Effect of Financial Leverage On Profitability

EFFECT OF FINANCIAL LEVERAGE ON PROFITABILITY OF LISTED
AGRICULTURAL FIRMS AT THE NAIROBI SECURITIES EXCHANGE.
BY
DAVID CHESANG
FINANCE AND BANKING (KENYA METHODIST UNIVERSITY)
A Research project Submitted to the school of postgraduate studies in Partial
Fulfillment of the Requirement for the Conferment of the Degree of Master of
Business Administration (Finance Option) of the School of Business and Economics,
Department of Business Administration, Kisii University.
OCTOBER, 2017
DECLARATION AND RECOMMENDATION
This research Project is my original work and has not been presented for a degree at any
other university.
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DAVID CHESANG
CBM12/10642/14
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University Supervisor.
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Dr. Caroline Ayuma
School of Business and Economics
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School of social sciences
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DEDICATION
This Research project is dedicated to my wife Teresia Olekima my children Ivy Jelagat
and Sharon Kaimugul for giving me humble time to carry out this research and my
friends for their encouragement and above all to the almighty God for his care throughout
my study.
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ACKNOWLEDGEMENT
I am grateful to my supervisors Dr Caroline Ayuma and Dr Were Edmond for their
professional guidance, dedication, time, encouragement and their commitment has made
this research possible. My gratitude goes to Kisii University for shaping my research
project and educational skills. Much appreciation also goes to my friends for their
commitment and encouragement throughout the course work and research period. Last
but not least I wish to thank my family for their patience, moral support and
encouragement during the period of the study.
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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.
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TABLE OF CONTENTS
DECLARATION AND RECOMMENDATION...................................................................ii
PLAGIARISM DECLARATION.........................................................................................iii
DECLARATION OF NUMBER OF WORDS.....................................................................iv
COPYRIGHT.........................................................................................................................v
DEDICATION.......................................................................................................................vi
ACKNOWLEDGEMENT...................................................................................................vii
ABSTRACT........................................................................................................................viii
TABLE OF CONTENTS......................................................................................................ix
LIST OF TABLES..............................................................................................................xiii
LIST OF FIGURES..............................................................................................................xv
ABBREVIATIONS AND ACRONYMS............................................................................xvi
CHAPTER ONE
1.0 INTRODUCTION............................................................................................................1
1.1 Background to the Study..................................................................................................1
1.2 Statement of the Problem...............................................................................................10
1.3 Objectives of the Study..................................................................................................12
1.3.1 Main Objective............................................................................................................12
1.3.2 Specific Objectives......................................................................................................12
1.4 Research Hypotheses......................................................................................................13
1.5 Significance of the Study...............................................................................................13
1.6 Scope of the study..........................................................................................................14
1.7 Limitation of the Study...................................................................................................14
1.8 Assumptions of the Study...............................................................................................14
1.9 Operational Definition of Terms....................................................................................15
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CHAPTER TWO
2.0 LITERATURE REVIEW...............................................................................................17
2.1Theoretical Framework...................................................................................................17
2.1.1 Pecking Order Theory..................................................................................................17
2.1.2 Agency theory..............................................................................................................20
2.1.3 Trade-off theory...........................................................................................................22
2.1.4 Net Income Theory......................................................................................................24
2.2 Empirical Studies on Financial Leverage and Firms’ Profitability................................25
2.2.1 Effects of Debt to Equity Ratio on firms Profitability.................................................31
2.2.2 The effect of Long term debts to capital employed on profitability............................33
2.2.3 Effects of Current Ratio on the firm Profitability........................................................36
2.2.4 Effects of Firm Size on the firm Profitability..............................................................38
2.3 Research Gap..................................................................................................................41
2.4 Conceptual Framework..................................................................................................42
CHAPTER THREE
3.0 RESEARCH METHODOLOGY...................................................................................44
3.1 Research Design.............................................................................................................44
3.2 Study Area......................................................................................................................44
3.3 Target Population............................................................................................................45
3.4 Sample size and sampling procedures............................................................................45
3.5 Data Collection procedures............................................................................................46
3.6 Piloting...........................................................................................................................46
3.7 Validity of Instruments...................................................................................................47
3.8 Reliability of Instruments...............................................................................................47
3.9 Data Analysis and Presentation......................................................................................48
3.9.1 Assumptions of Multiple Regression..........................................................................49
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3.10 Ethical Considerations..................................................................................................50
CHAPTER FOUR
4.0 DATA ANALYSIS, PRESENTATION AND INTERPRETATION...............................51
4.1 Demographic Characteristics....................................................................................51
4.1.1 Age of the Respondents................................................................................................51
4.1.2 Gender of the Respondents..........................................................................................52
4.1.3Length of Working Experience in Current Company...................................................53
4.2 Rating of the Effect of Financial Leverage on Profitability of listed Agricultural firms
54
4.3 The Effect of Debt to Equity Ratio on the Profitability of listed Agricultural Firms.....55
4.3.1 Regression Analysis for Debt to equity ratio and Profitability...................................56
4.4 Effect of Long Term Debt to Total Capital Employed on Profitability..........................60
4.4.1 Regression Analysis for Long Term Debt to Capital Employed and Profitability.......61
4.5 Effect of Current Ratio on the Profitability of Agricultural Firms Listed at the Nairobi
Securities Exchange.............................................................................................................65
4.5.1 Regression Analysis for Current Ratio and Profitability.............................................66
4.6 Effect of Firm Size on the Profitability of Agricultural Firms.......................................70
4.6.1 Regression Analysis for Firm Size and Profitability....................................................72
4.7 Rating of Financial Leverage Indicators affecting Profitability of listed Agricultural

