Effect of Financial Leverage on Profitability of Firms Listed in the Nairobi Securities Exchange

Abstract

Financial leverage is the use of fixed charge sources of funds to finance the firms' investment projects. A levered firm is a firm that employs debt in its capital structure. Excessive use of debt is likely to expose the firm to financial risk hence insolvency. Therefore, a firm should maintain an optimal capital structure that will minimise the overall cost of capital. This study sought to establish the effect of financial leverage on the profitability of firms listed in the NSE. Causal research design was employed on the target population of 66 listed firms. Purposive sampling technique was used to select a sample size of 30 listed firms. Data was analysed using descriptive and inferential statistics. Descriptive statistics was used to test for normality of data. Inferential statistics on the data were done using regression model. The study established that, firm size has a statistically significant effect on the profitability of listed firms with p value of 0.002. Liquidity and growth opportunity on the other hand were not statistically significant indicating p values of 0.062 and 0.914 respectively. This means they have no significant effect on the profitability of firms listed in the NSE.

Financial Leverage and Market Return of Manufacturing Firms Listed at Nairobi Securities Exchange, Kenya

“…Although financial leverage has the ability to have a major impact on performance, Olang (2017) points out that a high level of market returns can put a company at danger of insolvency due to large interest payments. As a result, companies should use the least amount of debt possible.…”

“…The study backed up MM II's argument that the predicted return on capital would rise as the market price rose. Banafa (2016), Maina and Kondongo (2013), Olang (2017), Shibanda and Okaka (2015), Mohamed (2016), Oketch, Namusonge &Sakwa (2018), andKunga (2015) based their research on Modigliani and Miller's (1963) theory of financial leverage and performance.…”

Analysis of Capital Structure and Financial Performance in the Jordanian Insurance Sector

“…The connection between capital structure and performance has sparked the interest of researchers in finance lately. Many studies, such as (Shamsuddin et al 2018), (Olang 2017), and (Patjoshi 2016) have pointed the importance to study the relationship between capital structure and financial performance of companies.…”

Faktor-faktor yang mempengaruhi profitabilitas pada perusahaan sektor pertambangan yang terdaftar di bei tahun 2018-2020

“…Profitabilitas menggambarkan keahlian perusahaan untuk menghasilkan keuntungan. Profitabilitas diartikan berupa ukuran keseluruhan dalam keberhasilan ekonomi perusahaan dan kompetensi manajemennya (Olang, 2017). Profitabilitas menjadi kunci utama dalam melihat perkembangan dan pertumbuhan perusahaan.iDengan meningkatnya perkembangan perusahaan akan sangat berpengaruh terhadap keberlangsungan perusahaanidalam jangka panjang,olehkarenaitudiperlukanstrategi untukmemaksimalkan profitabilitasnya (Alarussi & Alhaderi, 2018).…”

“…Faktor-faktor yang mempengaruhi profitabilitas pada perusahaan sektor pertambangan yang terdaftar di BEI tahun 2018-2020 Intan Putri Wijaya, Siti Nurlaela, Yuli Chomsatu mempertahankan struktur modal yang optimal untuk meminimalkan total biaya modal (Olang, 2017). Lain halnya dengan hasil penelitian dari Ferica etial.…”