Effect of Capital Structure on Financial Performance of Firms in the Commercial and Service Sector in the Nairobi Securities Exchange for the Period 2012-2016

EFFECT OF CAPITAL STRUCTURE ON FINANCIAL PERFORMANCE OF FIRMS IN THE COMMERCIAL AND SERVICE SECTOR IN THE NAIROBI SECURITIES EXCHANGE FOR THE PERIOD 2012-2016

KIZITO O. OMUKAGA

UNITED STATES INTERNATIONAL UNIVERSITY- AFRICA

FALL 2017

EFFECT OF CAPITAL STRUCTURE ON FINANCIAL PERFORMANCE OF FIRMS IN THE COMMERCIAL AND SERVICE SECTOR IN THE NAIROBI SECURITIES EXCHANGE FOR THE PERIOD 2012-2016

KIZITO O. OMUKAGA

A Research Project Report Submitted to the Chandaria School of Business in Partial Fulfillment of the Requirement for the Degree of Masters in Business Administration (MBA)

UNITED STATES INTERNATIONAL UNIVERSITY- AFRICA

FALL 2017

STUDENT’S DECLARATION

I, the undersigned, declare that this is my original work and has not been submitted to any other college, institution or university other than the United States International University in Nairobi for academic credit.

Signed: Date:

Kizito O. Omukaga (ID No: 619138)

This project has been presented for examination with my approval as the appointed supervisor.

Signed: Date:

Mr. Kepha Oyaro

Signed: Date:

Dean, Chandaria School of Business

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ABSTRACT The purpose of this study was to determine the influence of capital structure on financial performance of commercial and service firms in the Nairobi Securities Exchange in Kenya. The study sought to address the following concerns: What are the components of capital structure employed by firms? Is there a relationship between capital structure and firms’ profitability? Last but not least, what is the effect of capital structure on firms’ share performance.

The researcher employed descriptive research design to describe the independent variable. Explanatory research was used to describe the impact of the independent variable on the dependent variables. The data that was scrutinized for the purpose of the study was only secondary data obtained from the published accounts of the commercial and service firms listed on the Nairobi Securities Exchange. The population of the study included all the ten active commercial and service firms quoted on the Nairobi Securities Exchange as at 31st December, 2016. Thus, the study constituted a census survey for a period of 5 years (from 2012-2016).

The research model used in the study comprised of the independent variable Debt to Equity ratio and the following ratios as dependent variables: Return on Equity, Profit Before Tax, Profit After Tax and Earnings Per Share. The data collected for this research was analyzed using Statistical Package for Social Sciences (SPSS) in order to generate descriptive statistics and inferential statistics. Results were presented in form of tables and figures. Relevant recommendations and conclusions were given. Regression analysis was used in describing the degree of relationship between the independent and dependent variables used in the study.

The study examined the components of capital structure employed by firms. The study established that debt and equity are the main elements of financial leverage in firms. Other elements include; share capital, share premium, revenue reserves, capital reserves and retained earnings. Concerning the effect of capital structure on firms’ profitability, the study found that Debt to Equity ratio has a high correlation with Return on Equity and both Pre and After Tax Profits. As regards the effect of financial leverage on firms’ share performance, the study established that the relationship between Debt Equity ratio and Earnings Per Share was low.

In conclusion, the study found out that capital structure is made up of two major elements namely; debt and equity. However, an optimal mix of the two components of financial leverage that would be applicable to all firms remains a mirage. It is therefore recommended that further studies should be carried out to establish an optimal range of capital structure that will be applicable to different firms in different sectors. This will guarantee profitability and future growth for the firm.

Regarding the effect of financial leverage on firms’ profitability during the period 2012- 2016, the study used one independent variable, Debt to Equity ratio and four dependent variables namely; Return on Equity, Profit Before Tax, Profit After Tax and Earnings Per Share. If someone wants to carry out another research on the same topic, then the researcher should consider using more than one independent variable and other measures of profitability in the study. Besides, the period of study must be more than 5 years for better results.

Finally, as regards the relationship between capital structure and firm’s Earnings Per Share, the study established that there is low correlation between the two variables. The only measure of share performance used in the study was the Earnings Per Share. It is therefore advisable that if someone wants to conduct another study on this topic, the researcher must consider other measures of share performance such as the price earnings ratio and market price per share.

ACKNOWLEDGEMENT

I am grateful to the almighty God for the good health that was necessary to complete this project.

I would also like to express my sincere gratitude to my supervisor, Mr. Kepha Oyaro for the continuous support throughout my research. His guidance based on his immense knowledge and expertise in Finance helped me a great deal in the research and writing of this thesis.

Last but not least, I would like to thank my family: my mother, siblings, daughter Lisa and her mother for the material and spiritual support throughout my MBA program.

DEDICATION

This thesis is dedicated to my family for their love and endless support to ensure that I acquire this quality education.

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TABLE OF CONTENTS

STUDENT’S DECLARATION ...... ii

ABSTRACT ...... iv

DEDICATION ...... vii

LIST OF TABLES ...... xi

LIST OF FIGURES ...... xiii

CHAPTER ONE ...... 1

1.0 INTRODUCTION ...... 1

1.1 Background of the Problem ...... 1 1.2 Statement of the Problem ...... 5 1.3 General Objective ...... 6 1.4 Specific Objectives ...... 6 1.5 Significance of the Study ...... 7 1.6 Scope of the Study ...... 7 1.7 Definition of Terms ...... 8

1.8 Chapter Summary ...... 9

CHAPTER TWO ...... 10

2.0 LITERATURE REVIEW ...... 10

2.1 Introduction ...... 10 2.2 The Components of Capital Structure employed by firms ...... 10 2.3 The Effect of Capital Structure on a Firm’s Profitability ...... 15 2.4 The impact of capital structure on firms’ share performance...... 23 2.5 Chapter Summary ...... 26

CHAPTER THREE ...... 27

3.0 RESEARCH METHODOLOGY ...... 27

3.1 Introduction ...... 27

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3.2 Research Design...... 27 3.3 Population and Sampling Design ...... 28 3.4 Data Collection Methods ...... 29 3.5 Research Procedures ...... 29 3.6 Data Analysis Methods ...... 29 3.7 Chapter Summary ...... 30

CHAPTER FOUR ...... 31

4.0 RESULTS AND FINDINGS ...... 31

4.1 Introduction ...... 31 4.2 General Information ...... 31 4.3 Components of Capital Structure ...... 35 4.4 Relationship between Capital Structure and Firms’ Profitability ...... 39 4.5 Effect of capital structure on the firms’ share performance ...... 65 4.6 Regression Analysis ...... 80 4.7 Chapter Summary ...... 85

CHAPTER FIVE ...... 86

5.0 DISCUSSION, CONCLUSIONS AND RECOMMENDATIONS ...... 86 5.1 Introduction ...... 86 5.2 Summary of the Study ...... 86 5.3 Discussion ...... 87 5.4 Conclusion ...... 91 5.5 Recommendations ...... 93

REFERENCES ...... 95

APPENDICES ...... 108

Appendix 1: Cover Letter ...... 108 Appendix 2: Study Questionnaire ...... 109 Appendix 3 (a): Express Kenya Ltd Data Collection Instrument in Kshs...... 113 Appendix 3 (b): Kenya Airways Ltd Data Collection Instrument in Kshs...... 114 Appendix 3 (c): Nation Media Group Data Collection Instrument in Kshs...... 115 Appendix 3 (d): The Standard Group Data Collection Instrument in Kshs...... 116