Firms 75
CHAPTER FIVE:
5.0 DISCUSSION................................................................................................................82
5.1 Summary of the Findings...............................................................................................82
CHAPTER SIX
6.0 CONCLUSIONS AND RECOMMENDATIONS.........................................................85
6.1 Conclusions....................................................................................................................85
xi
6.2 Recommendations..........................................................................................................86
6.3 Suggestions for Further Studies.....................................................................................88
REFERENCES.....................................................................................................................89
APPENDICES....................................................................................................................100
Appendix I: Letter of approval from the university...........................................................100
Appendix II: Letter of Authorization from NACOSTI......................................................101
Appendix III: Research Permit from NACOSTI................................................................102
Appendix IV: Secondary Data Collection Guide...............................................................103
Appendix V: Research Questionnaire for Accounting Officers.........................................106
Section C: Effect of long term debt to total capital employed on the profitability............108
Appendix VI: N.S.E listed companies................................................................................111
Appendix VII: Measurement..............................................................................................115
Appendix VIII: Secondary Data.........................................................................................116
Appendix IX: Turnitin Originality Report..........................................................................128
Appendix VIII: Map of Study Area...................................................................................128
APPENDIX X: Study Area................................................................................................129
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LIST OF TABLES
Table 4. 1: Age of the Respondents...................................................................................51
Table 4. 2: Rating of the Effect of Financial Leverage on Profitability in in Agricultural
firms...................................................................................................................................54
Table 4. 3: The effect of debt to equity ratio on the profitability of agricultural firms.....55
Table 4. 4: Correlation between Debt to Equity and Profit before tax..............................57
Table 4. 5: Analysis of Variances (ANOVA).....................................................................58
Table 4. 6: Coefficients......................................................................................................59
Table 4. 7: Effect of Long Term Debt to Total Capital Employed on the Profitability.....60
Table 4. 8: Correlation between Long term debt to Total Capital Employed and Profit
before tax...........................................................................................................................62
Table 4. 9: Analysis of Variances (ANOVA).....................................................................63
Table 4. 10: Coefficients....................................................................................................64
Table 4. 11: Effect of Current Ratio on the Profitability...................................................65
Table 4. 12: Correlation between Current Ratio and Profit before tax..............................67
Table 4. 13: Analysis of Variances (ANOVA)...................................................................68
xiii
Table 4. 15: Effect of Firm Size on the Profitability of Agricultural Firms......................71
before tax...........................................................................................................................73
Table 4. 19: Correlation between Financial Leverage and Profitability of Agricultural
Firms..................................................................................................................................77
xiv
LIST OF FIGURES
Figure 1: Conceptual framework.......................................................................................43
Figure 2: Gender of the Respondents.................................................................................52
Figure 3: Length of Working Experience in Current Company.........................................53
xv
ABBREVIATIONS AND ACRONYMS
CDSC Central Depository and Settlement Corporation
CMA Capital Market Authority
DER Debt-Equity Ratio
DR Debt Ratio
EPS Earning Per Share
ICR Interest Coverage Ratio
LTDTA Long Term Debt to Total Assets
MBVR Market Value of Equity to Book Value of Equity
NSE Nairobi Securities Market
PM Profit Margin
ROA Return on Assets
ROE Return on Equity
ROI Return on Investment
RONA Return on Net Assets
xvi
xvii
CHAPTER ONE
1.0 INTRODUCTION
1.1 Background to the Study
An increase in leverage result in increased return and risk, while decrease in leverage result
in decreased return and risk. There are two types of leverage that is operating and financial
leverage, financial leverage is the use of the fixed charges of resources, that is preference
and debt capital along with the owners’ equity in the capital structure while operating
leverage is degree in which the firms uses much of fixed expenses, the higher the fixed
expense the higher the operating leverage.
Profitability is significantly to corporate performance, particularly in competitive
environment and profitability plays an important role in the structure and development of
the firm because it measures the performance and the success of a firm (Nousheen &
Arshad, 2013). Profitability is significant for survival and growth of the business enterprise.
Numerous factors contribute a significant role indirectly or directly in determining
profitability (Mistry, 2012). Profitability determinants are forces that directly impact the
profitability of a firm, and such factors are useful tools for relevant firms to understand
what needs to be done and where they should focus in order to improve on the profitability
of their business (Bashar & Islam, 2014). Internal factors like leverage, liquidity, tangibility
and size have been hypothesized to influence profitability.
Leverage is the extent to which companies make use of their funds borrowings (debts,
financing) to increase profitability and is measured by total liabilities to equity (Alkhatib,
2012).
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The choice between debt and equity suggests somehow a tradeoff between business and
financial risk (Vatavu, 2014). Increased leverage induces agency problems, such as the
underinvestment incentive, that can reduce annual profitability due to the associated
increase in the costs of monitoring and control. As such, high leverage levels can actually
be value enhancing for firms as the obligation to meet the repayment schedules under debt
covenants disciplines managers to act in ways which are consistent with shareholders’
wealth maximization objectives. This management practice encourages managers to
generate future cash flows, thus increasing period profitability and the traded value of the
firm (Olaosebikan, 2012).
Financial leverage decision is important since the operation is precisely affected by such
choice; hence, the choice of combination between equity and debt should be handled by
financial managers with concern, since the seminar paper of Modigliani and Miller in 1958
the capital structure theory and interaction with firms’ performance there has been
conformity with current findings (Al-Taani, 2013; Mohammed, 2010; Ogebe. Ogebe &
Alewi, 2013). Modigliani and Miller (1958) assert that worthlessness of equity to debt
proportion for company worth. However, since they considered the assumptions of perfect
markets with no taxes, and no bankruptcy transaction costs, the theory about the debt
irrelevance is hardly realistic (Osman & Mohammed 2010, Ogebe, Ogebe & Alewi, 2013).
Financial leverage, thus therefore has an effect on profitability, since low debt results into
limited ability to add more productive assets.
Studies worldwide demonstrate how important financial leverage is influencing
profitability in companies. Most have found a significant relationship between the two but
varying extent.
2
Such studies include: in the Kingdom of Jordan (Al-Shamaileh & Khanfar, 2014), in
Pakistan (Nawaz, Salmani & Shamsi, 2015) who found that financial leverage has a
statistically significant inverse impact on profitability at 99% confidence interval; in China
on the relationship between operational leverage and profitability (Chen, 2004); in Tehran,
Iran on the relationship among financial leverage and profitability (Fengju, Fard, Maher
and Akhteghan, 2013).Other examples include Banchuenvijit (2011) in Thailand and
Srivastava (2014) in India who established a positive relationship amid financial leverage
and profitability.
The association between the two types of leverage is also demonstrated in several studies in
Africa such as: Enekwe, Agu and Eziedo (2014) in Nigeria, Boachie, Boachie, Ezidisi,
Nyanese and Gyabeng (2013) in Ghana and Joshau, (2007) in South Africa. In East Africa,
there is the study by Ishuza (2015) who sought to the effect of financial leverage on
commercial banks’ profitability in Tanzania. In Kenya there are studies such as Gweyi and
Karanja (2014) on the effect of financial leverage on financial performance of Deposit
Taking Savings and Credit Co-operative in Kenya; and Kale (2014) on the impact of
financial leverage on firm performance: the case of non-financial firms in Kenya; and Mule
(2015) on the financial leverage and performance of listed firms in a frontier market: panel
evidence from Kenya. All these studies revealed a significant relationship between financial
leverage and profitability. However, these studies did not look relationship in Agricultural
firms listed with the Nairobi Stock Exchange.
In Pakistan, Al-Taani, (2013) carried out a study on how financial leverage measures firms
use of debt and equity to finance firm assets and its operations. A firm can fund its
investments portfolio through debt and equity. A company can also employ preference
3
capital as another form of capital. The company's rate of return on assets is fixed regardless
of the rate of interest on debt.
The financial leverage used by companies is meant to earn more funds on their fixed
charges than operation cost. As debt increases, financial leverage increases (Al-Taani, 2013;
Mohammed, 2010).The increased financial leverage means an increase in the company’s
capacity and thus, enhances its capacity of making much profits.
Financial leverage decision is important since the operation is precisely affected by such
choice; hence, the choice of combination between equity and debt should be handled by
financial managers with concern, since the seminar paper of Modigliani and Miller in 1958
the capital structure theory and interaction with firms’ performance there has been
conformity with current findings (Al-Taani, 2013; Mohammed, 2010; Ogebe. P, Ogebe &
Alewi, 2013). Modigliani and Miller (1958) assert that worthlessness of equity to debt
proportion for company worth. However, since they considered the assumptions of perfect
markets with no taxes, and no bankruptcy transaction costs, the theory about the debt
irrelevance is hardly realistic (Osman & Mohammed 2010, Ogebe, Ogebe & Alewi, 2013).
Financial leverage, thus therefore has an effect on profitability. Since low debt results into
limited ability to add more productive assets.
Myers and Majluf (2004) carried out a study on the impact of asymmetric information on
firms choice for source of funds, the study used a descriptive one where 342 agribusiness
firms in Canada were sampled, the study found that in the existence of asymmetric
material, internal source of finance is mostly preferred by the firm other than other funds ,
but debt will be issued if internal finance is exhausted, the least alternative for the company
4
is to issue new equity shares, profitable companies are likely to have more retained
earnings. Donaldson, (2001) carried out a study on the relationship between leverage and
past profitability in Canadian consultancy firms where a sample of 235 firms were used.
The study revealed that a negative relationship is anticipated between leverage and past
profitability. The study therefore concluded that investors will prefer to invest in gainful
companies. Since the more the profitable the firm is, the lower the likelihood of facing
financial problems which leads to bankruptcy. Hence, a positive relationship is anticipated
between institutional profitability and ownership. Hovakimian et al. (2004) carried a study
to determine the effect of growth potential of dairy firms to investors in UK where 312
firms were involved, using exploratory research design he found that high growth dairy
firms bring more capital gains to influential investors than lower growth ones, growing
firms are more severe to agency hitches, in that they are more flexible in their choice of
becoming company investments. So, it’s anticipated that growth rate and long term
leverage are negatively related.
Studies in various countries in the world have shown different associations between
leverage and financial performance. While examining the capital structure and performance
of firms in USA, UK, France and Japan, Wald (2009) found a positive association amongst
size and financial performance. However, there was a negative association for firms in
Germany. In China, Chen (2004) also established a negative association amongst long-term
leverage and financial performance. This disparity in results necessitates a study in Kenya.
5
The role of financial leverage in increasing the return of the shareholders' is based on the
belief that subject to change in funds such as the lending from financial institutions and
other sources for example debentures should be obtained at a value less than the
organization rate of return on total assets. Damouri, et al (2013) carried a study on firms in
South Africa and defined using of equity as risk charge involved and can be measured by
leverage ratio.
They add that there are various measures known for measuring the capital structure and
commonly used are, market value based measures, book value based measures and semi-
market value based measures.
Financial leverage impacts earnings per share or profit after tax. The combination of two
leverage has importance to the earnings attributable to ordinary shareholders (Pandey,
2010, Ogebe, Ogebe & Alewi, 2013). Al-Taani (2012) they posed that impact of financial
performance on working capital management policy and financial leverage. From their
studies showed that firm's working capital management policy, represented by financial
leverage and firm size have significant relationship to firms’ performance in respect to net
income however found no significant impact on Return on equity and return on Assets.
The firm size has the potential to influence the firm's financial performance in form of the
preference of capital structure mix. As big companies have advantageous position in raising
external funds easily from the capital markets, also there is less reliance on internal funds.
Moreover, the probability of bankruptcy is lower in larger firms; therefore, they are likely
to pay dividends (Osman et al; 2013). Small firms suffer from financial restrictions.
Furthermore, the cash flow of these companies did not show any significant impact on
6
investment. They indicated that the theory of pecking order and FCF theory do not have
any effect on medium firms' investment. Size, capital, ownership structure and growth
opportunities play important roles in the choice of performance measure.
Adekunle (2009) did a research to examine effect of capital structure on the performance of
pharmaceuticals in Nigeria, he used debt ratio to stand on capital structure though return on
equity and return on asset were used as measures of firm’s performance. Ordinary Least
Square method of estimation were used by the researcher. The result of the study indicated
that debt ratio has an important negative effect on the company’s financial actions of
performance. However, the study did not consider other funding choices in the inquiry,
including the intervening effect of internal cash flow available.
Kaumbuthu (2011) carried out a study to establish the association amongst capital structure
and return on equity for allied and industrial segment in Nairobi Securities Exchange for
the years between 2004 to 2008. Capital structure were proxy by debt to equity ratio while
performance concentrated on return on equity. The research used regression analysis and
found a negative association between equity to debt ratio and Return on equity. The
research focused on only one segment of the companies listed in Nairobi Securities
Exchange and concentrated only on one aspect of financing decisions. Agriculture remains
the backbone of the Kenyan economy. Agriculture is considered be the most important
sector in the economy, this sector is considered to contributing approximately 25% of the
Gross Domestic Product, employing 75% of the state labor force (Republic of Kenya 2005)
as cited by Alila and Atieno (2006). More than 80% of the Kenyan populace live in the
rural areas and derive their livelihoods, directly or indirectly from agriculture.
7
In Kenya it is a significant for economic development growth as it gives 35% of the gross
domestic product and gives 40% of the export income. Agriculture is a source of
employment to the populace through farming, agriculture also improves the standard of
living of individuals through business and research activities. Through agriculture a market
for industrial products is created which leads to improvement of purchasing power of the
population.
Profitability is the capacity of a business enterprise to make a profit after doing business.
Profit is what remains of a business after paying all expenses rightly related to the
generation of the revenue. The data available on the website of the listed agricultural firms
shows few firms publish their financial statements and others post profits on decline from
their previous profits.
According to Hassan, Khan and Wazir (2016) who did a study to determine the effect of
debt on profitability of companies’ indication from non-financial sector of Pakistan showed
a significant but negative association between long term debt, total debt, short term, and
return on assets. His Results indicated a negative association between debt and profitability
implying that increasing debt in the capital structure will decrease profitability. Thus, firms
should choose internal financing or other sources of financing than debt financing.
Accepting the key issues defining profitability supports managers in developing an
effective profitability approach for their firm.
Nairobi securities exchange was founded in 1954 under the society's Act as a voluntary
association for stock brokers and was not accessible to non-Europeans (Nairobi Stock
Exchange, 2014).
8
The Nairobi Securities Exchange was established as a charitable relationship of stock
agents under the Society Act. Over the historical period, the securities exchange has seen
many transformation, systematizing its trading operation as from September 2006 and in
2007 that enabled stockbrokers to do business of buying and selling shares in their offices
unlike previous decades where one was supposed to be present at the trading floor (NSE,
2014).
Agricultural stocks are predictable to continue to reduce in financial performance at the
NSE with most investors expected to continue going after liquid stands, in business which
are not exaggerated by uncontainable influences for example the weather, environmental
factors. External factors like variation of local currency against international currency,
economic recessions in agricultural export markets, and high costs of inputs affect the
incomes of agricultural firms in addition the dividends they pay out to the farmers. There
are seven agricultural firms listed in NSE as at December 2013. The agricultural sector is
one of the most significant segments in Kenyan economy. Apart from providing food for
the Kenyan economy basket, the sector also offers a good proportion of our transfer market
in international countries. Most of the companies in agricultural segment offer non-
commercial facilities such as ethical investing, corporate social responsibility, community
social investment and resource management. These firms are Kapchorua Tea Co, Limuru
Tea CoLtd, Eaagads Ltd, Ltd, Rea Vipingo Plantations Ltd,Sasini Ltd, Williamson Tea
Kenya Ltd and Kakuzi. There are 66 companies listed at the Nairobi Securities Exchange as
indicated in Appendix V.
9
However, after independence the securities market activities slumped as a result of
uncertainty on Kenya's future independence trend. The NSE has been denationalization
since 1988 by the Kenyan government selling 20% of its holdings. The operation is through
a Central Depository and Settlement Corporation (NSE, 2014). NSE has been operating
currently with 66 listed firms. The companies listed in NSE are anticipated to be financially
stable in order to build investors' confidence and contribute to economic growth. During
listing period these firms should meet the set criteria set by NSE. However, despite meeting
the set listing requirements, firms are exposed to market dynamics which affect them either
negatively or positively. These dynamics may be caused by the government policies, risk
perceptions, management decisions and investment decisions taken, (NSE, 2014).
1.2 Statement of the Problem
Firms’ performance is greatly influenced by financial leverage as established by many
studies. Such studies include Etyang', (2012), Koech, (2013) Arowoshegbe & Emeni,
(2014), Chinaemerem & Anthony (2012),Ogebe et al., (2013). However, most of this
studies in Kenya were carried out on firms in different sectors most notably banking and
manufacturing industries other than agricultural sector while agricultural sector is one of
the pillar of Country’s economy. It is important to note that, the success of agricultural
firms in Kenya’s ever-changing environment depends on how able firms can structure their
capital so as to ensure profitability. The paradox often is that a particular combination of
debt, common stock, and preferred stock used in financing the assets of a firm creates some
level of financial risk that also affect profitability. Arguably, this risk affects a firm’s
capacity to make profits. However, there is scanty information regarding the effect of
financial leverage on firm’s profitability of agricultural companies at the Nairobi Securities
10
Exchange Kenya. These include a study by Maroa and Kioko (2016) who investigated the
determinants of profitability of Agricultural Companies scheduled at the Nairobi Securities
Exchange in Kenya; and Njagi (2013) who sought to determine the association among
financial profitability and capital structure of agricultural firms listed at the NSE.Wandeto
(2005) conducted a study on the relationship between cash flows, dividend changes and
earnings and capital structure for the firms listed in the NSE, while Nyaboga (2008) looked
at the relationship between capital structure and agency cost. However, the focus of these
studies was not specifically on the dimensions of the financial leverage. Agriculture in
Kenya is a major source of the country’s food security and a stimulant to off farm
employment but agricultural production is in decline. Most firms in the agricultural sector
have not lived to their expectations and have led to shareholder apathy thereby contributing
to the decline of the rural economy due essentially to unbalanced and low dividend payout
by the firm (Waswa et al., 2014). The agricultural companies listed in Nairobi Securities
Exchange (NSE) their ability to determine the best mix between their debt and equity
financing will ensure that they obtain their much needed capital at an affordable cost. Due
to the fact that they operate in an unpredictable sector which is quiet susceptible to climate
change and climate variability (United Nations Economic Commission for Africa, 2013),
many investors may be skeptical about this sector capability to give back the much needed
return on the high capital that they may require, which may make equity finance for them to
be very expensive. This therefore pushes them to think of debt financing as the suitable
alternative.
However, since the farming activities directly depend on the existing climatic conditions,
the variability is likely to make the agricultural firm’s ability to meet the cost of debt be a
11
problem especially if too much of it has been used. This makes the knowing determinants
of financial leverage which directly affects them very important in making of their financial
decision. In addition, most agricultural firms are affected by adverse weather changes,
which lead to reduced production, lower sales realization, increased cost of wages, and
social facilities, which erode the most of agricultural firms’ profitability and thus contribute
to constraining cash flows. Hence, the need to examine the balance sheet factors that
determine profitability of listed agricultural firms in Kenya. This information inadequacy
has left a glaring research gap.
Therefore, the study sought to analyze the effect of financial leverage on profitability of
agricultural firms listed in Nairobi securities exchange.
1.3 Objectives of the Study
1.3.1 Main Objective
The main objective of the study was to examine the effect of financial leverage on
profitability of agricultural firms listed at the Nairobi securities exchange.
1.3.2 Specific Objectives
Specific objectives of the study were to;
i. Determine the effect of debt to equity ratio on the profitability of agricultural
firms listed at the Nairobi Securities Exchange
ii. Establish the effect of long term debt to total capital employed on the
profitability of agricultural firms listed at the Nairobi Securities exchange.
12
iii. Determine the effect of current ratio on the profitability of agricultural firms
listed at the Nairobi Securities Exchange
iv. Establish the effect of firm size on the profitability of agricultural firms listed at
the Nairobi Securities Exchange
1.4 Research Hypotheses
HO1: Debt to equity ratio has no statistical significant effect on the profitability of
agricultural firms listed at the Nairobi securities exchange
HO2: Long term debt to capital employed has no statistical effect on the profitability
of listed agricultural firms at the Nairobi securities exchange
HO3: Current ratio has no statistical significant effect on the profitability of
agricultural firms listed at Nairobi securities exchange
HO4: Firm size has no statistical significant effects on the profitability of agricultural
firms listed at the Nairobi securities exchange
1.5 Significance of the Study
The findings of this research would be of significance to the following groups specifically
government, Company’s Board of directors, management of agricultural firms,
Stakeholders and investors and finally to a theoretical critique. Last but not least the study
contributes to knowledge in the field of finance and related studies. The study findings
from this study may also be used to serve as reference materials by researchers and
academicians in guiding future studies in respect to the effect of financial leverage on
profitability of agricultural firms.

