AN EXAMINATION OF THE EFFECTS OF CAPITAL STRUCTURE DECISIONS ON FINANCIAL PERFORMANCE OF MANUFACTURING FIRMS: A CASE OF SUGAR FIRMS IN KENYA

Abstract

Capital structure is the mix of securities used to finance the operations of a firm. This is through a combination of debt and equity. The purpose of this study was to examine the effect of capital structure decisions on the financial performance of sugar manufacturing firms in Kenya. The study was prompted by the poor financial performance and huge debt burden owed by sugar manufacturing firms in Kenya that has disrupted the normal operations of these firms thus threatening the collapse of the sugar subsector in Kenya. The objectives of the study were: - to examine the effects of financial gearing on financial performance, to assess the relationship between cost of capital and financial performance and to investigate the relationship between debt to equity and financial performance. The study used gross profit margin, net profit margin, operating ratio and return on capital employed as measures of financial performance. The study adopted a descriptive design where secondary data from published financial statements of sugar manufacturing firms were used covering a period of eleven years from 2000 to 2010. Descriptive statistics, simple regression analysis, correlation analysis and multiple regression analysis were used for data analysis using Stata 13.0. The findings indicate that the capital structure decisions of sugar manufacturing firms in Kenya had a negative effect on the financial performance as measured by gross profit margin, net profit margin, operating ratio and return on capital employed (ROCE). The study recommended that the managers of sugar manufacturing firms should reduce their reliance on long term debt as a source of finance.