Appendix 3 (e): TPS Eastern Africa (Serena) Ltd Data Collection Instrument in Kshs. 117 Appendix 3 (f): Scangroup Ltd Data Collection Instrument in Kshs...... 118 Appendix 3 (g): Uchumi Supermarket Ltd Data Collection Instrument in Kshs...... 119 Appendix 3 (h): Longhorn Publishers Ltd Data Collection Instrument in Kshs...... 120 Appendix 3 (i): Deacons (East Africa) Ltd Data Collection Instrument in Kshs...... 121 Appendix 3 (j): Nairobi Business Ventures Ltd Data Collection Instrument in Kshs. .... 122 Appendix 4: Earnings Per Share Analysis ...... 123 Appendix 5: Sample Frame ...... 124

LIST OF TABLES

Table 4.1: Commercial and Service Firms and their Nature of Business ...... 32 Table 4.2: Average Turnover ...... 33 Table 4.3: Average After Tax Profits ...... 34 Table 4.4: Average Total Assets ...... 34 Table 4.5: Average Net worth ...... 35 Table 4.6: Express Kenya Ltd Return on Equity Ratio ...... 39 Table 4.7: Express Kenya Ltd Profit Before Tax and Profit After Tax Ratios ...... 40 Table 4.8: Express Kenya Debt to Equity Ratio ...... 40 Table 4.9: Kenya Airways Ltd Return on Equity Ratio ...... 42 Table 4.10: Kenya Airways Ltd Profit Before Tax and Profit After Tax Ratios ...... 43 Table 4.11: Nation Media Group Return on Equity Ratio ...... 44 Table 4.12: Nation Media Group Pre- Tax and After – Tax Profit Ratios ...... 45 Table 4.13: Standard Group Return on Equity Ratio ...... 47 Table 4.14: Standard Group Pre – Tax and After – Tax Profit Ratio ...... 47 Table 4.15: TPS Eastern Africa (Serena) Ltd Return on Equity Ratios ...... 49 Table 4.16: TPS Eastern Africa (Serena) Ltd Pre – Tax and After tax profit ratios ...... 50 Table 4.17: Scangroup Return on Equity Ratios ...... 51 Table 4.18: Scangroup Ltd Pre – Tax and After tax profit ratios ...... 52 Table 4.19: Uchumi Supermarket Return on Equity Ratios ...... 53 Table 4.20: Uchumi Supermarket Pre – Tax and After tax profit ratios...... 54 Table 4.21: Longhorn Publishers Return on Equity Ratios ...... 55 Table 4.22: Longhorn Publishers Pre – Tax and After tax profit ratios ...... 56 Table 4.23: Deacons (East Africa Return on Equity Ratios ...... 57 Table 4.24: Deacons (East Africa) Pre – Tax and After tax profit ratios ...... 58 Table 4.25: Nairobi Business Ventures Return on Equity Ratios ...... 59 Table 4.26: Nairobi Business Ventures Pre – Tax and After tax profit ratios ...... 60 Table 4.27: Weighted Average Debt Equity Ratios & Return on Equity Ratios Analysis 62 Table 4.28: Weighted Average Debt Equity Ratios & Pre Tax Profit Ratio Analysis...... 63

Table 4.29: Weighted Average Debt Equity Ratios & Profit After Tax Ratio Analysis. .. 64 Table 4.30: Express (K) Ltd Debt Equity Ratio ...... 65 Table 4.31: Express (K) Ltd Earnings Per Share ...... 65 Table 4.32: Kenya Airways Debt Equity Ratio ...... 66 Table 4.33: Kenya Airways Earnings Per Share ...... 67 Table 4.34: Nation Media Group Debt Equity Ratio ...... 68 Table 4.35: Nation Media Group Earnings Per Share ...... 68 Table 4.36: The Standard Group Debt Equity Ratio ...... 69 Table 4.37: The Standard Group Earnings Per Share ...... 70 Table 4.38: TPS Eastern Africa (Serena) Debt Equity Ratio...... 71 Table 4.39: TPS Eastern Africa (Serena) Earnings Per Share ...... 71 Table 4.40: Scangroup Debt Equity Ratio ...... 72 Table 4.41: Scangroup Earnings Per Share ...... 73 Table 4.42: Uchumi Supermarket Debt Equity Ratio ...... 74 Table 4.43: Uchumi Supermarket Earnings Per Share ...... 75 Table 4.44: Longhorn Publishers Debt Equity Ratio ...... 76 Table 4.45: Longhorn Publishers Earnings Per Share ...... 76 Table 4.46: Deacons (East Africa) Debt Equity Ratio ...... 77 Table 4.47: Deacons (East Africa) Earnings Per Share ...... 78 Table 4.48: Weighted Average Debt Equity Ratios & Earnings Per Share Analysis ...... 79 Table 4.49: Debt Equity and Return on Equity Model Summary...... 80 Table 4.50: Debt to Equity Ratio and Return on Equity Anova ...... 81 Table 4.51: Debt to Equity Ratio and Profit Before Tax Model Summary ...... 81 Table 4.52: Debt to Equity Ratio and Profit Before Tax Anova ...... 82 Table 4.53: Debt to Equity Ratio and Profit After Tax Model Summary ...... 83 Table 4.54: Debt to Equity Ratio and Profit After Tax Anova ...... 83 Table 4.55: Debt to Equity Ratio and Earnings Per Share Model Summary ...... 84 Table 4.56: Debt to Equity Ratio and Earnings Per Share Anova ...... 84

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LIST OF FIGURES

Figure 4.1: Average Debt Levels ...... 36

Figure 4.2: Average Equity Levels ...... 36

Figure 4.3: Average Share Capital in Kshs...... 377

Figure 4.4: Average Reserves in Kshs...... 388

Figure 4.5: Average Retained Earnings in Kshs ...... 39

Figure 4.6: Express Kenya Ltd Debt to Equity and Return on Equity Ratios Trend Analysis ...... 411

Figure 4.7: Express Kenya Ltd Debt to Equity Ratio and Profit (Pre Tax & After Tax) Ratios Trend analysis ...... 422

Figure 4.8: Kenya Airways Debt Equity and Return on Equity Ratios Trend Analysis . 433

Figure 4.9: Kenya Airways Debt to Equity Ratio and Pre & After Tax Profits Analysis444

Figure 4.10: Nation Media Group Debt to Equity and Return on Equity Ratios Trend analysis ...... 466

Figure 4.11: Nation Media Group Debt Equity and Pre & After Tax Ratios Trend analysis ...... 466

Figure 4.12: Standard Group Debt to Equity and Return on Equity Ratios Trend Analysis ...... 48

Figure 4.13: Standard Group Debt Equity and Pre & After Tax Profits Ratio analysis .... 48

Figure 4.14: TPS Eastern Africa (Serena) Ltd Debt Equity and Return on Equity Ratios Trend analysis ...... 50

Figure 4.15: TPS Eastern Africa (Serena) Ltd Debt Equity and Pre &After Tax Profits Ratio Trend Analysis ...... 51

Figure 4.16: Scangroup Ltd Debt Equity and Return on Equity Ratios Trend analysis .... 52

Figure 4.17: Scangroup Ltd Debt Equity andPre &After Tax Profit Ratios Trend Analysis ...... 53

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Figure 4.18: Uchumi Supermarket Debt Equity and Return on Equity Ratios Trend analysis ...... 54

Figure 4.19: Uchumi Supermarket Debt Equity and Pre &After Tax Ratios Trend Analysis ...... 555

Figure 4.20: Longhorn Publishers Debt Equity and Return on Equity Ratios Trend analysis ...... 56

Figure 4.21: Longhorn Publishers Debt Equity and Pre &After Tax Profit Ratios Trend Analysis...... 57