13
1.6 Scope of the study
The aim of the study would be to establish the effect of financial leverage on profitability of
agricultural firms listed at the Nairobi Securities Exchange. The companies selected were
all agricultural firms listed at Nairobi securities exchange. The study also focused on
accounting information since they were in a strategic position to provide primary data
sought in the company. The confine of the study was on the effect of debt to equity ratio,
long term debt to total capital employed, current ratio and firm size on profitability of
agricultural firms. The study covers the period of 5 years between 2010 to 2015.
1.7 Limitation of the Study
The researcher collected data from Nairobi Security exchange and Capital Market
Authority. The constraint encountered during the study was obtaining data from NSE and
specific firms’ websites due to slow response rate by the NSE staff and internet downtime.
This was overcome by continuous follow up through physical attendance, emails and phone
calls to the NSE secretariat and working late at night when the internet was free from many
users and therefore more efficient.
1.8 Assumptions of the Study
The researcher made several assumptions in line with the study. The study made
assumption on the population; each firm has an equal chance of representation within the
study. In addition, data was collected from firms with full information running from the
year 2010-2015.
14
1.9 Operational Definition of Terms
Capital structure It’s a mix of debt and equity which a firm deems as
appropriate to enhance its operations. Capital structure is
therefore composition of long-term liabilities, specific short-
term liabilities like bank notes, common equity, and preferred
equity which make up the funds with which a business firm
finances its operations and its growth.
Debt Ratio Financial ratio that indicates the percentage of a company's
total debt to its total assets.
Financial Leverage Is the degree to which operating assets are financed with debt
versus equity.
Financial performance Is a measure of how well a firm can use its current assets from
its primary mode of business and operations and generate
revenues for the business. Financial performance is an
indication of the financial health over a given period of time
for a firm, and can be used to compare similar firms across the
same industry or to compare industries or sectors in
aggregation to enable a business to make decision on how it
can improve on the prevailing situation or sustain a desirable
position.
Liquidity It’s the ability of a firm to meet its financial obligations in a
timely manner. In essence, the assets owned by a company are
15
liquid if they can quickly and cheaply be converted to cash.
Profitability: The state or condition of yielding a financial profit or gain. It
is often measured by price to earnings ratio.
Return on assets The percentage that shows how profitable a company's assets
are used in Generating income.
CHAPTER TWO
2.0 LITERATURE REVIEW
2.1Theoretical Framework
This section presents the theoretical review guiding this study. Capital structure decisions
of a firm involve determining whether to finance business operations using either equity or
debt finance entirely, or utilizing a mix of both debt and equity respectively (Abor, 2005).
16
The study discusses four theories put forth in an attempt to explain the corporate capital
financing structure namely the Pecking Order Theory, Agency theory, Trade -off theory and
Net Income Theory.
2.1.1 Pecking Order Theory
According to Frank & Goyal, (2003) Pecking order theory states that companies prefer
internal funds, if available, and use debt or issue equity last. In line with Myers (1984),
companies prefer internal sources to external finance due to asymmetric information. The
utilization of external financing sources are signals to information that a firm is not
profitable, which can decrease stock prices. When external financing sources are obligatory,
firms choose debts to equity because of lower information costs relate with debt. Issuing
new stock, instead of acquiring new debt, signals the news that directors think firms’ stocks
are overpriced.
Many theories have been advanced in line with the financial decisions process. Among
these theories is the Pecking order theory by Myers & Najfuf (1984), a capital structure
theory.
This theory advocates that companies should use the cheapest form of finance to run their
operations first. In most cases, businesses adhere to hierarchy of financing sources and
mostly prefer internal sources first and debt is preferred over equity due to information
asymmetry between the firm and outsiders. Internal sources may not be efficient to meet
certain financial decisions therefore the firm may consider external borrowing. Too much
external borrowing affects financial decision.
17
In line with the pecking order theory, firms that are in the growth stage of their cycle
usually tend to finance that growth through debt since they have low cash flows, whereas
more stable and established firms typically generate high cash flow hence need less debt to
finance growth as its revenues are stable and proven (Baskin, 1989; Myers, 1977). The
pecking order theory, like the other aforementioned theories, has attracted considerable
support as well as criticism. Those in support include Friend and Lang (1988), Baskin
(1989), Rajan and Zingales (1995) and Ku (1997) who found a significantly negative
correlation between profitability and leverage, consistent with the pecking order hypothesis.
Kjellman and Hensen (1995) conducted a survey on determinants of capital structure using
listed firms in Finland and found that managers of the listed firms tended to follow the
pecking order theory. De Miguel and Pindado (2001) also tested the theory using 133 listed
Spanish firms and found evidence in support of the pecking order theory.
De Medeiros and Daher (2004), in a comparative study, tested both the pecking order and
trade-off theories using a sample of listed Brazilian firms and found that the former
provides a better explanation of capital structure behaviour of the firms than the latter. On
the flipside, Frank and Goyal (2003) compared the pecking order theory against the trade-
off theory and showed that pecking order theory’s proposition of information asymmetry
may not hold for small firms.
Frank & Goyal, (2003) posited that the management of a company usually knows more
about its company's business and financial information than average outside investors do
and the company administration don’t expect to issue new stock when they think the stock
price is undervalued in the market. When the market is fairly priced or overpriced
18
management tend to issue shares. Thus, outside investors may interpret the declaration of a
stock issue as a negative signal for the current stock price (Tang & Jang, 2007).
This theory is relevant to this study since agricultural firms operate in a financial
environment that fits the Pecking order. If the agricultural firms must use outside financing,
preference capital is to be used in the subsequent command of funding sources: convertible
securities, debt, preferred stock, and common stock. An appropriate debt to equity ratio and
current ration needs to be maintained.
This theory advocates that companies should use the cheapest form of finance to run their
operations first. In most cases, businesses adhere to hierarchy of financing sources and
mostly prefer internal sources first, and debt is preferred over equity due to information
asymmetry between the firm and outsiders. Internal sources may not be efficient to meet
certain financial decisions, therefore the firm may consider external borrowing however
Too much external borrowing affects financial decision. This theory is relevant to this
study since agricultural firms operate in a financial environment that fits the Pecking order.
If the agricultural firms must use outside financing, preference capital is to be used in the
subsequent command of funding sources: convertible securities, debt, preferred stock, and
common stock.
An appropriate debt to equity ratio and current ration needs to be maintained.
2.1.2 Agency theory
Agency theory was developed by Jensen & Meckling (1976). The theory relates to
decisions made within a firm by managers and the shareholders. This is the principal agent
19
relationship. The theory states that, with low monitoring level to the organization and low
discipline in decision making, managers might decide to invest in projects with negative net
present values.
According to agency theory, higher level of debt increases shareholders' value because of
its disciplinary effect on manager behavior. There are two types of inherent conflicts of
interest in this theory: manager-to-shareholder conflict, and creditors-to-shareholder
conflict. In the first case, when long debt increases, shareholders can bind managers to
service the debt obligation. Thus, when the debt level is increased, a larger portion of
unrestricted cash flow should be used to pay the debt obligations. In this case, shareholders
or boards of directors effectively reduce the free cash flow in the company and prevent
managers from financing in sub-optimal or excessive investments (Jang & Tang, 2009).
The theory states that, with low monitoring level to the organization and low discipline in
decision making, managers might decide to invest in projects with negative net present
values.
According to agency theory, higher level of debt increases shareholders' value because of
its disciplinary effect on manager behavior. There are two types of inherent conflicts of
interest in this theory: manager-to-shareholder conflict, and creditors-to-shareholder
conflict. In the first case, when long debt increases, shareholders can bind managers to
service the debt obligation. Thus, when the debt level is increased, a larger portion of
unrestricted cash flow should be used to pay the debt obligations. In this case, shareholders
or boards of directors effectively reduce the free cash flow in the company and prevent
managers from financing in sub-optimal or excessive investments (Jang & Tang, 2009).
20
Managers would also lose their large investments if they fail to fulfill the obligation of debt,
and this results in insolvency (Jensen & Meckling, 1976). Agency theory offers an
additional end to clarify the high profitability and low debt ratio correlation. In a money-
making form, it is the managers' advantage to keep debt ratio low, because: The debt
payment is not committed to unrestricted cash flow and can be used for management's
interests, and managers are then free from debt payment pressure. This leads to a loss in a
shareholder's stock value, and it is agency cost. It is important to note that such managers
are answerable to stakeholders and thus need to make sound financial leverage decisions
that positively affect their financial performance.
Agency theory offers an additional end to clarify the high profitability and low debt ratio
correlation. In a money-making form, it is the managers' advantage to keep debt ratio low,
because: the debt payment is not committed to unrestricted cash flow and can be used for
management's interests, and managers are then free from debt payment pressure. This leads
to a loss in a shareholder's stock value, and it is agency cost.
It is important to note that such managers are answerable to stakeholders and thus need to
make sound financial leverage decisions that positively affect their financial performance.
This theory is relevant to this study in that managers of agricultural firms are bound by
shareholders to act responsibly by making correct decisions on the level of debt ratio and
profitability.
They are answerable to the shareholders or board of directors and thus need to ensure that
higher level of debt increases shareholders' value.
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2.1.3 Trade-off theory
The trade-off theory is built on the premise that a company chooses how much debt finance
and how much equity finance to use by balancing the costs and benefits involved in either
options (Hackbarth, et al., 2007). This theory is credited to the works of Kraus and
Litzenberger (1973) who factored in the deadweight costs of bankruptcy and the tax saving
benefits of debt in determining the optimal capital structure mix. Agency costs are also
included in the balance. The trade-off theory holds that firms finance their operations partly
with debt and partly with equity. It acknowledges the benefits of leverage (i.e. tax shields)
as well as the costs associated with the same (i.e. interest rates, bankruptcy costs,
transaction costs and agency costs among others). According to the theory, an increase in
debt translates to a decline in the marginal benefits derived, whereas the marginal cost of
debt increases. Essentially, a firm that seeks to optimize its overall value will focus on this
trade-off when deciding how much debt and equity to use for financing (Berens & Cuny,
1995; Frank & Goyal, 2005).
This theory explains why a company will concentrate on trade off benefits by selecting
how much equity and debt to use for its financing. Companies are taxed by government on
their income, but interest is a tax-deductible expense. As per trade-off theory a chargeable
company will increase its debt level to the point where additional debt is offset by the
marginal value of tax shield the NPV of possible costs of financial distress (Myers, 2001).
Because interest expense for debt is tax deductible, a higher leverage level would create a
larger tax benefit for corporate income. However, as the level of debt increases, the
company would have a high burden to service its debt obligations including a large amount
of interest expense. Subsequently, the company would incur default risk, which would
22
cause higher costs for debt financing and financial distress (Myers, 2001). Thus, an
optimal proportion of equity to debt capital structure maybe reached through establishing
equilibrium between the tax advantages and financial distress of debt.
Firms with more intangible assets, whose value will disappear in case of liquidation,
should rely more on equity financing. In terms of profitability, trade-off theory predicts
that more profitable firms should mean more debt-serving capacity and more taxable
income to shield, thus a higher debt ratio will be anticipated. Under trade-off theory, the
firms with high growth opportunities should borrow less because they are more likely to
lose value in financial distress. This theory is relevant to this study given that agricultural
firms that carefully select equity levels and debts used for their financing were better
placed to make higher profits compared to those that were not keen with the levels of
equity and debts. Those firms with higher debts were highly disadvantaged. Most firms
strive to achieve an optimal proportion of equity to debt capital structure and this is argued
to create tax advantages.
2.1.4 Net Income Theory
This theory exerts that there exists an optimal level of leverage, a point where the cost of
capital will be at the minimum value possible and allowing the firm to maximize its return.
The consequences of this are that low cost of capital, the value of the firm is maximized
when the optimal level of debt capital is employed (Brealey and Myer, 1998).
Their argument is that for firms with low debt ratio, increasing their financial leverage
level will not increase the cost of debt and therefore can be used as a replacement of equity
and preserves the firm’s value. This therefore implies that whether the firm is large or
23
small, with higher earnings or not there exist an optimal debt ratio that it must maintain for
it to maximize its return. This negates the effect that firms earning may be having on its
leverage. According to Brealey and Myers (1998), financial leverage will make the
managers be aware of the increased risk that they have to shoulder for the firm to continue
growing in the industry. This therefore calls for going for debt sparingly just to obtain that
amount that the firm will be able to shoulder without suffering the financial distress and
may go into bankruptcy. This again showed that the size and earnings of the firm has a
bearing on the financial leverage of the firm.
This theory is relevant to this study, since agricultural firms strive to strike an optimal level
of leverage, a point where the cost of capital will be at the minimum value possible and
allowing the firm to maximize its return. Therefore, the right mix of leverage in terms of
current ratio, liquidity, and total assets needs to be put in perspective. Agricultural firms
thus, need to ensure that the cost of capital is held at a minimum value possible, since the
opposite has a negative effect on profitability.
2.2 Empirical Studies on Financial Leverage and Firms’ Profitability
This section presents empirical literature review by assessing a number of the existing stock
of knowledge in the area of study. It essentially focuses on the research objectives that are
further connected to the linkage between the independent variables (debt to equity ratio,
long term debt, current ratio and firm size) and their significance on the dependent variable
(profitability as measured by ROA). While appreciating the importance and relevance of
the previous studies, the researcher will also identify knowledge gaps and suggest how the
study intended to close them.
24
Profitability is defined as the ability of a business entity to generate earnings as compared
to its operating expenses and all other relevant costs incurred during a specific time period
(Pandey, 2009). As such, in order to operate profitably, firms must ensure that revenue
generated is more than the overall expenses incurred. Without profitability, firms would not
survive in the long run. In other words, maximizing profitability, thereby maximizing firm
value, is ideally the goal of every firm as postulated by (Modigliani & Miller, 1958). Thus,
measuring a firm’s past, current, and projecting future profitability is crucial.
According to Frank and Goyal (2009), profitable firms do not expect to face serious
liquidity issues hence do not foresee incurring costs of financial distress such as bankruptcy
costs. Such firms therefore find interest tax benefits arising from use of debt more
important to them. This observation is therefore consistent with both the Modigliani and
Miller and trade-off theories. On the other hand, Myers (1977) arguing from the pecking
order point of view posits that profitable and liquid companies prefer to use internal funds
to finance their operations and external sources are sought only when necessity calls for the
same. Profitability and corporate leverage, therefore, portends both a positive correlation,
which supports trade-off theory, and a negative correlation which supports the pecking
order theory (Artikis, et al., 2007; Kayo & Kimura, 2011; Rajan & Zingales, 1995).
Profitability is considered the center around which all the actions of a business takes place
(Mistry, 2012). A company’ ability to increase profitability, to survive or to expand is more
an issue these days due to the existence of the free market (Salman & Yazdanfar, 2012).
The information about company performance, especially about its profitability, is useful in
substantiating managerial decisions regarding potential changes in the economic resources
that the company will be able to control in the future (Burja, 2011). Profitability of
25
corporate business enterprises permits organizations to endure negative shocks and to
strengthen their business surroundings. As such, the majority of business organizations are
started with the aim of seeking to earn profit and providing an exchange of sufficient
incomes to its shareholders (Devi & Devi, 2014).
Profitability is one of the most important objectives of financial management since one goal
of financial management is to maximize the owners’ wealth, and profitability is a vital
determinant of performance (Sivathaasan et al., 2013). Profitability is an important
principle of the majority of business entities (Devi & Devi, 2014). As such, maximizing the
profits of the firm is one of the main objectives of managers (Nousheen & Arshad, 2013).
In order to survive and to succeed in a competitive market, firm must focus on maximizing
profit, or they will eventually be driven out of business (Schmidt, 2014). A business that is
not profitable cannot survive while a highly profitable business has the ability to reward its
owners with a large return on their investment. Hence, the ultimate goal of any business
entity is to earn profit in order to make sure the sustainability of the business in the
prevailing market conditions (Malik, 2011; Sivathaasan et al., 2013).
Several studies have examined various determinants of profitability in different industries
and parts of the world and obtain mixed results. For instance, a study by Davy & Devi
(2014) examined the determinants of a firm’s profitability of Pakistani firms. The study
revealed a positive correlation between financial leverage, firm size and corporate
profitability. Pratheepan (2014) also explored the determinants of profitability of Sri
Lankan listed manufacturing companies over the period of 2003 – 2012. The study findings
established that size had a positive, statistically significant relationship with profitability
whereas tangibility had a negative statistically significant relationship with the profitability
26
of selected listed manufacturing companies in Sri Lanka. As such, the findings revealed that
leverage and liquidity had an insignificant impact on profitability.
A study by Zaid, Ibrahim and Zulqernain (2014) examined the determinants, public based
constructions companies' profitability in Malaysia from 2000-2012. The findings of the
study found that liquidity and size have a significant relationship with profitability while
capital structure had a negative insignificant relationship with profitability. Nousheen and
Arshad (2013) examined the impact of firm specific and macroeconomic factors on the
profitability of the food sector in Pakistan. The study findings revealed the presence of
significant negative relationship between size and profitability. The study also revealed that
tangibility, growth of the firm and food inflation had an insignificant positive relationship
with profitability while debt ratio had an insignificant negative relationship with
profitability.
In a study carried out by Ebaid (2009) on the effect of capital structure on performance of
firms in Egypt securities exchange, financial leverage did not appear to influence the firms’
performance. Multiple regression technique was applied to determine the association
between the leverage and performance. The result showed that financial leverage has no
impact on company’s performance.
Mwangi, Makau and Kosimbei (2014) examined the relationship among capital structure
and firms’ performance of 42 non-financial companies in the Nairobi Securities Exchange.
The study used secondary panel data contained in the experimented financial statements of
the listed companies, and employs panel data using random effects and feasible
27
Generalized Least Square (FGLS) model. The findings were that financial leverage is
negatively correlated to performance which is measured by return on assets.
Akhtar et al. (2012) studied the relationship among financial leverage and financial
performance using Energy and fuel segment of Pakistan. The result found a positive
association among financial performance and financial leverage of the firm thus
confirming that the firms having higher profitability may increase their performance by
possessing high levels of financial leverage. Additionally, the study give proof that the
participants of the energy and fuel in Pakistan can increase their financial performance by
employing the financial leverage and this can be arrived by making important decisions on
the choice of capital structure which will lead to sustaining future growth of the company
(Akhtar et al. (2012).
Onaolapo and Kajola (2010) studied the effect of capital structure on financial presentation
of firms listed on the Nigerian Stock Exchange. study used 30 non-financial companies in
15 business segments for a period from 2001 to 2007.The results indicated that financial
leverage had a significant negative relationship on financial performance, Return On Assets
and Return On Equity of tested companies (Onaolapo and Kajola, 2010).
Chinaemerem and Anthony (2012) investigated the effect of capital structure portfolio on
financial performance of Nigerian firms using 30 listed non-financial firms on the Nigerian
Stock Exchange for a span of 7 years from 2004- 2010. Panel data for the chosen
companies were examined using ordinary least squares method of approximation. The
findings indicate that a company's capital structure represented by debt ratio has negative
28
significantly association with the firm's financial performance surrogated by Return on
Assets and Return on Equity (Chinaemerem and Anthony, 2012).
An analysis of the impact of capital structure on company performance of firms in Jordan
securities exchange was conducted by Tian and Zeitun (2007). The analysis was done by
using a panel data approach of 167 companies for a span of 15 years from 1989 to 2003.
The study used Return on Equity, Return on Assets, Earnings before Interest and Tax and
tax plus depreciation to total assets, market value of ordinary equity to book value of
equity, price/earnings ratio and market value of equity plus total liabilities divided by book
value of equity as market performance measures. The results show that firms’ performance
and capital structure has negative relationship. It was also established that short term debt
to total assets as a determinant of leverage has an association which is positive on the
market performance proxy by Tobin's Q (Zeitun and Ian, 2007).
Al-Taani (2013) investigated relationship between capital structure and firm's performance
in 45 Jordanian manufacturing firms scheduled on Amman Stock Exchange for a period of
5 years from 2005 to 2009. Study variables were return on assets, profit margin, total debt
to equity, total assets to short term debt ratios, and long term debt to total assets (Al-Taani
(2013). Return on assets and Profit margin to represent the dependent variables were used
as indicators for financial performance, independent variables were long term debt to short
term debt to total assets represented for capital structure. Al Taani’s study found that there
is no important association among Short Term Debt to Total Assets and Return on Assets,
Total Debt to Equity and Return on Assets, Short Term Debt to Total Assets and Profit
Margin, long term debt to total assets and Profit Margin, and Total Debt to Equity and
Profit Margin.
29
Nuri and Archer (2001) established debt ratios in the UK lodging industry were higher than
the debt ratios in United Kingdom retail business. They indicate out that the theory of trade
-off is more consistent with regard to pecking order theory in the lodging and retail industry
the UK (Nuri and Archer (2001). They stated that profitability is the most significant factor
for the retail industry, followed by tax shields of non-debt products as related factors to
leverage level. Non-debt tax shields, contract management, and firm's profitability were the
most significant factors for the UK hotel industry.
Dalbor and Upneja (2002) reports that long-term debt ratio positively relates to profitability
of firms going into bankruptcy because of firm size among publicly traded U.S. restaurant
firms. Dalbor and Upneja (2002) established that firm quality and growth opportunities
were related negatively with long-term debt usage.
According to the study, lower quality and larger firms tend to use more long-term debt and
companies on growth opportunities stage use less long-term debt. They also found that
Hotel and restaurant, companies with positive growth opportunities tend to use less long-
term debt (Dalbor and Upneja (2002).Consistent with prior research, it was revealed
profitability of hospitality firms were independent of debt level (Phillips & Sipahioglu,
2004) and that growth opportunities for companies have a link with debt level (Dalbor &
Upneja, 2004; Tang & Jang, 2007).
Saeedi and Mahmoodi (2011) examined the association among capital structure and
performance of scheduled companies in Tehran Stock Exchange. According to the study
market measures of presentation are completely related to capital structure and while
Return on assets is positively associated to capital structure of the firm, no significant
30
association exists between Return on equity and capital structure. Saeedi and Mahmoodi
(2011) findings shows that financial leverage may have impact on measures of performance
in different ways.
2.2.1 Effects of Debt to Equity Ratio on firms Profitability
Nwude (2003) defines debt to equity ratio as a measure of the proportion of debt to
shareholders’ funds (i.e Net Worth) in the total financing of a business. Items such as
accumulated losses and deferred expenditures are eliminated from the shareholders' funds
before using it as the denominator. The ratio indicates how much naira was raised as debt
for NL of equity. Enekwe (2012) continues that equity to debt ratio is indicating the relative
proportion of debt to equity used to finance a company's assets which is a measure of
leverage.
The formula equals to total debt over shareholders' equity. When used to calculate a firm’s
financial leverage, the debt usually includes only the total debt. However, as specified the
bigger the interests then theirs need to repay the principal on borrowed fund because it can
outweigh the benefit, it is used to measure the net worth of the organization. DER equals to
total liabilities over shareholders’ funds or total equity.
Pouraghajan and Bagheri (2012) examined on the effect of capital structure on the financial
performance of firms listed in the Tehran Stock Exchange. The study tested a sample of 40
firms among the listed firms in Stock Exchange of Tehran. The Results suggest that there is
an important negative association among debt ratio and financial performance of
companies, and an important positive association between asset tangibility, growth
opportunities, asset turnover, firm size, and with financial performance actions.
31
In China, Yuan and Kazuyuki (2011) carried out a study on the impact of the debt ratio on
firm investment. Using example of Chinese scheduled firms presented that total debt ratio
had a negative impact on fixed investment. Additional if debt is employed in the capital
structure of a firm, the business risk will also increase.
Nduati (2010) studied the association among leverage and financial performance of firms
listed at the Nairobi Securities Exchange. In the collection of data, the researcher used
descriptive research design. Data was collected using secondary sources and interviews
such as yearly financial reports and statements of the targeted firms. Statistical Package for
Social Sciences SPSS was used in analyses of data, and findings were accessed in the form
of graphs, tables and pie charts. The findings concluded that leverage did not contribute to
financial performance of firms scheduled at the Nairobi stock Exchange.
Wainaina (2014) studied the association among leverage and financial performance of
topmost 100 SMEs small and medium organization in Kenya. The research used cross
sectional type of descriptive research design in his study. Objective population for the study
was the top 100 SMEs (2013) in Kenya. It used an example of 30 Small Medium
Enterprisesunsystematicallynominatedbased on the study population. This study compiled
data for a period of five years (2008-2012). The study made use of SPSS version 20, to aid
in the analysis. The study concluded that leverage had important effect on the financial
performance, and that there was a positive association amid leverage debt equity ratio and
financial performance of small and medium enterprises SMEs in Kenya.
A study by Gweji and Karanja (2014) examined the impact of financial leverage on
companies’ performance of credit, deposit taking and savings co-operative societies.
32
Secondary data obtained from financial reports of 40 savings, credit co-operative societies
considered in the study from 2000 - 2012. Descriptive and logical plans were both adopted.
The findings show strong positive association between financial leverage represented by
equity to debt ratio with ROE and net profit after tax at 99% confidence time, and a faint
confident correlation between equity to debt ratio with return on assets and income growth.
2.2.2 The effect of Long term debts to capital employed on profitability
The financial leverage of the firm can be shown by a long term debt to capital employed
ratio. This ratio is computed by dividing the long term debt with the total capital accessible
by a firm. The total capital of the firm comprises the long term debt and the stock of the
firm.
The formula of calculating Long Term Debt to Capitalization Ratio is:
Long term debt / Common Stock +Preferred Stock+ Long term debt
A long term debt to capital employed ratio greater than 1.0 shows business has more debts
than capital employed in essence is not a worthy practice to a business entity as it can
indicate financial difficulties, particularly the firm running to bankrupt. A tall long term
debt to capital employed ratio would show the financial limitation of the company and the
debt would most likely increase the risk of the firm (Myers and Majluf, 2004).
Kaumbuthu (2011) made a study to determine the link between capital structure and return
on equity for allied industrial sectors in the NSE between 2004 - 2008. The study used
regression examination and found a negative association between debt to equity ratio and
33
return on equity. The study centered to one sector of the firms listed in Nairobi Securities
Exchange and concentrate on aspect of financing decisions. The results cannot not be
generalized to the other sectors (Dalbor and Upneja (2002).
The information on the effect of debt on the performance of the company is still uncertain.
The work of others researchers shows a positive effect of debt on the performance of the
company (Myers and Majluf, 2004) and others that reason that the effect is negative. They
felt that debt makes the companies chart dissimilar output and investing strategies, in that
differs with regard to the make-up of the debt. Long term debts prompt the firm to pick
higher output and financing heights beside higher expertise up progression payments. It
therefore should have a positive effect on the performance of the company.
Though, the short-term debts, which make the company conformist with reference to output
and financing strategies, might have a harmful impact on the financial performance of the
companies (Myers and Majluf, 2004).
In Kenya, a study Maroko (2014) looked at the effect of the firm’s capital structure on firms
financial performance of companies scheduled in Nairobi Securities Exchange. Secondary
data used was obtained from financial statements of listed firms, and used stratified random
sampling technique. Multiple regression technique was used to explain the association
between financial leverage, debt interest and cost of equity and companies performance.
The findingspresented that positive association exists among cost of equity, financial
leverage, debt interest and organization financial performance.
34
Maina and Kondongo (2013) in their attempt to validate Miller and Modiglian (1963)
theory in Kenya, examined the impact of debt to equity leverage ratio on the operation of
companies listed at the NSE for the period 2002 to 2011. From their findings companies
listed at Nairobi Securities Exchange depend mostly on short term debt of financing. The
findings also disclose that statistically significant negative association exists between debts
to equity ratio as a measure of performance. The results also provided support for MM
theory that capital structure is significant in defining the performance of a company.
Innocent, Ikechukwu & Nnagbogu (2014) conducted a study on the impact of financial
leverage on financial performance on scheduled pharmaceutical companies in Nigeria stock
exchange for the period 2001 to 2012. Financial leverage represented by debt ratio, debt to
equity ratio, ratio on interest coverage were used as independent variable while financial
performance proxy by return on assets as dependent variable.
The study employed secondary data information sourced from audited financial statements
of 3 pharmaceutical firms listed on the Stock Exchange of Nigeria. Pearson correlation and
descriptive statistics were utilized in order to establish the association amid financial
leverage variables and performance degree adjustable identified in the research. The results
showed that debt ratio and debt to equity ratio contain harmful association with Return on
Assets, while interest coverage ratio has a positive relationship with ROA. The study also
displayed that on whole financial leverage variables has no significant effect on financial
performance of sampled companies (Innocent, Ikechukwu and Nnagbogu (2014).
35
2.2.3 Effects of Current Ratio on the firm Profitability
High current ratio shows a higher level of liquidity, a lower ratio shows a small amount of
liquidity, involving a greater reliance on operating cash flow and outside financing to meet
immediate requirement. Liquidityinvolves the firm’s capacity to take on debt.
Almazari (2013) studied association among the working capital management and the
company’s profitability for the Saudi cement manufacturing companies. The example
comprised of 8 Saudi cement manufacturing firms scheduled in Saudi Stock Exchange
between 5 years from 2008-2012. Regression and Pearson bivariate examination were
used. The study results showed that Saudi cement company current ratio is important
liquidity estimate which effected profitability, therefore, the cement companies should put
a trade-off between these two objectives found neither the liquidity nor profitability suffers.
Almazari (2013) argued that if size of a company increases, profitability increases and vice
versa. Besides, when the debt financing is improved, profitability is declined. Linear
regression tests established a high degree of association among the profitability and
working capital management.
According to Padron, Apolinario and Santana (2005), performance of companies with
liquid assets are likely to be more andbetter as they are capable to get money at given
period to meet up its requirement and are less open to the elements of liquidity risks. By
not having sufficient cash or liquid assets, listed firms end up selling their securities at a
substantial low price in order to settle debts quickly. Though, there are divergent views of
investors with regard to liquidity and performance in relation to the agency theory cost.
36
A study by Kayo and Kimura (2010) observed that high liquidity could increase agency
expenses incurred by the owners by providing administrators with inducements to misuse
excess cash-flows by investing in projects with harmful net present prices and appealing in
excessive privilege consumption. Liquidity measures the ability of managers to meet their
immediate commitments to shareholders and other creditors without having to increase
profit from investment activities and/or liquidate financial assets.
Eljelly (2004) looked at the relationship between profitability and liquidity measured by
current ratio cash breach and cash conversion cycle on an example of joint stock firms in
Saudi Arabia using method of correlation and regression examination. Eljelly (2004)
established a harmfulassociationamid profitability and liquidity signify, and it was
established that Cash Conversion Cycle had a large effect over profitability than Current
ratio factor affecting firm profitability. Itwas found out there wasgreat difference among
firms with respect to the assessment of liquidity Eljelly (2004)
Suhaila (2014) investigated the effect of liquidity and leverage on financial performance of
commercial publiccompanies in the tourism trade in Kenya. The study adopted descriptive
research design where information was recovered from the financial statements and Notes
of ten (10) Profitable State Companies in the travel industry in Kenya during the study
period 2008-2012. A positive relationship was found to exist between tourism industry
liquidity and profitability of Commercial State Corporations in the tourism sector in Kenya.
2.2.4 Effects of Firm Size on the firm Profitability
A study by Qureshi et al. (2012) observed that large sized companies are proficient of
lessening transaction costs by allotting long-term debt at a favorable low interest and raise
37
funds from creditors with ease (Moses, Edna and Newton, 2013). There exists a positive
association among the company size and leverage (Nadeem and Zongjun, 2011), implying
that the larger the agricultural firm is the more levered it is likely to be as compared to the
smaller firms. On the other hand, large firms also due to their high level of operations they
are likely to enjoy higher earnings which according to the pecking order theory they may
use to finance their operations instead of debt financing, negating the value of debt in the
capital structure. High earnings by the firm promote the use of debt and provide an
incentive to firms to benefit from tax shields on interest payments (Nadeem & Zongjun,
2011). The pecking order theory therefore ascertains that firms prefer to use internally
generated funds when adequately available over debt financing. This therefore depicts a
negative relationship between earnings and the leverage of the firm.
Padron et al., (2005) argued that profit interacted with size. The study noted that large
companies are less vulnerable to insolvency since they tend to be more diversified than
smaller companies. So, subordinate expected bankruptcy prices allow large companies to
take on more obligations like debts. Financial assets are more easily to be achieved in the
market as the level of asymmetries information are reduced by large firms. Large firms are
more likely to access debt as compared to small firms since they are more stable. (Padron et
al., 2005). If two companies have same profitability, larger company will get more external
finance.
Capital structure is one of factors bigger firms benefit over small firms, and can be
examined by comparing firm’s performance in particular financial performance (Eljelly
38
(2004). Larger firms obtain benefits from their size and diversification because they can
borrow with lower costs and survive economic disasters with more resilience than smaller
firms (Eljelly (2004).
Larger firms obtain benefits from their size and diversification because they can borrow
with lower costs and survive economic disasters with more resilience than smaller firms
and thus generate more profit. Their diversification and low borrowing cost benefits are
expected to support the profitability assumption. The size of a firm has the potential to
influence the firm's financial performance in terms of the choice of capital structure mix.
Larger firms had an advantageous position in capital markets to raise external funds, they
are less dependent on internal funds. Moreover, the probability of bankruptcy is lower in
larger firms; therefore, they are more likely to pay dividends (Osman & Mohammed 2010).
Kholdy and Sohrabian (2001) determined theFCF theory and pecking order hypothesis in
small, medium and large firms. Their conclusion showed that smaller firms suffer from
financial restrictions. Furthermore, the cash flow of these firms did not show any
significant effect on investment. Kholdy and Sohrabian (2001) concluded that the pecking
order theory and FCF theory do not have any effect on medium firms' investment.
When studying the relationship between firm growth, age and size, Evans (1987) found that
age is an important determinant of a firm's success. Older firms are expected to have more
historical information than younger ones and are thus expected to be more likely to survive
than growing firms. In other words, older firms will be able to use their experience to avoid
unexpected economic problems (Brooks ET al.2009).
39
Bulan and Yan (2009) conducted a study to examine the central prediction of pecking order
theory, taking into account the two phases of companies’ lifecycle which they describe to be
the first years of a company since its IPO, and maturity (Bulan and Yan (2009). They
argued that mature firms are older, more stable and more highly profitable, with fewer
development opportunities and good credit accounts. Due to this distinctiveness (Bulan and
Yan (2009) mature firms are able to borrow more easily at cost which is lower. Therefore,
older firms are supposed to use debt before considering equity when they need to finance
their projects. Hence, it is expected here that older firms are more powered than younger
firms. That is, firms with higher poor selection costs are more likely to follow the pecking
order theory (Bulan and Yan (2009).
According to Titman and Wessels (1988) larger firms are not faced with greater challenges
of straight insolvency cost owing to their capability to spread their processes in ordermake
money to allow the organization offset the cost of debt. They argued that big firms are
better off using debt financing to finance their projects, as there exist a positive relationship
between the size and the leverage of the firm. According to agency theory (Jensen and
Meckling's, 1976) large firms go for debt financing as a way of trying to solve their agency
cost. Therefore, the more the firm expands in size, the more debt financing it should go for.
2.3 Research Gap
A review of the existing literature on capital structure has revealed that there are several
theories attempting to explain a firm’s financial leverage behaviour including Modigliani
Miller, trade-off, pecking order, agency and signaling theories respectively. However, as El-
Sayed Ebaid (2009) notes, each of the theories come with assumptions, some of which may
40
not apply in a real business situation, and so does not offer a complete explanation of
financial decisions, that is, why some firms prefer more debt to equity and vice versa. Thus,
there is need to conduct further empirical tests to find out which of the many theories is
more relevant and applicable for listed companies in Kenya. This study therefore sought to
fill that gap since no other research in Kenya has done the same for the specific target
population using the same model applied in the current study
Most of the studies done on the effect of financial leverage on profitability have been done
in the non-agricultural segment which the current study is focusing upon. Further, there are
limited studies done in Kenya focusing on the effect of financial leverage on profitability.
This study will address the same as it will enrich the current knowledge on the financial
leverage on effect of Return on Assets / Profitability of listed agricultural firms at the NSE.
This study therefore comes in to fill the annulled by making whether there is an association
between financial leverage and firm performance/profitability among listed agricultural
firms’ in Kenya.
2.4 Conceptual Framework
Fraenkel and Wallen (2000) articulated that greatest study information through the problem
statement in perspective of a theoretical context or conceptual. An explanation of this
context adds to a research information in at least two means as it identifies research study
variables, and association among the study variables. This study tries to examine the effect
of financial leverage on profitability of agricultural firms listed at the Nairobi securities
41
exchange.
The conceptual framework of this study spells out the relationship between the profitability
which is the dependent variable and debt to equity ratio DER, long term to total capital
employed, current ratio CR and total firm sizes as the independent variables.
42
Independent variables (I.V) Dependent variable (D.V)
Debt to Equity Ratio (DER)
H01
Profitability
Long term debt to capital employed H02 Return on assets
Long term debt ÷ capital employed Profit before tax
Total assets
Current Ratio (CR)

