An Assessment Of The Effect Of Debt Financing On Profitability Of Agricultural Firms Listed In Nairobi Securities Exchange

Abstract

Debt financing in Kenya has regained much focus for both the government and private sector since independence. Companies have experienced increased profitability due to the use of debt financing on their operations and projects. The purpose of this study was to assess the effect of debt financing on profitability of Agricultural firms listed in Nairobi Securities Exchange. The study was guided by the following specific objectives; to establish the effect of short term debt financing on profitability of Agricultural firms listed in NSE, to determine the effect of long term debt financing on profitability of Agricultural firms listed in NSE and to evaluate the effect of financial gearing on profitability of Agricultural firms listed in NSE. Many firms in Kenya pay high cost of capital through debt financing that attract high interests. Some firms have even been put under receivership due to these high interests. This study was based in Kenya, in all Seven Agricultural sector firms listed in the Nairobi Securities Exchange for a period of Five years from 2010 to 2014. The study employed descriptive research design to deal with in-depth characteristics of the population. The target population was all 7 Agricultural firms listed in the NSE. Secondary data was collected from published financial reports for the purpose of the study and then compared with Nairobi Securities Exchange Handbooks and published books of accounts as listed in the Nairobi Securities Exchange. Analysis of data was done by use of Excel program in computing various ratios relevant for the study, and the use of descriptive statistics tools of minimum, maximum mean and standard deviation to understand the characteristics of the variables. Data was run into SPSS to determine the effect of independent variables of short term debt financing, long term debt financing and financial gearing on dependant variable of profitability. The data was then presented in form of frequency tables and ANOVA tables. The finding of the study indicated that long term debt financing had a positive significant effect on the profitability of Agricultural firms listed in the Nairobi Securities Exchange. This was necessitated by the existence of favorable investment opportunities in the country created by the government. The findings further revealed that short term debt borrowing had a significant positive effect on profitability of Agricultural firms listed in the Nairobi Securities Exchange. This was due to the fact that lenders charged high interest rates to short term borrowers during the period of study. Findings derived from a multi-linear regression indicated that financial gearing had a negative significant effect on the profitability of Agricultural firms listed in the Nairobi Securities Exchange. In conclusion long term debt financing was found to be a major determinant of profitability of Agricultural firms particularly those listed in the Nairobi Securities Exchange. The findings of this study recommended utilization of short term debt financing to procure firm inputs and running of day to day operations of the firm. To improve the overall profitability of Agricultural firms listed in the Nairobi Securities Exchange, the findings recommended the use of long debt financing because of the less costs and incentives offered by the government to the Agricultural firms listed in the Nairobi Securities Exchange. The study findings further recommended a similar study to be carried to assess the impact of short debt financing in terms of interest rates charged by lenders to both listed Agricultural firms and unlisted private Agricultural firms in Kenya.