Figure 4.22: Deacons (East Africa) Debt Equity and Return on Equity Ratios Trend analysis ...... 58

Figure 4.23: Deacons (East Africa) Debt Equity and Pre & After Tax Profit Ratios Trend Analysis...... 59

Figure 4.24: Nairobi Business Ventures Debt Equity and Return on Equity Ratios Trend analysis ...... 600

Figure 4.25: Nairobi Business Ventures Debt Equity and Pre &After Tax Profit Ratios Trend Analysis ...... 611

Figure 4.26: Express (K) Ltd Debt Equity and EPS Trend Analysis...... 66

Figure 4.27: Kenya Airways Ltd Debt Equity and EPS Trend Analysis ...... 67

Figure 4.28: Nation Media Group Debt Equity and EPS Trend Analysis ...... 69

Figure 4.29: The Standard Group Debt Equity and EPS Trend Analysis ...... 700

Figure 4.30: TPS Eastern Africa (Serena) Debt Equity and EPS Trend Analysis ...... 722

Figure 4.31: Scangroup Debt Equity and EPS Trend Analysis ...... 74

Figure 4.32: Uchumi Supermarket Debt Equity and EPS Trend Analysis ...... 75

Figure 4.33: Longhorn Publishers Debt Equity and EPS Trend Analysis ...... 77

Figure 4.34: Deacons (East Africa) Debt Equity and EPS Trend Analysis ...... 78

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CHAPTER ONE

1.0 INTRODUCTION

1.1 Background of the Problem

In an efficient economy, effective leadership is needed to ensure that scarce resources such as land, labour and capital are efficiently allocated and utilized. In a market economy, economic decisions and the pricing of goods and services are guided by the total interactions of an economy’s citizenry and businesses. There is very little government intervention. Of importance between these two schools of thought are the vital capital investment decisions at the two levels applicable to individual investing firms, and for the host nation’s economy as a whole.

At the company level, capital investment decisions have an effect on firms’ survival, profitability and growth. At the national level, proper planning and efficient allocation of resources in terms of capital investments play a crucial role in improving the general economy of a country which has an impact on firms’ future survival.

The background to the theory of capital structure can be traced to a paper presented by Modigliani and Miller (MM) in 1958 on the same. Modigliani and Miller revealed the circumstances under which capital structure is relevant or irrelevant to the financial performance of a firm quoted in the securities exchange. Bargeron, Denis and Lehn (2015) contend that issues such as cost, numerous taxes and interest rates are responsible for the variation in financial leverage across firms.

The correlation between capital mix and financial performance in firms has received considerable attention in finance literature in recent years. Authors have tried to answer questions such as; between debt holders and equity holders, who wields more control over the firm’s performance (Rottich, 2014)? Prior studies also indicate that a firm’s capital structure affects its corporate governance; a key issue affecting most state owned enterprises both in the developed world and developing economies (Okiro, Aduda and Omoro, 2015).

Capital structure is a mix of debt and equity including reserves and surpluses that makes up the finances of a company (Siddik, Sun, Kabiraj, Shanmugan and Yanjuan, 2016). From the strategic management point of view, capital structure analysis has always been an

1 important issue since it attempts to meet the expectations of the various interested parties in a firm (Sultan and Adam, 2015).

The study on capital structure tries to clarify the mix of stocks and financing sources used by business enterprises to finance investment portfolios (Jibran, Wajid, Waheed and Massod, 2012). Adeyemi and Oboh (2011) define capital structure as the way in which a commercial enterprise funds its operations either through debt or equity capital or a combination of both. Sultan and Adam (2015) also explains that there is no general theory on the debt to equity preference but acknowledged that there existed some theories that tried to explain the capital structure mix. Sultan and Adam further quoted the trade-off theory which says that business enterprises pursue liability or debt levels that seek to balance the tax benefits of extra debt against the costs of likely financial distress.

According to the pecking order theory, firms would rather borrow as opposed to issuing equity when internal sources of finance are not sufficient to finance capital expenditure. On the other hand, the free cash flow theory states that extreme high debt levels would increase the value of a business enterprise despite the risk of financial distress when a company’s operating cash flow to a greater extent exceed its viable investment opportunities (Obim, Anake and Awara, 2014).

Financing and investment are some of the major decision areas in any given business enterprise. When making a financing decision, the manager is interested with determining the best financing mix or capital structure for his firm. According to Coleman and Robb (2007), capital structure decision is the mix of debt and equity that a commercial enterprise uses to finance its business. Since 1958 when Modigliani and Miller came up with the MM model, studies on capital structure have been issues of great concern in financial economics. In frictionless markets where expectations are similar; Modigiliani and Miller argued that capital structure decision of a business enterprise is not relevant.

Abbadi (2012) noted that efficient firms stand higher chances of earning higher returns from a certain capital structure. These returns are useful in cushioning the firms against risky investment portfolios hence they are better placed to substitute the two sources of finance namely; equity and debt in their capital structure. Incidentally, capital structure trade-off theory whereby differences in efficiency allow business enterprises vary their optimal capital structures either downwards or upward.

Siro (2013) states that financial performance measures, for instance, profitability and liquidity, provide stakeholders with a valuable tool to evaluate both the historical and current financial position of a firm. Benson, Oluwafolakemi and Monisola (2013) contend that theoretically, the Modigliani and Miller model proved valid. However practically, bankruptcy costs which were directly proportional to a firm’s debt levels existed; which implies that there was a direct relationship between capital structure and the firm’s financial performance.

Capital structure decisions are critical decisions in any business enterprise because they have an impact on a firm’s value (Tongkong, 2012). Inept business decisions to finance a firm’s operations may be avenues for a firm to face liquidation, fall into financial distress or eventually be declared bankrupt. Firms with high leverage have the advantage to decide on an optimal capital structure to avoid unnecessary costs (Ting and Lean, 2012). However, it is important to note that overreliance on equity financing may lead to liquidity issues within the company and possibility of failure to take advantage of possible growth opportunities that may be there (Amara and Aziz, 2014).

Managers in business organizations have discretion over capital structure decisions. The capital structure adopted by a firm may not necessarily be meant for value maximization but to protect the interests of a manager as may the case be in organizations where managers dictate most corporate decisions in the companies they manage (Margaritis and Psillaki, 2010). Where shares are not closely held, equity owners are usually many and one shareholder may just control a very small percentage of a firm’s shares. Minority shareholders take less interest monitoring the activities of managers who are left to themselves to pursue their personal interests that may be totally different from the interests of equity owners. In general, when inflation rises the cost of debt increases. The increase of cost of funds negatively impacts firm’s performance.

Developed economies with numerous institutional similarities have been the major sources of knowledge on capital structure (Hasan, Ahsan, Rahaman et al., 2014). These economies have diverse institutional arrangements with regard to their tax and bankruptcy regimes, market for commercial control, and the roles played by commercial banks and security markets. Gill and Biger (2016) studied the leverage of 272 American service and manufacturing firms listed on the New York Stock Exchange between 2005 and 2007. The study revealed that there existed a positive relationship between a firm’s capital structure and profitability. The same results were revealed by (Nasimi, 2016).

Antwi, Fiifi, Atta et al., (2012) noted that business enterprises that record higher profits tend to prefer use of higher level of debts. Tailab (2014) noted that the correlation between capital structure and performance in terms of profitability in the American energy firms between 2005 and 2013 was negative. Similar findings applied to the studies on firms from 14 European countries (Mathur, 2015). Usman and Azeem (2014) in their study of sugar firms listed in the Karachi securities exchange between 2006 and 2011, established that there is a weak positive correlation between capital structure and financial leverage.