Current assets/current liabilities H03
Size of Firm
H04
Log of assets
Figure 1: Conceptual framework
Source: Author, 2016
The study conceptualizes that profitability of the companies under study is dependent on
debt level in the company’s financing structure. In analyzing the dependent variable, a
larger value for both ROA indicated more profitability for a company and vice versa. On
the other hand, a lower ratio for all the independent variables i.e. debt to equity ratio, long
term to total capital employed, current ratio, and total firm sizes indicated less profitability
on debt finance hence less risk and vice versa. The study assumed that revenue growth and
size have a determinant and significant effect on both the leverage level and profitability
and that needed to be adjusted for in order to make more reliable and realistic predictions
on the relationship between the dependent and independent variables.
43
CHAPTER THREE
3.0 RESEARCH METHODOLOGY
3.1 Research Design
This study used a descriptive research design. Descriptive research design is most
appropriate to test hypothesis. It determines the way things are reported. Mugenda
&Mugenda (2003) describes descriptive research design as a systematic, empirical
analytical which the examiner doesn’t have a direct control of independent variable as their
manifestation has already occurred because the inherently cannot be manipulated. This
design supports the use of research questionnaires in solicitation of data from respondents
and secondary data collection approach, and therefore the researcher will use both methods
of data collection. This research relied primarily on census as the study focused on all listed
agricultural firms. Descriptive studies are concerned with how where and what of a
phenomenon thus placed to build a profile on that phenomenon (Mugenda & Mugenda,
2003). Descriptive research design is important because the study seeks to build a profile
about the effect of financial leverage on profitability of agricultural firms listed at the
N.S.E. the specific variables were debt to equity ratio, long term debt to capital employed,
current ratio and firm size.
3.2 Study Area
The study was conducted at the Nairobi Securities Exchange on listed agricultural
companies. Considering the fact that, the study collected both primary and secondary data,
there was need to visit the organizations physically at their head offices to carry out the
survey. Most of these organizations are head quartered in Nairobi.
44
The data was obtained from company’s websites on individual companies’ financial books
of accounts.
3.3 Target Population
According to Ogula (2005), population is any group of people, institutions, objects that
have at least one characteristic in common. The study targeted the seven listed agricultural
firms at the NSE. These firms are Kapchorua Tea Co. Ltd, Eaagads Ltd, Rea Vipingo
Plantations Ltd, Limuru Tea Co. Ltd, Sasini Ltd, Williamson Tea Kenya Ltd and Kakuzi.
3.4 Sample size and sampling procedures
Owing to the fact that the population is small, the census technique was employed, where
all the seven respondents were used for the study. The researcher selected all the seven
agricultural firms listed at the Nairobi securities exchange Kapchorua tea co, Limuru Tea
co. ltd, Eaagads ltd, ltd, Rea vipingo Plantations ltd, Sasini ltd, Williamson tea Kenya ltd
and Kakuzi ltd. The accessible population for purposes of data collection was made up of 7
accounting officers or finance managers each from the seven agricultural firms. These are
preferred in this study, for they are in a strategic position to provide information sought
through this study.
Purposing sampling was employed in the selection of the sample. This is because they type
and class of respondents is already determined. In cases where we have two accounting
officers, preference was made to the senior most or most relevant as guided by the
organization. Data is anything given as a fact on which research inference was based. It is
anything actual or assumed as a basis of reckoning. In this study the researcher applied for
45
approval from C.M.A and N.S.E. With the approval the researcher collected the data using
secondary data.
3.5 Data Collection procedures
The study collected both secondary data and primary. The Primary data was collected from
the accounting officers using questionnaires. The accounting officers provided information
covering all the study objectives. A questionnaire has the following advantages according to
Kombo & Tromp (2006): Information can be collected from a large sample, confidentiality
is upheld, saves on time and no opportunity for interview bias. The questionnaire
comprised of closed ended questions subdivided thematically into sections. Secondary data
can improve the clarity of the problem and the circumstances surrounding the issues in data
collection procedure. This research relied primarily on secondary data of all the seven listed
agricultural firms. The Time series secondary data were collected from the publications of
NSE and CMA. Statistical Bulletins, Economic and Financial Reviews, and Annual Reports
and Statement of Accounts from the respective firms found on the company’s website.
3.6 Piloting
Piloting was conducted using 2 non-agricultural firms listed at the NSE (10% of the
sample). The purpose of pilot test is to detect weaknesses in design and implementation and
to provide proxy for data collection of a probability sample (Cooper & Schindler, 2006).
These processes are important because they enhance the quality of information collected
from the respondents for purposes of achieving the research objectives. Their comments
were used to improve questionnaires. The piloting was also used to establish validity and
reliability of Instruments.
46
3.7 Validity of Instruments
Prior to use the questionnaires were subjected to validity checks. The validity of the
research instruments should be confirmed prior to actual data collection (Drost, 2011).
Establishing validity of research instruments means that the study delivers the intended
results (Mugenda and Mugenda, 2003). This ensured that the instruments can be trusted and
results referred to when forming opinions and conclusions. Content validity was established
by judgement of experts who comprise supervisors. The experts provided guidance on the
content of the instruments by ensuring that all the research objectives have been addressed
in the instruments. The manner of construction of the questionnaires was also checked to
ensure there is no ambiguity during pilot study. The findings from the pilot study were used
to improve on the questionnaire, thus enhancing its validity.
3.8 Reliability of Instruments
Reliability refers to the stability or internal consistency of a questionnaire. Cronbach’s
alpha will be used to test the reliability of the measures in the questionnaire. According to
Sekaran (2006), in this approach, a score obtained is correlated with scores obtained from
other items in the instrument. The Cronbach’s Coefficient Alpha is then computed to
determine how items correlate. Cronbach’s Alpha is a general form of the Kunder-
Richardson (K-R) 20. A value above 0.7 was accepted. The questionnaire responses entered
into statistical package for social sciences (SPSS) and Cronbach’s alpha coefficient
computed to give assess reliability. If Cronbach’s alpha coefficient is close to 1, the higher
the internal consistency reliability (Sekaran, 2006), hence reliable for collecting data.
47
3.9 Data Analysis and Presentation
The study collected both quantitative and qualitative data. The study used SPSS statistical
package for social science in data analysis and using descriptive statistics; mean frequency
and percentages in presentation of study findings. Regression model was used to determine
the effect of explanatory between the independent and dependent variables. In statistical
modeling, regression analysis is a statistical process for estimating the relationships among
variables (Babbie, Wagner & Zaino, 2015). It was used to determine the relationship
between the independent variables and the dependent variables. The statistical tool was
preferred because of its efficiency and its powerful ability to display results in a very
detailed and more advanced manner.
The following regression model was used
Y = α + β1X1 + β2X2 + β3X3 + β4X4 + έ
Profitability=α 0+ β 1 DER ❑+ β 2 CR❑ + β 3 ld ❑ + β 4 lnFSIZE❑ + ε
Where;
DER❑ = Ratio of debt to equity
CR❑=¿ Current ratio
ld ❑=¿ Long term debt to total capital employed
FSIZE❑=¿ Agricultural firms’ sizes
ε =¿ Error term
48
α = Constant Term;
β1, β2, β3, β4= Beta Coefficients
3.9.1 Assumptions of Multiple Regression
Multiple Regression analysis was carried out using a model, which combines selected
independent variables and dependent variables. The four assumptions of Multiple
Regression that are not robust to violation and which can be dealt with if violated. These
assumptions focus on linearity, reliability of measurement and Homoscedasticity.
Regression assumes that variables have normal distribution. However non- normality
distributed variables (highly skewed or Kurtotic variables or variables with substantial
outliers) can distort relationships and significant tests. In this study outliers were identified
through visual inspection of histograms or frequency distributions. Bivariate/multivariate
data cleaning can be important (Tabachnick and Fidell, 2001) in multi regression. Analysis
by Osborne (2001) shows that removal of univariate and bivariate outliers may reduce the
probabilities of type I and type II errors and improve the accuracy of estimate.
Multiple Regressions can only accurately estimate the relationship between dependent and
independent variables if the relationships are linear in nature. In case of existence non-
linear relationships (anxiety), it is essential to examine analysis for non-linearity.
Variance inflation factors (VIFs) and correlation coefficients were used to test any multi
collinearity. This is a situation where there is a high degree of association between
independent variables (Kothari, 2004).
49
It is a problem that distorts the regression coefficients, making them unstable, difficult to
interpret and hence invalid significance tests (Cooper & Schindler, 2006). VIF is the extent
of inflation of standard errors of slopes due to presence of multicollinearity. The
coefficients were be compared with 0.8 or VIF of 5 and presence of multi-collinearity
concluded for those variables with at least 0.8 coefficients or VIF of at least 5 as
recommended by Gujarati (2003).
3.10 Ethical Considerations
According to Finnis (1983), ethics is a branch of philosophy, said to have been initiated by
Aristotle, which takes human action as its subject matter (Seale, 2004). A central issue in
ethics, Ali and Kelly argue, is the relationship between the individual and the social world
(Ibid). They further argue that, in research, there is need to consider how the imposition of
the research on individuals (with their consent or otherwise) can be balanced with the
benefit of making the world a better place to live in. Indeed, a number of ethical
consideration was taken into account throughout this study. The researcher was very clear
that participation is voluntary, the research is purely for academic purposes and that
confidentiality of participants was assured.
50
CHAPTER FOUR
4.0 DATA ANALYSIS, PRESENTATION AND INTERPRETATION
4.1 Demographic Characteristics
The results for the general characteristics of the respondents are as presented in this section.
4.1.1 Age of the Respondents
The response in respect to the age of the respondents participating in the study was as
provided in Table 4.1.
Table 4. 1: Age of the Respondents
Age of the Respondents Frequency Percentage
20-25 years 1 14.2
26-30 years 2 28.6
31-35 years 1 14.3
41-45 years 1 28.6
45 and above years 1 14.3
Total 7 100
Source: Author 2016
51
The findings in Table 4.1 shows that 57.2% of the respondents indicated that they were
aged above 31 years, while 42.8% were aged between 15 and 30 years. This implied that
most persons interviewed were aged above 30years. This therefore, means that the officers
interviewed were above the youth age bracket. According to the Kenya National Youth
Policy Sessional Paper No. 3 of July 2007 defines a Kenyan Youth as one aged between 15
– 30 years. Therefore, less youths occupied accounting jobs in the agricultural firms.
4.1.2 Gender of the Respondents
The findings in respect to the gender of the respondents that provided information were as
provided in Figure 2.
Gender of the Respondents
Female; 28.57%
Male; 71.43%
Male Female
Figure 2: Gender of the Respondents
As provided in Figure 2, the study was able to reach 29% female and 71% male. This was
due to the availability and willingness of males to participate in the study by males
52
compared to females. It is also an indication that there are more male staff than female in
the finance departments. However, the study was able to capture useful information from
both gender represented in the study.
4.1.3Length of Working Experience in Current Company
The respondents were asked to indicate to how long they had been working in their current
company and in the current position, and the response was as provided in Figure 3.
60 57.1
50
40
30 28.6
20
14.3
10
0
Below 1 year Between 1 and 3 years Above 3 years
Figure 3: Length of Working Experience in Current Company
The findings in Figure 3 shows that 57.1% of the respondents indicated that they had
worked in their current company for a period between 1 and 3 years, 28.6% indicated a
period above 3years, while 14.3% had served for a period below 1 year. This implied that
53
most of the respondents had been working in the organization for a period above 1 year and
thus understood the operational dynamics of the organization. Therefore, the experienced
gained by the respondents was good for the study.
54
4.2 Rating of the Effect of Financial Leverage on Profitability of listed Agricultural
firms
The respondents were asked to rate the effect of financial leverage on profitability in
Agricultural firms, was as shown in Table 4.2.
Table 4. 2: Rating of the Effect of Financial Leverage on Profitability in Agricultural firms
Response Frequency Percentage
Very Low 1 14.3
Low 2 28.6
Moderate 3 42.9
High 1 14.3
Total 7 100
The findings show that 42.9% of the respondents rated the effect of financial leverage on
profitability in their organization as moderate, 28.6% rated it as low, 14.3% rated it as very
low, while 14.3% rated it as high. This implied that according to most of the respondents
the effect of financial leverage was high. High leverage positively affected the financial
performance of agricultural firms. This finding was in agreement with a study by Gweji and
55
Karanja (2014) which established that there was a strong correlation between financial
leverage and financial performance of firms in Kenya.
4.3 The Effect of Debt to Equity Ratio on the Profitability of listed Agricultural Firms
The respondents were asked to rate the extent to which proportions of select aspects of debt
to equity ratio affected the profitability of their business, and the response was as provided
in Table 4.3.
Table 4. 3: The effect of debt to equity ratio on the profitability of agricultural firms
N Minimum Maximum Mean Std.

