Abstract:
Financial distress has been on the rise all over the world and more rampant in Africa
continent. Financial distress leads to firms being bankrupt and finally collapse. This
problem has been increasing and it has to be curbed since manufacturing firms contribute
to the growth of the economy. The essense of this study was to assess the effects of
financial distress on the financial performance of manufacturing firms listed in Nairobi
security exchange. The study specific objective were; to determine the effect of liquidity
on financial performance of listed manufacturing firms, to establish the effect of solvency
on financial performance of listed manufacturing firms and to analyse the effect of
financial health on financial performance of the listed manufacturing firms. The study used
credit risk theory, pecking order theory of financing,Gambler‟s Ruin Theory and
shiftability theory. Descriptive research design was used and census approach method
was used in the study where all eleven companies were selected without sampling. The
sample size included all the nine active listed manufacturing companies at the NSE. Data
for all the variables in the study was extracted from audited published reports and financial
statements of the listed manufacturing firms in the NSE covering the years 2011 to 2015
where quarterly reports were used. Data collected was analysed using SPSS version 22 and
microsoft excel spread sheet. Descriptive statistic such as mean, average, weighted mean
and standard deviation was also used in analysing the data. The Return on Assets and
Return on Equity ratios were used to measure the firm‟s financial performance with the
formulation of multiple regression analysis to establish the effect of financial distress on
financial performance of listed manufacturing companies on the NSE. The study
established AR
2
of 0.983 which implied that 98.3% of the changes in financial
performance (ROA) of the firms listed at NSE was attributed to the changes in
independent variables considered in the model while for ROE the findings indicated that
AR2 was .885 which implied that ROE explained 88.5% of performance in the SACCOs.
The findings showed that liquidity negatively impacts on the ROA of the firms listed at
NSE. The effect of liquidity on ROA and ROE is not statistically significant at 5% level of
significance. Solvency negatively affects ROA and ROE of firms listed at NSE. Financial
health was found to positively influence ROA and ROE though the effect is not
statistically significant.
