Relationship Between Financial Leverage and Profitability of Listed Manufacturing Firms in Kenya

Abstract

Business deploys a number of strategies to improve financial profitability, including streamlining processes, outsourcing and integrating new technologies. Financial leverage offers an alternative way to increase profits by financing a portion of the business through loans or by issuing stock. This study sought to determine the relationship between financial leverage and profitability of listed manufacturing firms in Kenya. Relationships between short term debt, long term debt and debt equity on profitability of listed manufacturing firms in Kenya were examined in ten manufacturing firms listed in Nairobi Stock Exchange. Secondary data was collected and analyzed by both descriptive and inferential statistics using Statistical Package for Social Sciences. Descriptive analysis involved means, standard deviations, maximum and minimum across all variables. Inferential statistics included; Pearson correlation and multiple regression analyses. Results were presented in form of statistical tables. The was a negative relationship of short term debt (-0.362) and debt to equity ratio (-0.062) on profitability of listed manufacturing firms. On the other hand, long-term debt (0.349) positively and significantly affected listed manufacturing firms. These research findings can advise development of financing policies that would ensure sustainability of the financial performance. It would be advisable to reduce debt to equity to minimize effects on the earning before tax and where possible, manufacturing firms should consider using internally generated funds to finance their projects and that debt financing should only be considered when internal funds are fully exhausted.