Deviation
Convertible debt 7 1.00 4.00 2.2857 .95119
Operating liabilities- 7 1.00 3.00 1.7143 .75593

accounts payable)
Operating liabilities accrued 7 1.00 3.00 2.1429 1.06904

liabilities
Leases 7 1.00 3.00 1.8571 1.06904
Preferred stock 7 2.00 5.00 3.2857 1.60357
Contractual obligations 7 3.00 4.00 3.4286 .53452
Deferred taxes 7 2.00 2.00 2.0000 .00000
56
Valid N (list wise) 7
Source: Author 2016
The findings in Table 4.3 show that select aspects of debt to equity ratio that affected the
profitability of their business recorded the following mean scores. Convertible debt (M =
2.2857) Operating liabilities- accounts payable) (M = 1.7143), Operating liabilities -
accrued liabilities (M = 2.1429), Leases (M = 1.8571), Preferred stock (M = 3.2857),
Contractual obligations (M = 3.4286), and Deferred taxes (M = 2.0000). The findings show
that according to most of the respondents, convertible debt, operating liabilities- accounts
payable, operating liabilities - accrued liabilities, leases and deferred taxes, though
important affected profitability to a small extent. This is because their mean score was less
than the 2.5 mid mean score.
On the hand most respondents agreed that preferred stock and contractual obligations
affected the organizations’ profitability to a large extent. Their scores tilted above the 2.5
mid mark, thus implying that they were critical aspects affecting profitability of agricultural
firms.
A study by Bancel and Mittoo (2004) in Europe revealed that a majority of firms issue
convertibles as ‘delayed equity’ and as ‘debt sweetener’ and that managers also use
convertibles to avoid short-term equity dilution and to signal firm’s future growth
opportunities. Furthermore, they document a large cross-sectional variation across firms in
rationales for issuing convertibles and find mixed support for most theoretical models.
Therefore, debt to equity ratio had an effect on the profitability of agricultural firms.
57
4.3.1 Regression Analysis for Debt to equity ratio and Profitability
To test the study hypothesisHO1 which sought to determine whether Debt to equity ratio had
no statistical significant effect on the profitability of agricultural firms listed at the Nairobi
securities exchange, linear regression was computed, and the findings were as presented in
this subsection. The section includes a model summary, ANOVA and resultant coefficients.
Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .983a .966 .960 62.35766
a. Predictors: (Constant), Debt to Equity
Source: Author 2016
The R2 represented the measure of variability in profitability of agricultural firms among
selected firms that debt to equity ratio is accounted for by the predictor. From the model,
(R2 = .983) showing that the predictor account for 96.6% variation in profitability of
agricultural firms listed at the Nairobi Securities Exchange. The predictors used in the
model have captured the variation in the agricultural firms the listed at the Nairobi
Securities Exchange.
The correlation is shown in Table 4.4.
58
Table 4. 4: Correlation between Debt to Equity and Profit before tax
Profit before tax Debt to Equity
Profit before Pearson Correlation 1 .983*

tax
Sig. (2-tailed) .000
N 7 7
Debt to Equity Pearson Correlation .983* 1
N 7 7
*. Correlation is significant at the 0.05 level (2-tailed).
r = 0.983, N = 7, p < 0.05.
The findings in Table 4.4 are reported as follows. The Pearson Correlation test statistic =
0.983. SPSS indicates it is significant at the 0.05 level for a two-tailed prediction. The
actual p value is shown to be 0.000. These figures are duplicated in the matrix. These
results indicate that as debt to equity increases, profit before tax increases, which a positive
correlation. Since, p < 0.05, and thus, it is argued that the relationship is statistically
significant. It therefore emerges that the two variables are positively correlated, and thus
debt to equity was statistically significant as a predictor of profit before tax.
Analysis of Variances (ANOVA)
59
The findings in respect to the analysis of variances are as provided in Table 4.5.
Table 4. 5: Analysis of Variances (ANOVA)
Model Sum of df Mean F Sig.

