Gearing and Performance of Selected Listed Companies in Nigeria

Abstract

Gearing and Performance of Selected Listed Companies in Nigeria 1. Introduction Gearing represents the amount of long-term debt used to finance a company's assets as distinct from shareholder's equity (Glautier, underdown and Morris, 2016). Jeleel and Olayiwola (2017) while describing gearing stressed that the providers of capital will have claim on the net cash flows of the business after paying the compulsory tax dues while the balance is retained for business operations. Gearing became prominent when the need for the growth and expansion of business concerns came to the front burner and therefore the need to employ the debt/equity financing as a way of oxygenating the financial capacity of concerns became profound. According to Oke and Afolabi (2011) gearing is referred to as the proportion of debt financing and equity financing that a firm employ in its capital structure. They measured gearing using debenture and ordinary share value of selected firms in Nigeria. They further stressed that if firm is wholly equity financed all the after-tax operating cash flow in each period accrues as a benefit to its shareholder in form of dividend and retained earnings. On the other hand, if the firm borrowed portion of its capital, a proportion of its cash flow must be dedicated to servicing this debt element. Firm's choice of source of funds therefore determines the allocation of its operating cash flow in each period between debt and shareholders. The overall significant of the firm choice of capital structure is esoteric. It relates to splitting finance into debt and equity elements with each of these having its peculiar features, merits and demerits on firm sustainability and market value. Gearing which is also referred to as leverage is some climes is the proportion of debt to equity that a business or organization adopts as a nomenclature for their capital structure. Olowe (2016) views gearing as the use of fixed interest sources of long term funds in the capital structure of a company. He further stressed that the fixed interest sources of long term funds consist of long term debt and preference share capital. A highly levered firm is one in which the debt to equity ratio is humongous while for an unlevered firm the debt to equity ratio is infinitesimal. According to Hong (1981), gearing is often subjected to a debate that as the ratio of debt to ordinary share capital increases, the risk of inability to meet debt obligations increases. His measure of gearing was debt/equity value of selected companies at Singapore. The corollary is that the market value of the debt drops and the cost of debt increases; the risk of return to ordinary shareholders also increases yielding an increase in the expected rate of return of equity capital. Akintoye (2016) opined on debt holder versus equity holder that the equity of a firm can be viewed as a call option on the firm's total value, the value being the associated or underlying asset of the option. He elongated extensively