Abstract:
Financial distress research of companies has attracted a growing attention in the recent past. This phenomenon of financial distress in public companies has been witnessed by a number of corporate failures and the increase in delisting of listed companies. However, the researcher notes that while there are various studies on, the impact of financial ratios on financial performance, the researcher notes that little has few studies have been conducted on effectiveness of ratio analysis in the context of firms listed at the NSE in Kenya. Efficiency ratio gives rise to either leveraged firm or unleveraged firm. This study therefore fills the gap by investigating effectiveness of market ratios on financial distress of listed firms in Nairobi Security Exchange Market, Kenya. Theories such as the agency theory, the Wreckers theory of Financial Distress and Normative Theory of Business Bankruptcy were reviewed which provides a foundation for both efficiency ratio and financial distress. The study used a cross-sectional survey research design is an observational study. The target population was 51 non-banking firms listed companies in Nairobi Security Exchange Market as indicated in from year 2012-2016. The entire population except the banking industry was used in the study. The study used document analysis by getting panel data from listed companies in Nairobi Security Exchange Market. Descriptive and inferential statistics method with the aid of Stata was used for data analysis and interpretation. Data were presented using tables and diagrams. Hypotheses were tested at 0.05 level of significance (95% confidence level) from OLS pooled least squares regression (fixed and random effect) which shows the relationship between the independent variable and dependent variable. The findings show that leverage ratio has a negative and significant effect on financial distress of firms listed on the NSE (β2 = -1.852, p-value = 0.001), while efficiency analysis ratio has a positive and significant effect on financial distress, β1 = 0.593, p-value = 0.000). The findings also showed that profitability ratio indicates effectively financial distress (β1= -0.010, p-value = 0.818). It is suggested that efficient management and financing of working capital can increase the operating profitability ratio. In conclusion financial ratios predict 47% of financial distress on firms listed in NSE. Users of financial information should always examine ratios since it an important tool in predicting financial distress. The study therefore recommends the development of guidelines on the level of leverage to be held by the listed companies for sustainability.