Squares Square
1 Regression 558295.416 1 558295.416 143.577 .000b
Residual 19442.303 5 3888.461
Total 577737.719 6
a. Dependent Variable: Profit before tax
b. Predictors: (Constant), Debt to Equity
The predictor is significant when Sig. (p value) p < 0.05. The findings in Table 4.5 show
that Sig. (p value) = 0.000. As p < 0.05 our predictor is significantly better than would be
expected by chance. The regression line predicted by the Debt to Equity, explains
significant amount of the variance in the firms’ profits before tax. This is reported as: F (1,
5) = 143.577; p <0.05, and therefore can conclude that the regression is statistically
significant.
The regression model significantly improved the ability to predict the profitability of
agricultural firms listed at the Nairobi Securities Exchange, and significant (P<.05) and
thus the model was significant leading to rejection of the null hypotheses (H O1).
60
Table 4. 6: Coefficients
Model Unstandardized Standardized t Sig.

Coefficients Coefficients
B Std. Beta
Error
1 (Constant) -105.074 39.769 -2.642 .046
Debt to Equity .187 .016 .983 11.982 .000
b. When P < 0.05 = you reject the null hypothesis
c. When P > 0.05 = you retain the null hypothesis
The findings presented in Table 4.6 show that the regression equation was: Profitability =
-105.074 + 0.187 Debt to Equity. The influence of Debt to Equity was reported at beta or r
= 0.983. This value was greater than the Sig. p value at 0.000, therefore significant. p <
0.05, and thus this factor is significant. The Unstandardized Coefficients B column, gives
us the coefficients of the independent variables in the regression equation including all the
predictor variables. We therefore reject the null hypothesis Ho1 that implied that Debt to
equity ratio had no statistical significant effect on the profitability of agricultural firms
listed at the Nairobi securities exchange. This implies that a unit increase in Debt to equity
ratio results to 11.982 increase to profitability of the company. These findings are
61
agreement to a study by Enekwe (2012) who established that debt to equity ratio had a
positive significant effect on the profitability of firms. A study by Almazari (2013) found
that when the debt financing is improved, profitability is declined. In Almazari’s study
linear regression tests established a high degree of relationship between the working capital
management and profitability. Similarly, Pandey (2011) observed that higher debt to equity
can increase long term earnings and dividends. A company’s dividend policy may also be
restricted by the availability of liquid funds. With limited cash, a high dividend policy is not
possible.
4.4 Effect of Long Term Debt to Total Capital Employed on Profitability
The Study sought to establish the effect of long term debt to total capital employed on the
profitability. Means were computed and the results are as provided in Table 4.7.
Table 4. 7: Effect of Long Term Debt to Total Capital Employed on the Profitability

Deviation
Level of long term debt 7 1.00 4.00 2.2857 1.60357
Ability to pay long term 7 3.00 4.00 3.4286 .53452

debts
Preferred stock / Equity 7 1.00 5.00 3.2857 1.60357
Common Stock / Equity 7 2.00 5.00 3.1429 1.06904
62
Source: Author 2016
The finding in Table 4.7 shows that aspects of debt to equity ratio recorded the following
means. Level of long term debt (M = 2.2857), ability to pay long term debts (M = 3.4286),
preferred stock / equity (M = 3.2857) and common stock / equity (M = 3.1429). This
implied that ability to pay long term debts, preferred stock / equity, and common stock /
equity were important aspects affecting the profitability of agricultural firms, and the effect
was to a large extent. In terms of the nature of the relationship, this study complements
Mumtaz et al. (2013) who also found a negative relationship. The findings were contrary
with Greenwald, Stiglitz and Weirs (2004) who found a positive effect on debt on the
performance of the company that was measured through factors that affects profitability.
4.4.1 Regression Analysis for Long Term Debt to Capital Employed and Profitability
To test the study hypothesisHO2 which sought to determine whether Long term debt to
capital employed had no statistical significant effect on the profitability of agricultural
firms listed at the Nairobi securities exchange, linear regression was computed, and the
findings were as presented in this subsection. The section includes a model summary,
ANOVA and resultant coefficients.
Model Summary
1 .200a .040 -.152 333.02820
a. Predictors: (Constant), long term debt to total capital employed
63
The R Square value in the Model Summary table shows the amount of variance in the
dependent variable that can be explained by the independent variable. In this case the
independent variable of Long term debt to capital employed accounts for 20 per cent of the
variability in profitability.
The R value (0.200) indicates that as Long term debt to capital employed increases
profitability also increases, and this is a positive correlation, with r = 0.200. The correlation
is shown in Table 4.8.
before tax
Profit Long term debt to total

before tax capital employed
Profit before tax Pearson Correlation 1 -.200
N 7 7
Long term debt to Pearson Correlation -.200 1

total capital
employed
N 7 7
64
r = -0.200, N = 7, p > 0.05.
-0.200. SPSS indicates it is significant at the 0.05 level for a two-tailed prediction. The
results indicate that as long term debt to total capital employed increases, profit before tax
decreases, which a negative correlation is. It is thus, argued that this relationship is
statistically insignificant. It therefore emerges that even though the two variables are
negatively correlated, and therefore, long term debt to total capital employed was not
statistically significant as a predictor of profit before tax. From the findings it was found
that an increase total debt to total capital employed ratio does not increase the profitability
of agricultural firms. This shows that total debt to total capital employed ratio was not a
major determinant of profitability of agricultural firms listed at the Nairobi Securities
Exchange. The findings of the study is also in line with the findings of Nadeem & Zongjun
(2011) when they conducted a study on the determinants of capital structure in the
manufacturing firms in Pakistan where they found out that earnings of the firms have
negative relationship with debt ratio.
The findings in respect to the analysis of variances were as provided in Table 4.9.
Model Sum of Squares Df Mean Square F Sig.
65
1 Regression 23198.820 1 23198.820 .209 .667b
Residual 554538.899 5 110907.780
Total 577737.719 6
b. Predictors: (Constant), long term debt to total capital employed
Source: Author 2016
The predictor is significant when Sig. (p value) p < 0.05. The findings in Table 4.7 show
that that Sig. (p value) = 0.667. As p >0.05 our predictor is insignificantly better than would
be expected by chance. The regression line predicted by the long term debt to total capital
employed, explains an insignificant amount of the variance in the firms’ profits before tax.
This is reported as: F (1, 5) = 209; p > 0.05, and therefore can conclude that the regression
is not statistically significant.

B Std. Error Beta
1 (Constant) 358.415 214.911 1.668 .156
Long term debt to total -141.532 309.458 -.200 -.457 .667
66
capital employed
b. When P < 0.05 = you reject the null hypothesis
c. When P > 0.05 = you retain the null hypothesis
Source: Author 2016
The findings presented in Table 4.10 show that the regression equation was: profitability =
358.415 - 0.141.532 long term debt to total capital employed. The influence of long term
debt to total capital employed was reported at beta or r = 0.200. This value was less than the
Sig. p value at 0.667, therefore not significant. P> 0.05, and thus this factor is insignificant.
The t value for study time (t = -0.457, p > .05) shows that the regression is significant. We
therefore accept the null hypothesis HO2 that implied that long term debt to total capital
employed had no statistical significant effect on the profitability of agricultural firms listed
at the Nairobi securities exchange. This implies that a unit increase in long term debt to
capital employed results to negative 2 units decrease on profitability. The findings were in
contrary with a study by Greenwald, Stiglitz and Weirs (2004) who found a positive effect
on debt on the performance of the company that was measured through factors that affects
profitability.
67
4.5 Effect of Current Ratio on the Profitability of Agricultural Firms Listed at the
Nairobi Securities Exchange
The study sought to establish the effect of Current Ratioon profitability. Various indicators
were tested to determine the extent of the effect, means were computed, and the results
were as provided in Table 4.11.
Table 4. 11: Effect of Current Ratio on the Profitability
N Minimum Maximum Mean Std. Deviation
Receivable days 7 1.00 4.00 2.7143 1.60357
Payable days 7 3.00 5.00 4.0000 .81650
Inventory days 7 1.00 4.00 2.5714 1.39728
Inventory turnover 7 1.00 4.00 2.8571 1.34519
The findings in Table 4.11 shows that the indicators recorded the following mean scores.
Receivable days (M = 2.7143), Payable days (M = 4.0000), Inventory days (M = 2.5714)
and Inventory turnover (M = 2.8571). This implied that receivable days, payable days,
inventory days and inventory turnover affected the firm’s profitability to a large extent. The
means were higher than the mid mean mark of 2.5 and thus were important factors affecting
68
the profitability of agricultural companies. The findings show that payable days had an
effect on the firm’s profitability.
The study findings are in agreement with a study by Ikechukwu and Nwakaego (2015) who
established that accounts payable ratio had negative and significant effect on profitability.
The findings show that the working capital of the firms had an effect on the financial
performance of agricultural firms. This is agreement with a study by Ali (2011) who
explores the association between working capital management and the profitability of
textile firms in Pakistan. The study shows that inventory turnover moderately affected the
profitability of the agricultural firms. However, an earlier study by Luchinga (2014) found
out that inventory turnover in days has negative relationship with Return on Assets from the
regression model, which implies that companies ‘financial performance can be increased by
reducing inventory in days. Inventory days also affected the firms’ profitability. A study by
Aminu, et al. (2013) observed that optimum inventory levels depended on sales, so sales
were forecasted before target inventories were established. Moreover, because errors in
setting inventory levels led to lost sales or excessive carrying costs, inventory management
is quite important. A study by Ikechukwu and Nyakaego (2012) showed that accounts
receivable had positive and significant effect on profitability. Therefore, these current ratio
dimensions were important in determining the performance of the agricultural firms.
4.5.1 Regression Analysis for Current Ratio and Profitability
To test the study null hypothesisHO2 which sought to determine whether Current ratio had
no statistical significant effect on the profitability of agricultural firms listed at the Nairobi
69
this subsection. The section includes a model summary, ANOVA and resultant coefficients.
Model Summary
1 .863a .745 .694 171.51644
a. Predictors: (Constant), Current Ratio
independent variable of Current ratio accounts for 86.3 per cent of the variability in
profitability. The R value (0.863) indicates that as Current ratio increases profitability also
increases, and this is a positive correlation, with r = 0.863. The correlation is shown in
Table 4.12.
Table 4. 12: Correlation between Current Ratio and Profit before tax
Profit before tax Current Ratio
Profit before Pearson Correlation 1 -.863*

70
tax
N 7 7
Current Ratio Pearson Correlation -.863* 1
N 7 7
-.863*. SPSS indicates it is significant at the 0.05 level for a two-tailed prediction. The
results indicate that as current ratio increases, profit before tax decreases, which is a
negative correlation. It is thus, argued that this relationship is statistically insignificant. It
therefore emerges that current ratio was not statistically significant as a predictor of profit
before tax.
71
Model Sum of Squares df Mean Square F Sig.
1 Regression 430648.282 1 430648.282 14.639 .012b
Residual 147089.437 5 29417.887
Total 577737.719 6
b. Predictors: (Constant), Current Ratio
Source: Author 2016
In the study, the predictor is significant when Sig. (p value) p < 0.05. The findings in Table
4.13 show that that Sig. (p value) = 0.012. As p <0.05 our predictor is significantly better to
profitability than would be expected by chance.
The regression line predicted by the current ratio, explains a significant amount of the
variance in the firms’ profits before tax. The regression model significantly improved the
ability to predict the profitability of agricultural firms listed at the Nairobi Securities
Exchange. The F (1, 5) = 14.639; p < 0.05 and significant (P<.05) and thus the model was
significant leading to rejection of the null hypotheses (HO3).
72
Model Unstandardized Coefficients Standardized T Sig.

Coefficients
B Std. Error Beta
1 (Constant) 761.586 141.873 5.368 .003
Current -1408.2 368.072 -.863 -3.826 .012

Ratio
79
b. When p< 0.05 = you reject the null hypothesis
c. When p > 0.05 = you retain the null hypothesis
The findings presented in Table 4.14 show that the regression equation was: profitability =
761.586 - 1408.279 Current Ratio. The influence of Current Ratio employed was reported
at beta or r = -0.863. This value was less than the Sig. p value at 0.012, therefore
significant. P< 0.05, and thus this factor is significant in relation to profitability of the firm.
The t value for current ratio (t = -3.826, p < .05) this shows that the regression is significant
to firms’ profitability. We therefore reject the null hypothesis H o3that implied that Current
Ratio had no statistical significant effect on the profitability of agricultural firms listed at
the Nairobi securities exchange this implies that a unit decrease in current ratio results to
negative increase in profitability. These findings are in agreement with Eljelly (2004) who
established a negative relationship between profitability and liquidity signify, and it was
73
established that Cash Conversion Cycle had a large effect over profitability than Current
ratio. On the same note a study by Vural, et al. (2012) using regression analysis, revealed
that there was a positive relationship between cash conversion cycle and firm value while
there was a negative relationship between leverage and firm value. This means, extending
the cash conversion cycle will increase the firm value and lower leverage will lead to
increasing of the firm value.
4.6 Effect of Firm Size on the Profitability of Agricultural Firms
The study sought to establish the effect of firm size on the profitability of agricultural firms
listed at the Nairobi Securities Exchange. Means were computed for the select indicators
and the response was as provide in Table 4.15.
Table 4. 15: Effect of Firm Size on the Profitability of Agricultural Firms

Deviation
74
Our company size has more 7 1.00 5.00 3.0000 1.63299
market power that provides it
with the possibility to earn
higher profits
Charging higher prices and 7 2.00 5.00 3.4286 1.13389

earn higher profits.
Due to our company size we 7 2.00 5.00 3.2857 1.25357

are able to benefit from lower
costs; size brings bargaining
power over the suppliers
The size enables us to cope 7 1.00 5.00 3.1429 1.46385

better with changes and have
better chances to offset
random losses, i.e. due to
market uncertainties
Due to our company’s size, the 7 2.00 5.00 3.5714 .97590

capital constraints are not
severe as it grows larger
From the findings in Table 4.15the current ratio indicators the following mean scores. Our
company size has more market power that provides it with the possibility to earn higher
profits (M = 3.0000). This implied that most agriculture firms at Nairobi Securities
exchange own capitalised on their size to earn higher profits by utilising market power
advantages. The study also established that there was a relationship between charging
75
higher prices and earn higher profits (M = 3.4286); Due to their company size they are able
to benefit from lower costs; size brings bargaining power over the suppliers (M = 3.2857);
The size enables them to cope better with changes and have better chances to offset random
losses, i.e. due to market uncertainties (M = 3.1429); Due to their company’s size, the
capital constraints are not severe as it grows larger (M = 3.5714). This implied that in most
agriculture firms, large firm size was considered to have more market power that provided
it with the possibility to earn higher profits, to charge higher prices and earn higher profits,
to be able to benefit from lower costs, to have bargaining power over the suppliers, and to
cope better with changes and have better chances to offset random losses. These statements
scored means above the 2.5 mid mean mark. The findings also established that payable
days affected profitability of Agricultural firms to a large extent.
4.6.1 Regression Analysis for Firm Size and Profitability
To test the study hypothesisHO1 which sought to determine whether firm size had no
statistical significant effect on the profitability of agricultural firms listed at the Nairobi
this subsection. The section includes ANOVA and resultant coefficients.
Model Summary
1 .361a .130 -.044 317.00677
a. Predictors: (Constant), Total Assets
76
Source: Author 2016
independent variable of firm size accounts for 36.1 per cent of the variability in
profitability. The R value (0.361) indicates that as firm size increases profitability also
increases, and this is a positive correlation, with r = 0.361. The correlation is shown in
Table 4.16.
before tax
Profit before tax Firm size
Profit before tax Pearson Correlation 1 .361
N 7 7
Firm size Pearson Correlation .361 1
N 7 7
0.361. SPSS indicates it is significant at the 0.05 level for a two-tailed prediction. The
77
results indicate that as total assets increases, profit before tax increases, which is a positive
correlation. However, the p value was greater than the 0.05 test significant level, thus
implying that this relationship is statistically insignificant. It therefore emerges that even
though the two variables are positively correlated, total assets was not statistically
significant as a predictor of profit before tax.
1 Regression 75271.258 1 75271.258 .749 .426b
Residual 502466.461 5 100493.292
Total 577737.719 6
b. Predictors: (Constant), Total Assets
4.17 show that that Sig. (p value) = 0.426. As p >0.05 our predictor is not significantly
78
better than would be expected by chance. The regression line predicted by the Total Assets
(firm size), does not explain a significant amount of the variance in the firms’ profits before
tax. This is reported as: F (1, 5) = 0.749; p > 0.05, and therefore can conclude that the
regression is not statistically significant.
Model Unstandardized Standardized T Sig.