Pouraghajan (2012) conveyed a negative relationship between leverage and financial performance of firms on 12 industrial firms listed on the Tehran Stock Exchange. Salim and Yadav (2012), also found a negative relation between capital structure and performance on Malaysian firms for the research conducted on 237 listed firms during the period 1995- 2011. Al-Taani (2013) studied the relationship between capital structure and financial leverage on 45 manufacturing companies listed on the Amman Stock Exchange in Jordan covering five year period from 2005-2009. The research established a positive correlation between the two parameters.

Mwangi, Makau, and Kosimbei (2014) probed the impact of financial leverage choice on the financial performance of some 42 firms listed in the Nairobi Securities Exchange between 2006 and 2012. The study used secondary data extracted from NSE handbooks. The research concluded that financial leverage options, in general, exhibit significant negative link with firm performance. Isola and Akanni (2010), demonstrated that firms in developing countries used more of debt finance in financing their growth compared to firms in developed countries. Abor (2005) also found out that profitable firms’ in West Africa and in Ghana to be precise, relied more on debt as their main financing option because such financing is perceived to have low financial risk.

In the recent past, several studies have been conducted on the relationship between capital structure and financial performance of firms in Kenya. For instance, Simiyu, Namusonge, and Sakwa (2017), researched on the influence of financial leverage on financial performance of sugar manufacturing companies in Kenya; Kuria and Omboi (2015) researched on the extent to which the capital structure influences financial performance of investment firms and banking institutions listed on the Nairobi Securities Exchange for the period 2009-2013, Wamugo and Mutinda (2017) studied effects of capital structure on NSE listed firm’s cost of capital, profitability and firm value, Siro (2013) studied the effect of capital structure on financial performance of firms listed at the Nairobi securities exchange,

whereas Otieno (2015) researched on the relationship between capital structure , performance and replacement of CEO in firms listed on the Nairobi Securities Exchange. These findings are of importance to investors and policy makers as they serve as a guide for better investment decisions.

The Nairobi Securities Exchange (NSE) is one of the most active security markets in Africa. It was formed in 1954. By virtue of being a capital market institution, the NSE plays a significant role in Kenya’s economic development process. It mobilizes domestic savings thus facilitating the reallocation of dormant financial resources to the active sectors of the economy (Fredrick, 2015). The transfer of stocks between stockholders trading at the securities exchange improves liquidity in the market. This happens when long-term investments such treasury bonds are traded.

The market facilitates participation of locals as equity holders particularly in foreign firms which would like to do business in the country thus affording Kenyans a chance to have a stake in those business enterprises. Companies listed in the securities exchange market can use this market to raise funds for expansion and development. Besides being useful as an avenue of privatization of firms which may be facing various challenges, the NSE enhances the flow of international capital into an economy (Gakeri, 2012).

The NSE comprises of 64 listed companies with a daily trading volume of over USD 5 million and a total market capitalization of approximately USD15 billion. It comprises of three market segments viz.; the Main Investments Market (MIMS), the Alternative Investment Markets Segment (AIMS) and the Fixed Income. The MIMS is the main quotation market, the AIMS provide an alternative method of raising capital to small, medium sized and starter companies that are unable to meet the stringent listing requirements of the MIMS. The FISMS provides an independent market for fixed income securities such as treasury bonds, corporate bonds, preference shares and debenture stocks, as well as short term financial instruments such as treasury bills and commercial papers (Gatua, 2013).

1.2 Statement of the Problem

Several studies have been done on capital structure from a broader perspective. For instance, past researches carried out in Kenya have attempted to generalize the impact of capital structure on financial performance of firms in NSE. Such an approach may not necessarily be representative of all the various individual sectors in the Kenyan economy

5 because each sector is distinct in various aspects. Besides, experimental evidence in these studies regarding the relationship between capital structure and firms’ performance is conflicting and mixed (Simiyu, Namusonge and Sakwa, 2017; Kuria and Omboi, 2015; Otieno, 2015 and Siro, 2013).

The critical research gap associated with this study is failure by management in commercial and service firms to link performance to capital structure. This is due to the fact that various companies have different mix of debt and equity in their capital structures. Empirical studies have however established that there is no ideal capital structure that is applicable to all firms (Michalak, 2014).

Furthermore, very little literature discussing the relationship between capital structure and financial performance of commercial and service firms listed on the Nairobi Securities Exchange market is available. According to Jordan, Westerfield and Ross (2011), a firm’s riskiness is increased when the proportion of debt over equity is increased in its capital structure. Such a move may have a negative effect on a firm’s performance.

Thus, there is need for further research to establish the link between financial leverage and performance of commercial and service firms listed on the Nairobi Securities Exchange. Therefore, this research seeks to address this concern. To achieve this, the study has scrutinized elements of capital structure employed by firms, the effect of capital structure on firms’ profitability and the effect of capital structure on firms’ share performance.

1.3 General Objective

The purpose of the study is to assess the effect of capital structure or financial leverage on financial performance of commercial and service firms listed on the Nairobi Securities Exchange.

1.4 Specific Objectives

The following are specific objectives of this study:

1.4.1 To determine the components of capital structure employed by firms.

1.4.2 To evaluate the effect of capital structure on firms’ profitability.

1.4.3 To analyze the effect of capital structure on firms’ share performance.

1.5 Significance of the Study

The beneficiaries of this study are:

1.5.1 Financiers

To evaluate a firm’s creditworthiness for possible future financial assistance if need be. This study would also be of benefit for creditors to do comparisons between the individual enterprises within the sector under study.

1.5.2 Investors

Investors are interested in evaluating the efficacy with which management is utilizing a firm’s capital for the success of the business. Besides, this study will furnish investors with information relating to an appropriate capital mix for the firm.

1.5.3 Scholars and Researchers

Scholars and researchers will find this study useful if they wish to use the findings as a basis for current and further research on capital structure theories, focusing on developing countries. This research paper will be available in libraries and most likely on the internet for easy access by scholars and researchers.

1.5.4 Regulatory Authorities

Regulatory bodies for instance the Nairobi securities exchange and the Capital Market Authority will assess and monitor capital structure of commercial and service firms in Kenya. They will provide oversight role in regards to the firms’ creditworthiness as portrayed in the financial statements.

1.6 Scope of the Study

The focal point of this study is on commercial and service firms located in Nairobi and its environs. The firms that the study will cover are those quoted on the Nairobi Securities Exchange. Particular attention is given to all the ten companies under the commercial and services sector for the period 2012-2016.

The limitation of this study is that some respondents may not be willing to give out information regarding their firms. The researcher assured respondents that information sought will be treated with utmost confidentiality and for academic purposes only.

1.7 Definition of Terms

1.7.1 Capital Structure

Capital structure is a mix of debt and equity including reserves and surpluses that makes up the finances of a company (Siddik et al., 2016). From the strategic management point of view, capital structure analysis has always been an important issue since it attempts to meet the expectations of the various interested parties in a firm (Sultan and Adam, 2015).

1.7.2 Debt

Debt refers to both short-term and long-term borrowing aimed at financing a firm’s activities. Companies prefer debt financing because interest paid on debt is not taxable hence improving the value of a firm (Iavorskyi, 2013).

1.7.3 Equity

Equity capital represents the shareholders' interest on the firm’s assets after liabilities are deducted. In financial statements, equity can take the form of common stock (share capital), preferred stock, capital surplus, retained earnings and reserves (Stephen, 2012).

1.7.4 Financial Performance

According to a shareholder, a firm’s financial performance is a measure of how better a shareholder is at the end of the period in question compared to how the shareholder was at the beginning of the same period. The shareholder state can be determined using ratios derived from a firm’s financial statements or using a firm’s data as reflected in the stock market prices (Abbadi, 2012; Bhunia, Mukhuti, Roy, Harbour, Bengal and Delhi, 2011).

