EFFECT OF FINANCIAL LEVERAGE ON THE PROFITABILITY OF PETROLEUM COMPANIES IN KENYA
Abstract
This study explored the relationship between financial leverage and profitability among Kenyan petroleum companies, using financial data from selected firms over a defined period. The research employed statistical analysis to assess how different measures of financial leverage specifically debt ratio, debt-to-equity ratio, and long-term debt affect profitability. The theoretical framework guiding the study included the Modigliani and Miller hypothesis, trade-off theory, pecking order theory, and agency cost theory. The research design was descriptive, targeting a population of thirty-five oil marketers registered in Kenya. The study relied exclusively on secondary data, which was sourced from the financial statements of these companies covering the years 2010 to 2020. Data analysis was conducted using SPSS (Version 23), with both descriptive and inferential statistics applied. Inferential statistics helped identify relationships between variables, and Pearson correlation analysis assessed the strength of these relationships. The results indicated that the debt-to-total assets ratio had the most significant impact on Return on Assets (ROA), with a standardized beta coefficient of 0.944. The debt-to-equity ratio also positively influenced profitability, though to a lesser extent, with a beta coefficient of 0.79. Conversely, the long-term debt-to-assets ratio had a minimal and statistically insignificant effect on ROA. The study concluded that optimizing the total debt-to-total assets ratio is crucial for enhancing profitability. Recommendations include achieving a balance between debt and equity financing and adopting effective financial strategies. Future research should investigate additional macroeconomic factors and consider other segments within the petroleum sector for a more comprehensive analysis.
Keywords: Financial Leverage, Profitability, Debt, Equity
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