CAPITAL STRUCTURE DECISIONS AND FINANCIAL PERFORMANCE OF SUGAR MANUFACTURING FIRMS IN KISUMU COUNTY, KENYA
Kennedy Otieno Ongombe - Masters in Business Administration (Finance), Kenyatta University, Kenya
Dr. John Mungai - Department of Accounting & Finance, School of Business, Kenyatta University, Kenya
ABSTRACT
The sugar factories in Kisumu County are performing badly and this is as a result of the fact that most of these sugar manufacturing factories are riddled with a heavy debt burden and continuous poor performance (KSB 2013). This poor state has resulted to loss of employment opportunities and delay in payment to cane suppliers thus has garnered a lot of concern from the Government, the sugar cane growers and the companies’ employees. This predicament led to the placement of Muhoroni Sugar Company under receivership in the year 2001. Poor state of the sugar firms has persisted despite the fact that the sugar manufacturing companies in Kisumu County have well branded commodities, sufficient trained personnel and a huge domestic demand that they are unable to fully satisfy. The factors affecting the operations of sugar firms have been studied and analysed from diverse dimensions and hardly on the influence of capital structure decisions on financing decisions. Capital structure decisions are vital since the financial performance of an entity is directly affected by such decisions. Capital structure has attracted a strong debate and scholarly attention in the corporate finance literature for a long period of time. However, in the context of sugar industries, the topic has received inadequate research attention. This study therefore, investigated the influence of the choice of capital structure decision on financial performance of sugar milling firms in Kisumu County. The specific objectives of the study were to investigate the effect of financial debt-ratio, debt-equity ratio and weighted average cost of capital on the financial performance of sugar milling firms. The financial performance of the three sugar milling factories in Kisumu County were analysed from the perspective of the indicator of return on equity. The study was conducted based on the Trade-off theory, the Pecking order theory and the Agency cost theory. The units of analysis were individual firm to determine the effect of capital structure on financial performance. The population of the study consisted of all the three sugar manufacturing firms in Kisumu County. The study involved financial analysis and thus used descriptive survey design. The study used secondary data which was obtained from published financial statements from the period 2011-2015 and collected using the secondary data collection sheets. Data was analysed quantitatively using statistical package for social science (SPSS) version 21. Additionally, correlation analysis, simple and a multiple regression analysis was done to determine the extent of influence of each of the autonomous variable. To check whether there was colinearity, multicollinearity was carried out using tolerance and variance inflation factor and the normality was indicated by a PP plot of regression standardized residual. Data was presented using table and written discussions. The findings indicated that debt-ratio had a negative insignificant statistical relationship while debt-equity ratio had a significant negative effect on monetary performance of sugar manufacturing firms in Kisumu County as measured by ROE. It also revealed that WACC had positive significant effects with financial performance of the sugar firms. The study recommended that Sugar firms that are in position to finance their operations using equity should reduce debt financing so as to lessen the risks connected to borrowing hence improve on their financial performance. It also recommended that firms’ management should therefore strike a balance between their choice of capital structure and the effects on its performance as it affect the shareholders risks, returns and cost of capital.