B Std. Error Beta
1 (Constant) 157.965 183.937 .859 .430
Total Assets .032 .037 .361 .865 .426
b. When p < 0.05 = you reject the null hypothesis
c. When p > 0.05 = you retain the null hypothesis
Table 4.18 shows that the regression equation was: profitability = 157.965+ 0.032 firm size.
The influence of firm size employed was reported at beta or r = 0.361. This value was less
than the Sig. p value at 0.426, p < 0.05, and thus this factor is significant. The t value for
total assets (t = 0.865, p > 0.05) shows that the regression is not significant. We therefore
accept the null hypothesis Ho4, which implied that Total Assets (firm size) had no statistical
significant effect on the profitability of agricultural firms listed at the Nairobi securities
79
exchange. This implies that an increase in asset volume as an effect on firms’ profitability.
The findings were not in agreement with a study by Osman & Mohammed (2010) who
reported that the probability of bankruptcy is lower in larger firms; therefore, they are more
likely to pay dividends, and that bankruptcy did affect the profitability of a business.
4.7 Rating of Financial Leverage Indicators affecting Profitability of listed
Agricultural Firms
To come up with a clear rating of the Financial Leverage Indicators affecting Profitability
of Agricultural Firms, multiple regression was computed and the results are presented in
this section. The indicators in this section includes descriptive statistics, ANOVA and
resultant coefficients. Debt to Equity ratio, Long term debt to capital employed, Current
ratio and Firm size.
Model Summary
1 1.000a 1.000 .999 11.51803
a. Predictors: (Constant), Debt to Equity, Current Ratio, Total Assets, Long term debt to
total capital employed
80
independent variables of Debt to Equity, Current Ratio, Total Assets, Long term debt to
total capital employed accounted for 100 per cent of the variability in profitability. The R
value (1.000) indicates that as the four variables increases profitability also increases, and
this is a positive correlation, with r = 1.000.
A summary of correlations for the four study variables and the performance variable was as
provided in Table 4.19.
Table 4.19: Correlation between Financial Leverage and Profitability of Agricultural Firms
Profit before tax
Profit before tax Pearson Correlation 1
Sig. (2-tailed)
N 7
Debt to Equity Pearson Correlation .983**
81
N 7
Current Ratio Pearson Correlation -.863*
N 7
Long term debt to total capital Pearson Correlation -.200

employed
N 7
Total Assets Pearson Correlation .361
N 7
**. Correlation is significant at the 0.01 level (2-tailed).
Pearson correlations for the four variables were as follows. Debt to Equity and Profitability
r = -0.983, N = 7, p < 0.05; Current Ratio and Profitability was r = -0.863, N = 7, p < 0.05;
82
Long term debt to total capital employed and Profitability was r = -0.200, N = 7, p > 0.05;
and Total Assets and Profitability was r = 0.361, N = 7, p > 0.05. The implication was that
only total assets had a statistical significant positive relationship with profitability. Debt to
equity had a statistically insignificant positive relationship with profitability.
1 Regression 577472.389 4 144368.097 1088.215 .001b
Residual 265.330 2 132.665
Total 577737.719 6
b. Predictors: (Constant), Debt to Equity, Current Ratio, Total Assets, Long term debt
to total capital employed
83
4.20 show that that Sig. (p value) = 0.001. As p < 0.05 our predictors are significantly better
than would be expected by chance. The regression line predicted by the dimensions of
financial leverage does not explain a significant amount of the variance in the level of
leverage ratings. This is reported as: F (4, 2) = 1088.215; p < .05, and therefore can
conclude that the regression is statistically significant.

B Std. Beta
Error
1 (Constant) -255.675 38.721 -6.603 .022
Debt to Equity 23.203 .984 1.221 23.571 .002
Long term debt to -106.483 25.754 -.151 -4.135 .054

total capital
employed
84
Current Ratio 397.807 64.719 .244 6.147 .025
Total Assets -.005 .004 -.056 -1.251 .338
The following regression model was used
Y = α + β1X1 + β2X2 + β3X3 + β4X4 + έ
Profitability = -255.675 - 0.056+ 0.244–0.151 +1.221 + 0
As provided in Table 4.21, the Unstandardized Coefficients B column, gives us the
coefficients of the independent variables in the regression equation including all the
predictor variables. So the regression equation is: Profitability = 602.224 - 0.056 Total
Assets +0.244 Current Ratio –0.151 Long term debt to total capital employed + 1.221Debt
to Equity.
From the findings it emerges that the most influential determinant of profitability was Debt
to Equity(r = 1.221; t =23.571), followed by Current ratio(r = 0.244; t = 6.147), then total
assets (r = -0.56; t = -1.251). Long term debt to total capital employed was the least
influential with a Beta (r) value of -.151 (t = -4.135).
The p value for Debt to Equity and Current Ratio was lower than 0.05, thus implying that
the two variables had a statistically significant relationship with profitability. However, in
the case of Long term debt to total capital employed and Total Assets, it is noted that the p
85
value of 0.054 and 0.338 respectively were higher than 0.05, thus implying that these two
variables did not have a statistically significant effect on the firms’ profitability. It is thus
reported 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.
The findings seem to suggest that the leverage financing trends of NSE listed firms follow a
mix of the pecking order theory as well as the Modigliani Miller capital structure
irrelevance theory. Other researchers who found a negative relationship between long term
leverage and profitability include Miller (1977), Majumdar and Chhibber (1999), Abor
(2005), Booth et al. (2001), Sheikh and Wang (2012), and Oguna (2014). As for leverage
the findings shows that it was positively related to firm performance as measured by ROA
though the effect was small. This finding contradicts what was observed by Nunes et al.,
(2008); Pacini, Hillson and Marlet (2008) and Dogan (2013). This implies that the extra
unit proportion of external financing from debt providers compared to total financing from
all providers of capital contributes positively to firm performance.
The study findings revealed that there is a positive and statistically significant relationship
between liquidity, firm size and profitability whereas there is an insignificant positive
relationship between leverage and profitability while tangibility has a significant negative
relationship with the profitability of listed agricultural firms in Kenya.
Thus, the study concludes that liquidity and firm size positively and significantly influences
profitability while tangibility negatively influences the profitability of listed agricultural
firms in Kenya. The study also concludes that debt does not influence the profitability of
86
the listed agricultural firms in Kenya since most the listed agricultural firms’ debt usage is
minimal.
87
CHAPTER FIVE:
5.0 DISCUSSION
5.1 Summary of the Findings
The summary of study findings was as provided in this section.
The first objective of the study was sought to determine the effect of debt to equity ratio on
the profitability of agricultural firms listed at the Nairobi Securities Exchange. From the
study it was established that according to most of the respondents, convertible debt,
operating liabilities- accounts payable, operating liabilities - accrued liabilities, leases and
deferred taxes, though importantly affects profitability of the firm to a small extent. The
study also established that preferred stock and contractual obligations affected the
organizations’ profitability to a large extent. The regression equation was: Profitability =
-105.074 + 0.187 Debt to Equity < 0.05 which implies that an increase in profitability
negatively affects the Debt to Equity of the firm. The influence of Debt to Equity was
reported at beta or r = 0.983. This value was greater than the Sig. p value at 0.000, therefore
significant and p < 0.05, and thus this factor is significant. We therefore reject the null
hypothesis Ho1 that implied that Debt to equity ratio had no statistical significant effect on
the profitability of agricultural firms listed at the Nairobi securities exchange.
The second objective of the study was sought to establish the effect of long term debt to
total capital employed on the profitability of agricultural firms listed at the Nairobi
Securities exchange. It was established that the ability to pay long term debts, preferred
stock / equity, and common stock / equity were important factors affecting the profitability
88
of agricultural firms, and its effect was to a large extent affecting the profitability of the
firm. The study also revealed that the regression equation was: profitability = 358.415 -
0.141.532 long term debt to total capital employed, p > 0.05. Which signify that decrease in
Debt to Equity results to an increase in profitability of the firm. The influence of long term
debt to total capital employed was reported at beta or r = 0.200. This value was less than the
Sig. p value at 0.667, therefore not significant, and thus this factor is insignificant. The t
value for study time (t = -0.457, p > .05) shows that the regression is significant. We
therefore accept the null hypothesis Ho2, that implied that long term debt to total capital
employed had no statistical significant effect on the profitability of agricultural firms listed
at the Nairobi securities exchange.
The third objective was sought to determine the effect of current ratio on the profitability of
agricultural firms listed at the Nairobi Securities Exchange. According to most of the
respondents’ receivable days, payable days, inventory days and inventory turnover affected
the firm’s profitability to a large extent. The study also shows that the regression equation
was: profitability = 761.586 - 1408.279 Current Ratio. The influence of Current Ratio
employed was reported at beta or r = -0.863. This value was less than the Sig. p value at
0.012, therefore significant, and thus this factor is significant in relation to profitability of
the firm. The t value for current ratio (t = -3.826, p < .05).This shows that the regression is
significant to firms’ profitability. We therefore reject the null hypothesis Ho 3 that implied
that Current Ratio had no statistical significant effect on the profitability of agricultural
firms listed at the Nairobi Securities Exchange.
89
The fourth objective sought to establish the effect of firm size on the profitability of
agricultural firms listed at the Nairobi Securities Exchange. The findings show that in most
agriculture firms, large firm size was considered to have more market power that provided
it with the possibility to earn higher profits, to charge higher prices and earn higher profits,
to be able to benefit from lower costs, to have bargaining power over the suppliers, and to
cope better with changes and have better chances to offset random losses. It was found that
the regression equation was: profitability = 157.965 + 0.032 Current Ratio. The influence
of firm size employed was reported at beta or r = 0.361. This value was less than the Sig. p
value at 0.426, and thus this factor is not significant. The t value for total assets (t = 0.865,
p > 0.05) shows that the regression is not significant. We therefore accept the null
hypothesis Ho4, that implied that Total Assets (firm size) had no statistical significant effect
on the profitability of agricultural firms listed at the Nairobi Securities Exchange.
90
CHAPTER SIX
6.0 CONCLUSIONS AND RECOMMENDATIONS
6.1 Conclusions
From the findings it can be concluded as follows.
Even though most accounting officers believed that debt to equity ratio had some positive
effect on the profitability of the firms, secondary data revealed otherwise. Secondary data
analysis revealed that though there was some effect, it was statistically significant. The
study therefore, concluded that debt to equity ratio had a significantly affect statistically the
profitability of agricultural firms listed at the Nairobi Securities Exchange. Important
indicators such as convertible debt, operating liabilities- accounts payable, operating
liabilities - accrued liabilities, leases and deferred taxes that are reported to positively affect
profitability were found to work well in agricultural firms in Kenya. In most of the
agricultural firms, debt to equity ratio had statistical significant effect on the profitability of
agricultural firms listed at the Nairobi securities exchange.
The findings show that even though most accounting officers indicated that long term debt
to total capital employed affected the profitability of agricultural firms, the effect was
statistically insignificant as shown by the regression analysis. The study therefore
concluded that long term debt to total capital employed as measured through indicators
such as ability to pay long term debts, preferred stock / equity, and common stock / equity,
did not have a statistically significant effect on the profitability of agricultural firms listed
at the Nairobi Securities exchange.
91
The study also concludes that current ratio had a statistically significant effect on the
profitability of agricultural firms listed at the Nairobi Securities Exchange. According to
most of the respondents’ receivable days, payable days, inventory days and inventory
turnover affected the firm’s profitability to a large extent. This was the view held by most
of the accounting officers; however, this view was not true as proven through data analyzed
through secondary data. It can be concluded that much has not been done by the firms to
come up with an effective ratio that contributes to profitability. It can therefore be
concluded that Current Ratio had a statistical significant effect on the profitability of
agricultural firms listed at the Nairobi Securities Exchange
The study also concluded that firm size was not a statistically significant factor affecting
the profitability of agricultural firms listed at the Nairobi Securities Exchange. According to
most of the respondents’ firm size had capacity advantages over small firms. However,
despite this advantage was not utilized well by agricultural firms. The officers were aware
of such benefits, however the effect according to the analysis revealed that firm size did not
have a statistical significant effect on the profitability of agricultural firms listed at the
Nairobi Securities Exchange in Kenya. It is concluded that Total Assets (firm size) had no
statistical significant effect on the profitability of agricultural firms listed at the Nairobi
Securities Exchange
6.2 Recommendations
The study recommendations were as follows:
Agricultural firms should consider investing in research to find out the best mix of financial
leverage that does not negatively affect profitability.
92
The research can also focus on findings cheaper sources of debt finance as well as
alternatives of debt finance.
Agricultural firms should consider where possible, using their internally generated funds to
finance their projects and only go for debt financing when they have fully exhausted their
internal funds.
Managers of listed Agricultural firms must ensure cash conversion cycles are reduced,
bargain for better payment terms with suppliers and collect receivables as soon as possible
from their clients in order to be more profitable.
Small agricultural firms need to consider mobilizing resources for firm expansion, while
large firms need to devise strategies on how to reap best from the associated size benefits in
the quest of making more profits.
The firms need to consider mobilizing resources for non-current assets / fixed assets so as
to enhance their long term loan borrowing capacity. There is also the need to work on
reduction of long term debt to total capital employed ratio, since this affects profit before
tax and even earnings per share.
The management of agricultural firms needs to consider ensuring that the current ratio is
maintained at most minimum since for this can help boost the firms’ profitability. These can
be ensured by closely monitoring the receivable days, payable days, inventory days and
inventory turnover and periodically making appropriate adjustments.
93
6.3 Suggestions for Further Studies
The study’s suggestions for further studies were as follows:
The study focused on agricultural firms listed at the Nairobi Stock Exchange that means
unlisted agricultural firms were not studied. A similar study on the effect of financial
leverage on profitability of unlisted agricultural firms needs to be carried out to compare if
the results will show similar effects.
The study recommends that future researchers interested in this field of research might
consider investigating all the firms and increase the period of study to ten years. The study
was based on a period of six years, 2010 to 2015, which may not have been conclusive for
a firm that started making low profits over the last three years.A similar study needs to be
carried out using different analytical tools to enable it find out whether the findings of this
study will still hold or shed more light for the firms on the relationship that exist between
leverage and profitability.
94
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APPENDICES
Appendix I: Letter of approval from the university
107
Appendix II: Letter of Authorization from NACOSTI
108
Appendix III: Research Permit from NACOSTI
109
Appendix IV: Secondary Data Collection Guide
Debt to equity
Variable 9/10 10/11 11/12 12/13 13/14 14/15
2009-2015
Total
liabilities
Total equity
Debt to
equity
Long term debt to capital employed
Variable 09/10 10/11 11/12 12/13 13/14 14/15
2009-2015
Retained
Earnings
Debt
capital
Current ratio
110
Variable 09/10 10/11 11/12 12/13 13/14 14/15
2009-2015
Current
assets
Current
liabilities
Firm size
Variable 09/10 10/11 11/12 12/13 13/14 14/15
2009-2015
Turn over
Total assets
Profitability
Variable 09/10 10/11 11/12 12/13 13/14 14/15
111
Return on
assets
Return on
equity
Return on
Total Assets
Earnings per
share
112
Appendix V: Research Questionnaire for Accounting Officers
My name is David Chesang from Kisii University; I am a postgraduate student in the
school of business and economics. I am carrying out a research on “Effect of Financial
Leverage on Profitability of Listed Agricultural Firms at The Nairobi Securities
Exchange” The aim of this questionnaire is for academic purpose only and whatever
information provided shall be cared for confidentially. Please, answer the questions as
objectively as possible to assist the researcher to ascertain the determinants of capital
structure in automobile industry.
Section A: Personal Information
1. Age
15-19 ( ) 36-40 ( )
20-25 ( ) 41-45 ( )
26-30 ( ) 45 and above ( )
31-35 ( )
2. Sex
Female ( )
Male ( )
3. What is the current position ________________________?
4. How long have you been working in your current company and in the current
position?
Below 1 year ( ) Above 3 years ( )
Between 1 and 3 years ( )
113
5. How would you rate the effect of financial leverage on profitability in your
organization?
Very High ( ) Low ( )
High ( ) Very Low ( )
Moderate ( )
Section B: The effect of debt to equity ratio on the profitability of agricultural firms
6. To what extent do proportions of the following aspects of debt to equity ratio affect
the profitability of your business? Use the scale provided.
Very Large Large Moderate Small No

