Abstract:
The financial leverage used by a firm is anticipated to earn more on the fixed charges funds than their costs. The leverage decisions made by a firm are a vital one as the performance of a firm is directly affected by such decision; hence, managers should trade with concern when taking debt-equity mix decisions. The objective of the study was to examine the effect of financial leverage on profitability of agricultural firms listed at the Nairobi Securities Exchange. The specific objectives were to, determine the effect of debt to equity ratio on the profitability of listed agricultural firms at Nairobi Securities Exchange, the effect of long term debt to capital employed on Nairobi securities exchange, determine the effect of current ratio on the profitability of listed agricultural firms at Nairobi securities exchange and to establish the effect of firm size on the profitability of agricultural firms listed at the Nairobi securities exchange. The study was anchored on four theories i.e. pecking order Theory, Agency theory, Tradeoff theory and Net income theory. The study used a descriptive research design. The study targeted 66 listed firms at Nairobi securities exchange and a target population of all the seven agricultural firms listed at the Nairobi securities Exchange. The study used Statistical Package for Social Science for data analysis and using descriptive statistics; mean frequency and percentages on presentation of study findings. The study used regression model to determine the effect of independent and dependent variables under study. The study also collected secondary data. The secondary data was collected from the publications of Nairobi securities exchange and Capital Markets Authority, Statistical Bulletins, Economic and Financial Reviews, and Annual Reports and Statement of Accounts from the respective firms. The study established that debt to equity ratio and current ratio have a statistically significant effect on the profitability of agricultural firms listed at the Nairobi Securities Exchange while long term debt to total capital employed and firm size did not have a statistically significant effect on the profitability of agricultural firms listed at the Nairobi Securities Exchange. Following these, The study recommended that agricultural firms consider finding out the best mix of capital structure that does not negatively affect profitability; devising strategies on how to reap best from the associated size benefits in the quest of making more profits; mobilizing resources for non-current assets / fixed assets so as to enhance their long term loan borrowing capacity; and ensuring that the current ratio is maintained at most minimum since for this can help boost the firms’ profitability. The management of these firms, the government of Kenya can use these findings in guiding the review or development of appropriate financial policies and guidelines that enhance the efficacy of financial leverage in positively affecting profitability.