1.7.5 Financial Leverage

Financial Leverage is sometimes referred to as equity or debt ratios. These ratios measure equity value in an organization by evaluating a firm’s overall debt portfolio. These ratios compare debt or equity to a firm’s assets or outstanding shares with the sole objective of measuring the true value equity in an enterprise (Sultan and Adam, 2015).

1.7.6 Securities Exchange Market

Securities Exchange market mobilizes dormant domestic savings and reallocates the financial resources to active agents. To raise money through the securities market, the issuer issues a prospectus, which gives details about the prospective issue including the issue price per share and the total amount it aims to raise from the offer. The Securities

Exchange also boosts the inflow of international capital as well as a useful tool for privatization programmes (Hamilton and Brandt, 2014).

1.7.7 Return on Assets

The return on assets formula, sometimes abbreviated as ROA, is a company's net income divided by its average of total assets. The return on assets formula looks at the ability of a company to utilize its assets to gain a net profit (Heikal, Khaddafi and Ummah, 2014).

1.8 Chapter Summary

This chapter has introduced the research topic; effect of capital structure on financial performance of commercial and service firms listed on the Nairobi Securities Exchange for the period 2011-2016 by giving a detailed background of the study. The chapter also discussed the problem statement aimed at adding literature on the topic. In addition, the chapter highlighted the research’s general objective and specific objectives by specifically focusing on the elements of capital structure, effect of capital structure on a firm’s profitability and return on assets. The chapter ended by defining some concepts which are unique to the study for easy understanding by all the readers.

Chapter two will examine the literature review based on the research objectives in chapter one; followed by the research design and methodology as chapter three, while results and findings are presented in chapter four. Last but not least, chapter five will provide the summary, discussion, conclusion and further recommendations.

CHAPTER TWO

2.0 LITERATURE REVIEW

2.1 Introduction

This chapter presents literature review on previous studies on effect of capital structure on financial performance of firms. Section 2.2 looks at the components of capital structure employed by firms and the related theories. Section 2.3 is about effect of capital structure on firms’ profitability. Section 2.4 analyses the influence of capital structure on firms’ share performance. All the sections attempt to address the specific objectives and fulfill the general objective of the study. Last but not least, section 2.5 summarizes the whole chapter.

2.2 The Components of Capital Structure employed by firms

Financing is a crucial function of a firm. A finance manager must determine the best mix of debt and equity for his business enterprise (Coleman and Robb, 2007). The importance of settling on an optimal capital mix is that an enterprise will be able to satisfy the needs of its various stakeholders. Capital structure signifies various claims to an enterprise’s assets namely; equities and liabilities (Ubesie, 2016). There are numerous alternatives of debt to equity ratio, namely; one hundred percent equity: Zero percent debt, Zero percent equity: one hundred percent debt and W% equity: X% debt (David and Olorunfemi, 2010). From these three options, alternative one represents an unlevered firm. Alternative two represents a firm with no equity in its capital structure. This option is not realistic in the real world because no investor would invest in a firm where shareholders have no stake. It is the equity element in a firm’s capital structure that encourages debt providers to lend money to a firm in form of short-term or long-term debt. The study established that alternative three is the most realistic one because both debt and equity are represented in a firm’s capital structure in different proportions. By having the two sources of finance in a firm’s capital structure, the firm can exploit any available leverage advantage that may be there.

Experimental literature on capital structure begun with the proposition on its irrelevance (Modigliani and Miller, 1958). Subsequent studies have researched on the relevance of the choice of capital structure as a measure of firms’ financial performance. Researchers developed several theories to support their arguments.

The two notable dominant theories of capital structure are the trade-off theory and the pecking order theory (Chen, Jung, and Chen, 2011). The other two more theories are the agency and life stage theories. Taiwo (2012), in their research based on ten companies quoted on the Nigerian Stock Exchange between 2006 and 2010, established that the two theories, namely; trade-off and pecking order are crucial in discussing capital structure.

The trade-off between taxes (corporate and personal), bankruptcy costs and agency costs defines an optimal capital structure for a firm (Ali, 2014). The trade-off theory advocates that a firm should maintain a reasonable mix of debt to equity in its capital structure. This is due to the fact that there are tax savings associated with use of debt as source of financing thereby making it cheap for a firm in the long run. The drawback of using a lot of debt on the other hand is associated with the likely cost of financial distress. This theory propagates for trade-off between the tax advantage synonymous with use of debt and the possible risk due to financial distress.

The pecking order theory emphasizes that business enterprises rank internal sources of finance first then external sources of finance comprising of low-risk debt financing and share financing (Afrasiabishani, Ahmadinia and Hesami, 2012). Whenever firms source for finances externally, they do so in the following order; they will firstly use debt leverage, secondly issue preferred stock and finally, issue ordinary shares. This order is aimed at minimizing the possible costs attributable to external financing.

The trade-off and pecking order theories of capital structure have elicited several arguments. However empirical studies support both theories. Each one of the two theories can be used to explain some aspects of financing decisions (Serrasqueiro and Caetano, 2014).

Later researchers have tried to study the extent at which firms are trying to achieve optimal capital structure. The studies contend that a firm’s decision on the appropriate capital structure is dependent on a firm’s risk level and the associated external financing adjustment costs. This theory is referred to as dynamic trade-off theory (Dierker, Kang, Lee and Seo, 2015).

2.2.1 Debt Financing of the Firm

Debt is a mix of short term and long term borrowing of a firm. Short term borrowing is meant to cater for a firm’s short term obligations whereas long term borrowing is aimed at financing long term projects. Interest on long term borrowing is normally captured in the

11 loan agreement between the financier and the borrower. This agreement will stipulate among other things, the repayment schedule of the borrowed funds (Brealey, Myers and Marcus, 2001).

According to the pecking order theory, the option to consider debt financing is the last option after internal financing and equity options have been exhausted (Afrasiabishani, Ahmadinia and Hesami, 2012). Under the pecking order, Chen et al., (2011) contend that, optimal capital structure does not hold. This is due to the fact that the cumulative pecking order financing outcome overtime is what constitutes a debt ratio.

Vera and Nganso (2012) in their comparative research on 104 Canadian firms and 74 Colombian firms established that small Colombian firms did not follow the pecking order theory but large companies did. In Canada, all firms follow the pecking order. However, the relationship is much higher in smaller firms compared to large firms. This can be explained by the existence of information asymmetry between small firms in a developed country compared to a developing country. It further suggests that capital market in Colombia is not as developed as in Canada. Therefore, small and medium size firms in developing countries cannot access the capital markets whereas the reverse is true in the case of developed countries.

De Medeiros and Daher (2004), research on the Brazilian economy, representing the developing world supported the above mentioned view due to the difficulties associated with issuing of equity finance. Bharath, Pasquariello and Wu (2009), established that debt issue is mainly caused by asymmetrical information and adverse selection costs. However, these two elements played a vital role in developing countries for instance the US, over the past three decades compared to the developed countries.

Capital structure trade-off theory emphasizes that firms’ mix of debt and equity should balance the benefits and costs of debt. The theory defines an optimal capital structure of a firm as the blend of funding that equates marginal benefits and marginal costs of debt (Michalak, 2014; Lewellen and Lewellen 2006).

Firm size influences capital structure. Large firms listed in securities exchange markets are viewed as more stable by financiers hence capable of attracting more debt finance. These firms enjoy economies of scale in the market and are flexible through economic cycles (Wahome, Memba and Muturi, 2015).

