The relationship between financial leverage and profitability of firms listed at the Nairobi securities exchange

Abstract

This study sought to establish the relationship between financial leverage and profitability of firms listed at the Nairobi Securities Exchange. To achieve this objective a descriptive research design was used. The study considered firms that have been listed on the NSE for the past five years and utilized secondary data obtained from the period 2010-2015. Data was collected from 47 listed firms which represented a response rate of 73 percent. This was considered sufficient for making generalization on the whole population. The study covered a period of five years from 2010-to-2014. Data was analyzed using descriptive statistics, correlation analysis and regression analysis. The results indicated that liquidity and financial leverage depicted a negative relationship with profitability. Size of the firm was found to have a positive relationship with profitability of listed firms at the Nairobi Securities Exchange. The limitation of this study is that it used only four variables only, namely; financial leverage, firm size, profitability and liquidity. Profitability is affected by many factors other than the ones discussed in this study and therefore it is important to consider other factors that have bearing on profitability and establish whether the findings will hold or not after which conclusive results can be drawn. The study recommends that listed firms should look for alternative ways of financing their projects other than using financial leverage. From the results obtained it is evident that financial leverage does not contribute to profitability of the firm. This is because when a firm borrows more from its creditors then the firm has to pay more amount of cost of debt to the creditor which is the interest rate. This leads to less net income for the firm and hence lower profitability.