Influence of Debt Ratio on Financial Performance of Non-Listed Building and Construction Firms in Kenya

Debt financing constitutes a fundamental avenue through which business entities secure resources for their operational and strategic obligations, thus necessitating careful determination of appropriate borrowing levels. The principal challenge resides in establishing and implementing the optimal quantum of debt that can deliver superior financial outcomes. Kenya’s building and construction industry recorded performance metrics of 3.2/3.5 in third order during the 2014/2016 study period, representing a notable decline when juxtaposed against the 5.8 and 6.0 percentages achieved during 2005/2006. This suboptimal performance trajectory within the construction sector, according to extant literature, was attributable to the debt composition employed in financing operational activities among industry participants. This circumstance prompted the current investigation into the effect of debt ratio on the financial performance of non-listed building and construction enterprises operating in Kenya. The research endeavor sought to assess the influence of debt ratios on profitability metrics of these non-listed construction firms. The study employed Return on Assets (ROA) and Return on Equity (ROE) as proxies for financial performance evaluation. The investigation covered the period spanning 2014 to 2016. The theoretical framework incorporated Trade-off theory. A descriptive survey design was adopted as the research methodology. Secondary data were extracted from consolidated financial statement records maintained at the National Construction Authority and the Kenya Association of Manufacturers. The target population encompassed all 10 Tier 1 non-listed building and construction firms registered with the National Construction Authority during the three-year study window. The sample size corresponded to the entire target population, with secondary data serving as the primary information source. The outcomes derived from this analysis demonstrated that debt ratio exerts a discernible inverse influence on the financial standing of non-listed building and construction firms in Kenya. The evidence indicated that financial performance tends to deteriorate as the proportion of debt within the capital structure increases. This observation provides compelling justification for prioritizing equity financing over borrowed capital. Debt financing proved to be cost-intensive, attracting interest expenses and other associated costs that surpass the anticipated benefits of leveraging. The findings of this study will enable management and financial practitioners to evaluate corporate growth characteristics, business risk exposures, and financial performance metrics to project future enterprise value. The research recommends that business entities should strive to minimize financial leverage within their capital structures as a strategy for enhancing financial performance and maximizing shareholder wealth creation.

debt ratio, financial performance, non-listed building and construction firms, Kenya

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