Debt also offers business enterprises a tax shield, hence firms are motivated to borrow more to reap maximum tax benefits which translate to higher profits. But, abnormal debt levels may force a firm into bankruptcy (Jibran, Wajid, Waheed and Masood, (2012). Hence, managers should be keen to address risk factors, for instance, high debt-equity ratio which implies that a firm’s bankruptcy risk is high (Antwi, Fiifi, Mills and Zhao, 2012). When bankruptcy is avoided, the firm will realize better financial performance in the long run.

While servicing debt, cash that would otherwise be misused by management on personal spending spree is put in good use of repaying long term loans. Thus, possible shareholder- manager conflict is mitigated. Debt financing in this case is an advantage to the firm.

Just like living things, organizations undergo various stages of growth namely; introduction, growth, maturity and decline. At each stage, organizations exhibit unique characteristics. It is asserted that debt utilization by firms is positively correlated with the age of the firm. However, not many studies have been conducted to have this theory tested empirically (Tailab, 2014).

A typical firm has low or high growth potential. As a result, such a firm will require adequate financing preferably debt financing because it is cheaper compared to equity financing (Dube, 2013).

2.2.2 Equity Financing of the Firm

According to Stephen (2012), equity capital represents the shareholders' interest on the firm’s assets after liabilities are deducted. In financial statements, equity can take the form of common stock (share capital), preferred stock, capital surplus, retained earnings and reserves.

When a firm is starting up, more equity than debt is needed but as it grows, its ability to borrow debt increases Different firms have different patterns of growth. There are those with low growth opportunities, some with high growth opportunities whereas others have no growth potential at all (Vanacker and Manigart, 2007).

Tailab (2014) established that profitable business enterprises have a high equity and lower debt in their capital structures. Alternatively, firms that have experienced increase in share price over time can attract more equity than debt financing. Besides, they may consider repurchasing debt.

According to the pecking order theory (Julius, 2012), most firms prefer to be financed through internal sources represented by equity. Debt which is an external source of financing ranks second to equity in cases where equity is not sufficient. Retained earnings are part of equity.

According to Seifert and Gonenc (2008) in their research on the pecking order theory application in firms in the developed countries of the USA, United Kingdom and Germany between 1980 and 2004, found little support for the theory. This was due to information asymmetry between stock dealers and investors. The dealers knew more about the market than the investors hence took advantage and benefited at the expense of the investors through insider trading. In the flipside, this study found that between 1980s and 1990s, financing of firms in Japan followed the pecking order behavior.

Lemmon and Zender (2010) in a study on capital structure tests and debt capacity, agency and bankruptcy costs advocates for use of more of equity than debt thereby contradicting the trade-off theory that advocates use of more debt as a source of finance after evaluating the cost benefit analysis of debt.

The study of agency theory as advanced by Atiyet (2012), contends that an organization’s management have an impact on shareholders equity in the long term. Thus, management may be tempted to pursue personal interests at the expense maximizing shareholders’ wealth (Jibran, 2012). The other conflict noted in this study is the conflict between ordinary shareholders and debt holders of a firm. Whenever these two parties enter into binding contract, such contract should have a clause that allows conversion of debt into equity. If a firm makes profits and earns a required rate of return that is higher than the cost of debt, then ordinary shareholders benefit. On the other hand, if the financial performance or the required rate of return is lower than its cost of debt, then the loss is borne by the debtholders.

Another factor that dictates the mix of debt and equity in a firm is its growth. Equity financing is a preferred source of finance by firms with expected growth as opposed to debt finance (Draniceanu and Ciobanu, 2014).

2.2.3 Other elements of capital structure

There are other elements of capital structure namely; share capital, share premium, revenues reserves, capital reserves and retained earnings (Cho, 2014).

2.2.3.1 Share Capital

Share capital refers to funds raised by a firm through issuance of shares in exchange for cash or other consideration. Share capital consists of ordinary shares and preferred stock (Uremadu and Efobi, 2012).

2.2.3.2 Share Premium

According to Servaes and Tufano (2006), share premium is the amount over and above a security’s par value. In other words, it is the amount of money paid by a shareholder that is usually greater than the cost of the share in question.

2.2.3.3 Revenue Reserves

This is that portion of an organization’s profits that is retained by a firm for purposes of future investment and growth. They are not paid to shareholders in form of dividends. Revenue reserves are meant to strengthen a firm’s financial position, replace depreciated assets, settle short term liabilities and conducting Research and Development for an enterprise (Uremadu and Efobi, 2012).

2.2.3.4 Capital Reserves

These are reserves set aside by an organization to cater for future long term capital investments. They are permanently invested and never paid as dividends. Donations, subsidies or part of the retained earnings set aside for future long term developments are some of the main sources of funds to this reserve. As the name suggests, it is a reserve fund to finance fully or partially possible future capital projects (Cho, 2014).

2.2.3.5 Retained Earnings

Retained earnings refer to a proportion of net income that is not paid out as dividends but retained by a firm to be re-invested either for the purchase of capital assets or pay obligations such as debt. These earnings are set aside for investment in viable areas with growth potential for instance, purchase of new machinery and research and development. They are accumulated earnings, thus usually reduced by losses (Bhat and Zaelit, 2014).

2.3 The Effect of Capital Structure on a Firm’s Profitability

Capital structure decisions are crucial because such decisions directly affect a firm’s profitability. The successful selection of mix of debt and equity is one of the crucial elements of business enterprises’ financial strategy (Kajananthan and Nimalthasan, 2013).

Profitability should be ploughed back into the business for a firm’s survival (Niresh, 2012). However, too much attention should not be paid to profitability due to the fact that it may dilute the organization’s liquidity position. Firms are better informed that other indicators contribute to their financial performance and not lay much emphasis on capital structure alone (Xu and Banchuenvijit, 2012). These other factors include completion from competitors and business strategies used by parties in the market.

Modigliani and Miller (1958) in their capital structure theory commonly referred to as the MM theory, promulgated that there is no ideal capital structure. This is due to the fact that, different assumptions for instance perfect market and lack of taxes hold for different structures. The MM theory formed the basis of all current researches on capital structure. MM-I irrelevance theory stipulates that in the absence of taxes, bankruptcy costs and assuming that the market is efficient and information is asymmetric, the source of finance whether debt or equity is irrelevant as far as the worth of a firm is concerned. In other words, firm value is totally dependent on a firm’s real assets and not the firm’s capital structure. The same position was embraced by Kim (2012) and Nagaraja and Vinay (2016). MM-II proposition (1963) on the other hand concluded that capital structure is relevant to a firm’s value and concluded that a firm’s capital structure is optimum at 100% debt due to tax shield and interest.

Capital structure ensures that a business enterprise adopts procedures and mechanisms that ensure a firm is managed and directed in such a way that guarantees accountability on the part of management that is aimed at improving organizational performance and maximization of shareholders’ wealth (Kajananthan and Nimalthasan 2013). Studies on capital structure and firm performance have attracted public attention over the years because they are instruments of social and economic development. Besides, an optimal capital mix and better performance in a firm impacts positively on the administration of a firm (Memon, Bhutto and Abbas, 2012).

Jensen and Meckling (1976) however, maintained that conflict between lenders and shareholders will always work in favour of shareholders. Because if the firm’s capital structure is composed of more debt than equity, shareholders can afford to undertake risky projects. If a firm is reporting profits and is financially sound, it is better placed to settle its financial obligations including servicing debts. On the contrary, if the performance is poor, financiers will incur higher losses attributed to un-serviced loans.

A firm’s future profitability is dictated by the mix of debt and equity in its capital structure. The debt element of the capital structure mix is composed of both short term debt and long term debt. Debt increases a firm’s risk of making future profits thus raising a firm’s expectations of higher future returns (Sembel, 2014).

