The Extent of Indebtedness in Public Companies in Kenya: Prom 1972 to 1981

Abstract

As we might all be aware, quite a number of companies have gone bankrupt, others are in receivership, while others are experiencing financial difficulties. There are several explanations that might be advanced, for instance, mismanagement of" funds or inappropriate investment decisions which result in excessive borrowing. Alternatively it may be that the company is not making sufficient return on its investments to enable it meet its financial obligations as they fall due or it is not making the best use of borrowed funds. This study was therefore undertaken in order to find out if one of the possible causes of the problem could be attributed to the extent of indebtedness. The study Was Limited to public companies because of the ready availability of the data.it was restricted from the period 1972-1981. Because this period was seen to be the representative of the recent changes in company finance in Kenya. The total number of companies researched on were sixty three. Data such as current assets, total assets, short t~rm liabilities, long term loans, share capital, reserves and profit/loss was collected for each of the companies for ten years. With these data in had, various statistics namely;current ratio, debt/equity ratio,debt/asset ratio, long term debt/ fixed assets percentage, percentage Change in total debt and percentage of long term debt/total funds were computed. This analysis was facilitated by the use of a computer. The results o,f the study reveal that public companies in Kenya are highly geared as evidenced by the debt/equity and debt/asset ratios. The current ratio shows that these companies are also just barely managing to meet their short term obligations as they fall due. The percentage of long term debt/total funds has been rapidly increasing, though the percentage of long term debt used to finance fixed assets has been generally constant The debt levels of the public companies showed tremendous increases in 1977 and then decreased in the following years. The explanation for this was of course the "coffee boom" of 1977 when a lot of money was in circulation and companies borrowed heavily in that year. The debt levels, however, show signs of increasing in the 1980's and so we can expect that the public companies will continue to use more debt capital in their capital structures and place less reliance on equity capital.