The effect of debt financing on the financial performance of companies listed at the Nairobi Securities Exchange

Abstract

This study sought to examine the effect of debt financing on the financial performance of companies listed at the Nairobi Securities Exchange. The objective of the study was to establish the effect of debt financing on firm performance in companies listed at the Nairobi Securities Exchange. The research design used was a quantitative research design. The data was then analyzed using linear regression models using SPSS to establish, if there is any significant relationship of debt structure and the financial performance. Three regression models were utilized, with return on asset as the dependent variable and total debt, long term debt and short term debt as the independent variables so as to assess the effects of debt on firm performance. The findings of the research revealed that short-term debt was negatively correlated to return on assets but not significantly. Long-term debt was also negatively correlated to return on assets but less significantly than short term debt. There was a weak negative correlation between return on assets and total debt with a correlation of -0.337. According to the study, we underlined that debt has no significant influence on profitability either in a linear way, or in a non-linear way but recommended that firms should use more of long term debt since there is less negative impact on financial performance as long as the cost of debt does not exceed the required rate of return of the firm.