According to Modigliani and Miller (1963), firms are motivated to use debt finance than other sources due to tax shield advantage on interest expense. Firms with low leverage may report low returns thereby cushioning themselves from eroded profit returns that would be used to service interest associated with debt. Capital structure size impacts a firm’s profitability. Small firms with lower debt ratios in their capital structure may not be able to raise enough funds to be invested in higher return projects due to higher risks associated with such firms (Alghusin, 2015).

Grossman and Hart (2011) argue that conflict between the principal and agent can be resolved by devising a trade-off between debt and equity and not necessarily increasing agency costs. According to Amouzesh (2011), efficiency in firms is improved by increasing debt to equity ratio. This ratio maximizes shareholders’ wealth that can be paid to shareholders in form of dividends as opposed to investing in risky projects. High debt to equity ratio motivates firm managers to concentrate on those business ventures that improve firm financial performance.

But caution must be observed. Too much debt in a firm’s capital structure may increase the cost of capital which may cause firm face liquidity problems and eventually rendering the firm bankrupt. Enterprises should strive to make higher returns to remain afloat and be able to attract investors (Boodhoo, 2009).

Salmanzadeh, Jafari, Anjomani and Marefat (2014) in a study on free cash flows, argue that when managers are exposed to too much free cash flows, they would rather invest in projects with negative Net Present Values rather than pay shareholders dividends from reported profits. Managers may prefer to increase the size of a firm so that they can justify earning higher salaries. The law on the other hand prefers servicing of debt interest and repayment of the principal amount of debt than paying dividends to shareholders to reduce the level of free cash flows available to management.

Study on the correlation between capital structure and financial performance has received considerable attention in the field of finance. Various scholars have attempted to explain the relationship between capital structure and corporate finance which has an impact of a

17 firm’s financial performance (Pratheepkanth and Lanka, 2011). The study is important to various stakeholders in the business arena in understanding the role played by corporate governance in a firms’ financial performance.

Studies such as; Al-Taani (2013), Shubita and Jordan (2012) and Coleman and Robb (2007) exhibited weak or no correlation whatsoever between capital structure and a firm’s financial leverage both in the developed and developing countries in Europe and Asia respectively. On the other hand, studies namely; Ferati and Ejupi (2015) and Antwi et al., (2012) exhibited a positive relationship between capital structure and firms’ performance.

Fairlie and Robb (2010) research on American firms established that linking firm’s management with shareholding or ownership improves a firm’s profitability tremendously. An efficient management is able to effectively minimize on a firm’s cost of capital thereby improving firm performance. Besides, if managers have a stake at the firm, they tend to perform better in pursuing shareholders’ wealth maximization aim rather than pursuing their own interests (Boodhoo, 2009).

Zeitun and Tian (2007) study on firms listed in the Jordanian securities exchange established that debt levels are negatively correlated with firm’s performance. In the African continent, a study of nonfinancial firms listed in the Nairobi Securities Exchange between 2008 and 2013 indicated a weak to no impact relationship between capital structure and a firm’s performance (Kimathi, Galo and Akenga, 2012).

2.3.1 Return on Equity

The return on equity (ROE) is one of the key profitability measures that a business enterprise publishes annually. The return on equity measures the efficiency with which a firm utilizes capital raised by its shareholders to grow and dictates remuneration to be paid to shareholders in form of dividends or interest. Thus, return on equity articulates the extent to which managers of a business enterprise have succeeded to maximize shareholders’ wealth. In other words, it can be said that a shareholders wealth increases when a firm they have invested in earn higher returns for its shareholders (Brealey, Myers and Marcus, 2001).

The assessment of the return on equity (ROE) is important for the following reasons; the ratio demonstrates the extent of allocating shareholders’ funds in a firm and the efficiency with which management utilizes these funds in the business; the ratio also reveals the return

18 on shareholders’ investment which reflects on the firm’s ability to remunerate its shareholders.

Different firms employ different systems of standards which differentiates the influence of decisions impacting on performance and the expectations of a firm’s shareholders using the DuPont method. The DuPont method highlights the connection between rate of return level and the various factors of influence. For instance, using the DuPont method, ROE= (TA/E)*(T/TA)*(NP/T)

Where: TA – total assets; E – equity; T – turnover; NP – net profit; TA/E - the equity multiplier; T/TA - the total assets turnover; NP(NI)/T- the return on sales

The equity multiplier indicates the extent to which equity finances total assets (financial independence/financial leverage). Thus, an increase in the multiplier equals increase in indebtedness. There should be no cause for alarm due to increase in borrowing as long as leverage is maintained within reasonable limits and the debt is utilized effectively. The total assets turnover reflects the way an enterprise manages its assets and hence has an impact on the ROE. A lower turnover implies the likelihood of realizing a higher ROE, using a lower volume of current assets and fixed assets.

According to Soumadi and Hayajneh (2006), on their study on the effect of financial leverage on 53 industrial firms and 23 service firms listed on the Jordanian stock market during the period 2001-2006, there existed a negative relationship between capital structure and firm performance. Chinaemerem and Anthony (2012) contend that influence of capital structure on firm performance is negative. Espieh and Moridipour (2013) in their study of 131 Iranian firms between 2004 and 2010 established that financial leverage’s relationship with capital structure is both positive and negative.

2.3.2 Gross Profit Margin

A firm’s profit margin is measured by the return on sales (ROS). The level of this rate is dependent on the firm industry. For instance, in some business sectors where there exists reduced elasticity of demand to price changes, adoption of a flexible pricing policy so that profitability may be increased is not possible. The empirical evidence in the studies about the impact of capital structure on firm performance is conflicting and mixed. Some researchers have found a positive relationship while some found negative correlation. Other researchers have concluded that capital structure and firm performance are

19 correlated both positively and negatively. Interestingly, some experimental evidence has suggested that there is no relation between capital structure and firm performance.

Studies like: Javed, Younas and Imran, (2014); Fosu (2013); Ahmad, Abdullah, and Roslan (2012); Cheng, Liu and Chien (2010); Margaritis and Psillaki, (2007) showed positive relationship. The correlation between indebtedness and return on sales should be taken into consideration too. When return on assets exceeds the cost of debt, financial leverage as well as ROE increases. However, this positive relationship is likely to be offset by the negative effect of return on sales as a result of lower net income.

Some studies have showed a negative correlation between capital structure and firm performance, for instance, Akeem, Terer, Kinyanjui and Kayode, (2014); Salim and Yadav (2012) and Ahmad and Rahim (2013) who researched on 38 government owned firms listed in the Bursa Stock Exchange during the period 2001- 2010. Cheng et al., (2010) established that firms’ exhibit positive relationship between capital structure and firm performance when the debt ratio lies within a range of between 53.97% and 70.48%, but if the debt ratio is above 70.48%, then that relationship would be negative.

Other studies have showed zero or very poor relationship between leverage and firms’ financial performance, they include: Innocent, Ikechukwu and Nnagbogu (2014) and Ebaid (2009) while studying the correlation between financial leverage and firm performance of 64 sampled nonfinancial listed Egyptian firms for the period 1997-2005. In addition, Saeedi and Mahmoodi (2013), while researching on 320 firms quoted on the Tehran Stock Exchange (TSE) between 2002 and 2009 concluded that there is no significant correlation between financial leverage and firm performance.

2.3.3 Return on Assets

Anderson, Spade and Jackson (1990) classifies assets as follows: fixed, current, tangible or intangible. Efficient utilization of assets can be used to gauge the effectiveness with which a firm is utilizing its assets to generate income. The ratio used to measure this effectiveness is referred to as Return on Assets which is computed by dividing net profit over total assets. This ratio has a positive relationship with a business enterprise’s future potential growth Jami and Bahar, (2016).

