Effect of Capital Structure on Financial Performance of Firms in Energy Sector in Kenya

Abstract

This study explored the effect of capital structure on financial performance of energy sector firms in Kenya. Capital structure has been recognised to be crucial in assessing the liquidity risks as well as the costs of each financing options, that would affect financial performance. However, the metrics around energy sector firms in Kenya, involves the need for increased financing as energy projects in the country are massive and which needs increased capital. The study therefore focused on how capital structure, liquidity, asset utilization, and firm size influenced financial performance. The study's objective was therefore to shed light on effect of capital structure on financial performance of energy sector firms in Kenya, offering insights for businesses, investors, and policymakers seeking to enhance financial sustainability and profitability. Descriptive research design was employed by the study, where the study targeted all the energy sector firms in Kenya, to collect secondary data that was required for undertaking the analysis for the period spanning the years spanning 2018-2022. Inferential statistics that comprised of a combination of regression and correlation analysis was utilized to assess the relationships between capital structure, liquidity, asset utilization, and size and their impact on financial performance. The study found a negative and significant effect of capital structure on financial performance of energy sector firms in Kenya. These findings also suggested that optimizing capital structure, maintaining an appropriate current ratio, and efficiently utilizing assets could significantly enhance the financial performance of energy sector firms in Kenya. The study emphasized the need for careful debt management, prudent liquidity practices, and a focus on enhancing asset productivity. Moreover, the study found that size alone was not a reliable predictor of financial success. Operational complexities associated with larger firms could lead to diseconomies of scale. Therefore, a holistic approach considering multiple factors was recommended when assessing financial performance. The results provided valuable insights for decision-makers within the energy sector, aiding in the formulation of strategies that bolster financial sustainability and profitability.