Impact of capital structure on the financial performance of manufacturing firms listed at the Nairobi Securities Exchange

Abstract

This study aimed to determine the relationship between capital structure and financial performance of firms listed under manufacturing at the Nairobi Securities Exchange. Return on Asset and Return on equity were used as the measures of firm performance while equity, Long-term Debt and retained earnings represented capital structure indicators. The study will cover the firms listed under manufacturing from 2019 to 2023. Correlational research was the design applied in this research. Data was obtained from the firms consolidated financial statement. The data was then analyzed using linear regression models using SPSS to establish if there is any significant relationship of capital structure and the financial performance. To gauge the effect of debt on performance, two regression models were estimated. In this case, the dependent variables are return on asset and return on equity. For each model, several regression analyses have been conducted whereby, in each one, one capital structure proxy had been included with the use of lag values for obtaining the best fitted relationship between performance and capital structure. Retained earnings showed a positive and significant relationship with ROA at 0.003, while Equity had a positive coefficient of 0.001 demonstrating a statistically significant positive effect on ROA. At the same time, Long-term debt had a negative coefficient of -0.003 which indicated an inverse relationship between long-term debt and ROA. The study also depicted that high levels of long-term debt negatively influenced both ROA and ROE. Firms are therefore recommended to maintain their optimal capital structure by avoiding high levels of debt and shifting to other available options for financing, such as equity or internal funding.