NSE was significantly and positively influenced by profitability, leverage, company size, and capital structure. This suggests that finance managers should prudently balance their equity and debt positions in order to positively impact the financial performance of manufacturing companies listed on the NSE. Additionally, the report proposes that senior management aim to strengthen their leverage and capital structure in order to have a beneficial impact on financial performance.