extent extent extent extent extent
Convertible debt
Operating liabilities-
accounts payable)
Operating liabilities accrued

liabilities
Leases
Preferred stock
Contractual obligations
Deferred taxes
115
Section C: Effect of long term debt to total capital employed on the profitability
7. To what extent do proportions of the following aspects of long term debt affect the
profitability of your company? Use the scale provided.
Level of long term
debt
Ability to pay long
term debts
Preferred stock /
Equity
Common Stock /
Equity
Section C: Effect of long term debt to total capital employed on the profitability
116
8. To what extent do proportions of the following aspects of current ratio affect the
profitability of your company? Use the scale provided.
Receivable days
Payable days
Inventory days
Inventory
turnover
Size of the firm
Liquidity
117
D. Effect of Firm Size on the Profitability of Agricultural Firms
9. The following statements relate the effect of firm size on profitability. To what
extent do you agree with the statements? Use the scale provided.
Very Large Moderate Small No

Large extent extent extent extent
extent
Our company size has more market

power that provides it with the
possibility to
Charging higher prices and earn

higher profits.
Sue to Our company size we are able

to benefit from lower costs; size
brings bargaining power over the
suppliers
The size enables us to cope better with

changes and have better chances to
offset random losses, i.e. due to
market uncertainties
Due to our company’s size, the capital

constraints are not severe as it grows
larger
118
Appendix VI: N.S.E listed companies
Agricultural Sector Commercial and Services
1.Williamson Tea Kenya Limited 35.Express Kenya Limited
2. Sasini Tea And Coffee Limited 36.Kenya Airways Limited
3.Rea Vipingo Plantations Limited 37.Longhorn Kenya Limited
4. Limuru Tea Company Limited 38.Nation Media Group Limited
5. Kapchorua Tea Company Limited 39.Scangroup Limited
6. Kakuzi Limited 40.Standard Group Limited
7. Eaagads Limited 41.TPS Eastern Africa Limited (Serena
Hotels)
Automobiles and Accessories 42.Atlas Development & Support
Services
8. Car And General (Kenya) Limited 43.Hutchings Biemer Limited
9. CMC Holdings Limited 44.Uchumi Supermarket Limited
10. Marshalls (EA) Limited Construction and Allied Sector
11.Sameer Africa Limited 45.ARM Cement Limited
Banking 46.Bamburi Cement Company Limited
119
12.Barclays Bank Of Kenya Limited 47.Crown Paints Kenya Limited
13.CFC Stanbic Bank 48.East African Cables Limited
14. Co-operative Bank Of Kenya 49.East African Portland Cement
Company
15.Diamond Trust Bank (Kenya) Limited Investment
16.Equity Bank Limited 50.Centum Investment Company (ICDCI)
Limited
17.I & M holdings limited 51.Olympia Capital Holdings Limited
18.Housing Finance Company Limited 52.Transcentury Limited
19.Kenya Commercial Bank Limited 53.Kurwitu ventures limited
20.National Bank Of Kenya Limited 54.Flame tree group holdings ltd
21.NIC Bank Limited 55.Nairobi securities exchange
22.Standard Chartered Bank Kenya Ltd 56.Home Africa limited
Energy and Petroleum 57.A.Baumann & co. limited
23.Kenol Kobil Limited Manufacturing and Allied
24.Kenya Electricity Generating 58.Boc Kenya Limited
25.Company (KENGEN)Co.
26.The Kenya Power &Lighting Limited 59.British American Tobacco Kenya
120
Limited
27.Total Kenya Limited 60.Carbacid Investments Limited
28.Umeme Limited 61.East African Breweries Limited
Insurance 62.Eveready East Africa Limited
29.Britam Limited 63.Mumias Sugar Company Limited
30.CIC Insurance Limited 64.Unga Group Limited
31.Jubilee Holdings Limited Telecommunication and Technology
32.Kenya Reinsurance Corporation Limited 65.Accesskenya Group
33.Liberty Kenya Holdings Limited 66.Safaricom limited
34.Pan Africa Insurance Company Limited
Source: www.nse.co.ke -Nairobi Securities Exchange (NSE) (2014)
121
Appendix VII: Measurement
Variable Formulae Interpretation
Profitability-Return on Profit b4 tax /total Assets Measures return on profit to
Assets shareholders
Debt to Equity Ratio Total debt /total equity measure how much debt is
employed in relation to equity
Current Ratio Current Assets/Current Measures liquidity position of the
Liabilities company
Total debt/Total Total long term Measures how the firms employs
Capital Employed ratio Debts/Total Capital long term debt in relation to total
Employed capital
Firm Size Capitalization Measures total capital
122
Appendix VIII: Secondary Data
This section contains secondary data obtained from reports and publications. The figures
provided are in millions.
A. Debt to Equity
Total Liabilities
Company 2010 2011 2012 2013 2014 2015
Limuru Tea Company Limited 25 35 10 5 16 28
Sasini Tea And Coffee Limited 5625 7205 8922 9054 14924 4005
Kapchorua Tea Company Limited 680 593 829 794 548 555
Rea Vipingo Plantations Limited 1023 1185 653 711 730 765
Kakuzi Limited 1003 1060 770 821 1111 872
Eaagads Limited 1011 1265 1034 925 -1144 601
Williamson Tea Kenya Limited 1125 1761 2298 2165 1958 2015
Total Equity
Company 2010 2011 2012 2013 2014 2015
Limuru Tea Company Limited 42 50.1 142 95 174 254
123
Kakuzi Limited 2210 2756 2801 2899 2984 3443
Eaagads Limited 1422 1114 2354 2560 2145 2149
Debt to Equity Ratio
Company 2010 2011 2012 2013 2014 2015
Limuru Tea Company
Limited 60% 70% 7% 5% 9% 11%
124
Sasini Tea And Coffee
Limited 68% 76% 62% 43% 68% 21%
Kapchorua Tea Company
Limited 83% 61% 73% 62% 40% 39%
Rea Vipingo Plantations
Limited 81% 83% 38% 34% 33% 33%
Kakuzi Limited 45% 38% 27% 28% 37% 25%
Eaagads Limited 46% 46% 37% 32% -38% 17%
Williamson Tea Kenya
Limited 54% 69% 90% 61% 42% 42%
B. Long Term Debt to Capital Employed
Retained Earnings
Company 2010 2011 2012 2013 2014 2015
Limuru Tea Company
Limited 122 120 116 209 226 230
Limited 1215 1212 1109 1295 1245 1251
125
Limited 799 956 1114 1264 1210 1183
Limited 719 1138 1452 1831 1955 1921
Kakuzi Limited 1848 2325 2631 2718 2809 3248
Eaagads Limited 1546 1835 2421 2658 2645 3021
Limited 4102 4093 4735 5622 6322 6351
Debt Capital
Company 2010 2011 2012 2013 2014 2015
Limuru Tea Company
Limited 0 0 0 0 0 0
Limited 0 0 55 175 0 0
Limited 4 0 0 0 0 0
Limited 17 21 48 28 12 0
126
Kakuzi Limited 0 0 0 0 0 0
Eaagads Limited 2 0 0 0 0 0
Limited 0 0 0 0 0 43
C. Current Liabilities / Current Assets
Current Assets
Company 2010 2011 2012 2013 2014 2015
Kakuzi Limited 795 1174 1237 1170 1181 1530
Eaagads Limited 684 1047 1130 986 1042 1343
127
Current Liabilities
201 201 201 201 201
Company 0 2011 2 3 4 5
Kakuzi Limited 798 635 826 925 724 915
Eaagads Limited 556 835 660 605 814 839
193 215 221 231 254
128
Current Ratio
Company 2010 2011 2012 2013 2014 2015
Limuru Tea Company Limited 31% 16% 19% 19% 18% 17%
Sasini Tea And Coffee Limited 74% 67% 53% 56% 59% 50%
Kapchorua Tea Company Limited 38% 28% 45% 36% 19% 15%
Rea Vipingo Plantations Limited 57% 25% 29% 21% 22% 25%
Kakuzi Limited 100% 54% 67% 79% 61% 60%
Eaagads Limited 81% 80% 58% 61% 78% 62%
Williamson Tea Kenya Limited 91% 79% 81% 82% 85% 93%
D. Firm Size
Total Assets
Company 2010 2011 2012 2013 2014 2015
129
Kakuzi Limited 1451 515 1571 1721 2181 1275
Eaagads Limited 2001 3021 3408 3029 2005 2448
Turnover
Company 2010 2011 2012 2013 2014 2015
Limuru Tea Company 295 312 221 222 185 260
Limited
130
Sasini Tea And Coffee 8125 8800 6600 7500 6540 6554
Limited
Kapchorua Tea Company 1130 1246 1406 1353 1192 1073
Limited
Rea Vipingo Plantations 440 200 150 165 314 155
Limited
Kakuzi Limited 2376 2113 1540 1384 1354 1655
Eaagads Limited 2460 2146 1402 1311 1199 1551
Williamson Tea Kenya 8065 8125 6500 6150 5554 7541
Limited
E. Profitability
Earnings per Share
Company 2010 2011 2012 2013 2014 2015
Limuru Tea Company Limited 0 0 0.45 10.98 -0.28 -1.27
Sasini Tea And Coffee Limited 0 0 0.25 0.75 0.25 0.75
Kapchorua Tea Company Limited 35.6 47.8 19.93 45.94 32.21 5.82
131
Rea Vipingo Plantations Limited 0 0 0 0 0 0.25
Kakuzi Limited 0 0 19.35 8.42 2.69 8.17
Eaagads Limited 0 8.7 17 7.11 2.01 7.23
Williamson Tea Kenya Limited 0 97.4 93.7 94.3 81.3 -23.77
Profit before tax
Company 2010 2011 2012 2013 2014 2015
Limuru Tea Company Limited 1.15 0.14 0.5 13 20.78 51.26
Sasini Tea And Coffee Limited 35 88 -124 91 45 0.55
Kapchorua Tea Company Limited 139 187 77 179 125 -22
Kakuzi Limited 558 920 116 239 232 160
Eaagads Limited 522 855 265 301 816 -416
132
Williamson Tea Kenya Limited 1037 1293 1163 1155 1041 -298
133
Appendix IX: Turnitin Originality Report
Appendix VIII: Map of Study Area
134
APPENDIX X: Study Area
135

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EFFECT OF FINANCIAL LEVERAGE ON PROFITABILITY OF LISTED

AGRICULTURAL FIRMS AT THE NAIROBI SECURITIES EXCHANGE.

FINANCE AND BANKING (KENYA METHODIST UNIVERSITY)

A Research project Submitted to the school of postgraduate studies in Partial

Fulfillment of the Requirement for the Conferment of the Degree of Master of

Business Administration (Finance Option) of the School of Business and Economics,

Department of Business Administration, Kisii University.

Signed ……………………………… Date ………………………………

Dr. Caroline Ayuma

School of Business and Economics

School of social sciences

Reg. No____________________________ Date_________________________

DECLARATION BY SUPERVISOR (S)

Affiliation ________________________ Date_________________________

Affiliation ___________________________ Date_________________________

Affiliation ____________________________ Date__________________

REPEAT NAME(S) OF SUPERVISORS AS MAY BE NECESSARY

Name of Candidate: …………… ADM NO………………

I confirm that the word length of:

1) the thesis, including footnotes, is …………… 2) the bibliography is ………………

and, if applicable, 3) the appendices are …………………………………………

Signed: …………………………………… Date:……………………

Signed: ...................................... Email…………..… Tel……….. Date:……………

Signed: ………............................ Email…………….. Tel……….. Date:……………

stored in a retrieval system or transmitted in any form or by any means electronic,

mechanical, photocopying, recording or otherwise, without the prior written permission

of the author or Kisii University on that behalf.

© 2017, Chesang David

I am grateful to my supervisors Dr Caroline Ayuma and Dr Were Edmond for their

encouragement during the period of the study.

DECLARATION AND RECOMMENDATION...................................................................ii

DECLARATION OF NUMBER OF WORDS.....................................................................iv

ABBREVIATIONS AND ACRONYMS............................................................................xvi

1.1 Background to the Study..................................................................................................1

1.2 Statement of the Problem...............................................................................................10

1.3 Objectives of the Study..................................................................................................12

1.3.1 Main Objective............................................................................................................12

1.3.2 Specific Objectives......................................................................................................12

1.4 Research Hypotheses......................................................................................................13

1.5 Significance of the Study...............................................................................................13

1.6 Scope of the study..........................................................................................................14

1.7 Limitation of the Study...................................................................................................14

1.8 Assumptions of the Study...............................................................................................14

1.9 Operational Definition of Terms....................................................................................15

2.1.1 Pecking Order Theory..................................................................................................17

2.1.2 Agency theory..............................................................................................................20

2.1.3 Trade-off theory...........................................................................................................22

2.1.4 Net Income Theory......................................................................................................24

2.2 Empirical Studies on Financial Leverage and Firms’ Profitability................................25

2.2.1 Effects of Debt to Equity Ratio on firms Profitability.................................................31

2.2.2 The effect of Long term debts to capital employed on profitability............................33

2.2.3 Effects of Current Ratio on the firm Profitability........................................................36

2.2.4 Effects of Firm Size on the firm Profitability..............................................................38

2.3 Research Gap..................................................................................................................41

2.4 Conceptual Framework..................................................................................................42

3.1 Research Design.............................................................................................................44

3.2 Study Area......................................................................................................................44

3.3 Target Population............................................................................................................45

Reg. No____ Date_

Affiliation Date_

Affiliation ___ Date_

Affiliation __________ Date