Influence of Capital Structure on Financial Performance of Non-listed Building and Construction Firms in Kenya

Abstract

Capital structure does form a spectrum by which institutions and business entities finance their financial obligations, thus; the need of making a good choice of equity mix. The biggest nightmare is in combining and employing the right fuse of equity in order to realize optimal performance worth of finance. The image of Kenya’s building and construction industry in the study period of 2014/2016 was at a mark of 3.2/3.5 in third order, a representation of a down ward trajectory when put into comparison with what was exhibited in the years 2005/2006. Within that period, 5.8 and 6.0 percentages were realized within the industry. Such a kind of poor performance across the building and construction industry in Kenya, in accordance to the existing literature, pointed at the composition of capital structure in funding operations among the said firms within the industry. This informed the study to examine the effect of capital structure on financial performance of non-listed building and construction in Kenya. This research exercise intended to make an examination on the influence of Liquidity ratios, Tangibility of assets, and Debt ratios on profitability of non-listed building and construction firms in Kenya. The study thus created use of ROA and ROE as measures for financial performance. The period of the study was between 2014 -2016. The study utilized M&M theory, Trade off theory, Pecking Order theory, and Market Timing theory. The research design used was descriptive survey design. Data was collected from the firms’ consolidated financial statement documentations at the National Construction Authority and the Kenya Association of Manufactures. The target population had all the 10 Tier 1 building and construction non-listed firms registered and regulated by the National Construction Authority within the three-year period of study of 2014 to 2016. The sample size was the same as the target population. The data collected were secondary. Data was analyzed using mean, correlation regression model, and Annova (F-test). Analyzed data was interpreted and presented using tables and figures. Data analysis was done using SPSS software version 2.1 for efficient data representation. The results generated out of this activity deduced that capital structure does have a typical influence that is inverse on the financial position of ix non-listed building and construction firms in Kenya. The results did indicate that financial performance apparently declines when the debt ratio is increased in the capital structure of the respective firm. Thus, giving enough reason to warrant injection of capital as opposed to borrowed capital. Financing through debt proved to be cost implicating as it attracts such costs as interest rates that exceeds the benefits expected of debt financing. This study will assist management and financial experts in examining the company's growth characteristics, liquidity and asset utilization, business risk, and financial performance to anticipate its future worth. This research exercise recommends that business entities should work on minimizing financial leverage within their capital structure for purposes of enhancing and stirring financial performance thus creating a huge value to their respective shareholders.