Impact of liquidity and solvency on financial performance of firms listed at the Nairobi securities exchange

Abstract

Given that stakeholders are interested in liquidity and solvency ratios of companies and that they react differently when the ratios show increasing risks, then it means that liquidity and solvency can affect the performance of a firm. The objective of this study was to investigate the impact of liquidity and solvency on financial performance of firms listed at the Nairobi Securities Exchange. The study also tested whether financial leverage, Operational efficiency, Capital adequacy, and Size of the firm also affect the financial performance of these firms. Descriptive research design was used. The study covered a five year period from 2009 to 2013. Secondary data was collected from the annual reports of firms listed at the NSE. Data was then analyzed using a regression analysis model, SPSS version 21 and Microsoft Excel 2010. Tables and graphs were used to interpret the results of analysis. The findings showed that liquidity positively impacts on the ROA of the firms listed at NSE. However, the effect of liquidity on ROA is not statistically significant at 5% level of significance. Solvency negatively affects ROA of firms listed at NSE. Financial leverage was found to negatively influence ROA though the effect is not statistically significant. Capital adequacy positively affects ROA of the firms listed at NSE though the effect is not statistically significant at 5% level. Operational efficiency positively affects ROA and the effect is statistically significant at 5% level. Size of the firms listed at NSE negatively impacts on ROA and the effect is statistically significant at 5% level of significance. The study concludes that of all the variables considered, only operational efficiency and size of the firms are significant determinants of the financial performance of firms listed at NSE.