The Effect of Capital Structure on Financial Performance of Small and Medium Enterprises in Dairy Sector in Kiambu County

Abstract

The purpose of this study was to establish the effect of capital structure on financial performance of small and medium enterprises in dairy sector in Kiambu County. The SMEs in Kiambu have undergone tremendous growth over the last four years. Despite the undeniable importance of capital structure, its effect on financial performance is not always obvious since there are reported cases of reverse causality between capital structure and financial performance. The causal research design was used to carry out this study. The population of study was all the 71 dairy SMEs in Kiambu County as at 31st December 2013. Probability sampling techniques was employed in this research to select a sample of 50 (70%). The study used secondary data from the SMEs annual reports and newsletters. The study used multivariate regression and correlation analysis for data analysis and results presented in tables. The independent variable was capital structure (debt equity ratio; debt asset ratio and liquidity) while dependent variable was dairy SMEs financial performance (ROA).The results indicate that Debt equity ratio was significant at 5% level of significance (0.009). The estimate of coefficient value for Debt equity ratio was -0.179; Debt asset ratio was significant at 5% level of significance (0.006) with estimate of coefficient value of 0.195 whereas liquidity ratio was significant at 5% level of significance (0.01) with coefficient value of 0.012 which indicates that the three factors are predictors of financial performance of small and medium enterprises in dairy sector in Kiambu County. The study recommended that the SMEs to use more of equity in financing its operations and firms to ensure there is adequate current asset for them to remain liquid at all times.