Liu, Liu, and Zhang, (2016) contend that assets being a crucial element of a firm’s capital structure, rely to a greater extent on a firm’s liquidation value. The extent to which asset supports debt depends on the asset type. Thus, comparing tangible assets with intangible assets, the former can support huge debt than the latter (Lim, Macias, and Moeller, 2014).

A firm’s capital structure growth is directly proportional to its assets growth (Kinyua, 2014). A firm may be compelled to borrow more if its assets are effectively utilized and optimal production levels are achieved to maintain the momentum and avoid stock outs. If fluctuations in a firm’s earnings are more linked to fluctuations in the value of assets, then there will be a negative impact on the values of debt and equity because implied security is less valuable. Thus, shareholders should invest in those assets whose fluctuations are less interrelated.

Skoog and Sward (2015) in their research on listed Swedish firms between 2005 and 2014 revealed that asset tangibility is positively correlated with debt levels. Thus, tangible assets play a crucial role in explaining firms’ capital structure decisions. Their theoretical basis is the pecking order and trade-off theories of capital structure. Firms’ whose asset values have a higher growth rate, have higher debt and equity values too. Shareholders prefer to invest in assets whose future value is not positively related with its current financial performance and debt renegotiations are less probable to result in sale of such assets when the said relationship is low (Kinyua, 2014).

A firm with more liquid assets in its capital structure is better placed to achieve optimal leverage (Muscettola, 2014). Financiers incur lower costs financing liquid assets thus firms with more of these assets are attractive to debt financing (Habib and Johnsen, 1999). Ultimately, this turn of events has a positive correlation with the total amount of capital that business enterprises can borrow and not forgetting achieving overall optimum leverage level for the firm.

Information is power in as far as liquidity and leverage issues are concerned. According to Fosberg (2012), a firm’s history of financial performance may be used by investors to gauge firm’s ability to service its debts. Thus investors can minimize investment risks by balancing such perceived risks with firm’s asset liquidity.

It should however be noted that the extent to which asset liquidity influences leverage is dependent on whether or not there exist restraints placed on asset disposition. Assets with higher liquidity are more likely to be sold because it is cheaper selling them and liquidation

21 values are higher. Selling assets reduces the size of the firm. This is not good information to creditors. Hence, limiting chances of selling assets impacts positively on their liquidity worth to financiers and creditors (Gopalan, Kadan and Pevzner, 2016). This in effect implies that assets are being used as collateral for the debt with an impact on the capital structure mix.

The impact of liquidity of assets on leverage is positive when firm managers have no discretion over a firm’s assets (Lim et al., 2014). As a result, risk is reduced when such assets are used as debt security or guarantee. The reverse is true- the liquidity of assets becomes negative when managers wield more power over an enterprise’s assets. Such discretion exposes a firm’s assets into more risk because managers can easily sell these assets.

Various studies in the past failed to come up with a formula of measuring assets liquidity. However, Schlingemann, Stulz, and Walkling (2002) managed to develop one dubbed “the liquidity index”. This index is estimated in two steps as follows: firstly, the liquidity index for the industry is estimated as the proportion of the corporate transactions total value to the total book value of assets in a particular industry. Secondly, liquidity index for the firm is computed as the average of the total industry segments’ liquidity indices, weighted by the segments’ total book value of assets.

The index is based on the assumption that liquidity of assets at the organization level mainly depends on the conditions prevailing in the business enterprises industry; Lakonishok, Shleifer, and Vishny, (1992) support this claim. However, a study by Sibilkov (2007) established that industry level measure of asset liquidity is biased and tend to be conservative.

According to Pervaiz et al., (2013) study on liquidity index, industry turnover is positively correlated with liquidity which may not be the case in the real world. This reflects a weakness in the measure. Notwithstanding the shortcoming, the asset liquidity measure has proved advantageous both in theory and applicability over other liquidity measures. For instance, liquidation costs are computed by getting the difference between one and the proportion of assets value as estimated by management (Alderson and Bekter 1995).

These estimates are not objective. They are significantly biased. On the other hand, Kim (2012) stipulates that asset specificity equals purchases of used equipment divided by total purchase of equipment in the industry. However, this ratio decreases when there is an

22 increase in purchases of new equipment despite the fact that the said purchases create higher demand for assets, greater assets and greater asset liquidity in the industry.

In order to evaluate the link between capital structure and firm’s profitability, this study used the Debt Equity Ratio as the independent variable and Return on Equity, Profit Before Tax and Profit After Tax as the dependent variables.

2.4 The impact of capital structure on firms’ share performance.

Capital structure is a combination of debt and equity both long-term and short-term and other sources of finance for instance, surpluses and retained earnings of a firm. An organization’s capital structure is a mix of financial liabilities and capital which are essential financing resources for all businesses (Harris and Raviv, 1991). Equity contribution is given by equity holders whereas debt is contributed by debt holders of the firm. Each of these forms of finance is associated with different levels of risk, benefits, and control. Availability of equity in a firm’s mix of capital structure encourages debt holders to pump more funds into the firm when such need arises (Dube, 2013).

Debt is an obligation in which interest must be paid regardless of the firm’s performance. Equity on the other hand, comprises of owners, or shareholders’ funds in which dividend payment is dependent upon firm profits. A high percentage of debt in a firm’s capital structure increases the risk of liquidation during hostile times. Thus, capital structure is a composition of a firm’s liabilities which impacts on the firm’s share price performance. The level of share price has been considered very significant specifically as an alternative for market liquidity. Investment in stocks contributes immensely towards the expansion of a country’s economy and businesses in general (Choudhry, 2009).

The price of a security is generally used as a yardstick to measure a firm’s performance. Therefore, variation in share price is a pointer to the economic environment prevailing, hence the need for investors to be conversant with the economic indicators that pose a threat to share price changes. Investing in equity does not only guarantee investors with substantial returns but it is also one of the major sources of finance for a business enterprise. Equity returns are likely to be affected by the following firm specific factors; book value, dividend pay-out ratio or external factors such as interest rate paid on loans and the GDP, inflation, government regulations, and a firm’s earnings per share.

Interest on debt finance is an allowable expense that is not taxed. Dividends paid to a firm’s shareholders on the other hand is taxable because it is considered as an appropriation of profits. Thus, it is cheaper to raise funds through debt than equity. The cheaper it is for a firm to raise funds, the higher the profits for the shareholders which will be reflected in increased share price (Kheradyar, Ibrahim and Nor, 2011).

Masulis (1980), in the study on effects of capital structure on security prices noted positive correlation. In Kenya, Buigut, Soi, Koskei, and Kibet, (2013) study found out positive correlation between financial leverage and share price. But Salim and Yadav, (2012) established that profitability in terms of Earnings Per Share is negatively correlated with leverage.

2.4.1 Effect of Debt on Share Performance

Although debt holders hold little sway over the control and how business is run, they are guaranteed of fixed return in form of interest or dividend in case of preference shareholders thus protected by contractual obligations. The covenants in the contractual obligations dictate the amount of return to compensate for the provision of finance and when contract is breached. Equity holders have greater control over the decision making process in a firm but are residual claimants of returns (Ubesie, 2016).

Management’s expectations are aroused when a firm’s debt ratios are higher and could be used to gauge future cash flows and hence, may result in shifts in a firm’s share prices and general influence on a firm’s financial performance (Siro, 2013). Debt is beneficial to a firm, for instance, interest payments are not taxed; hence value of a firm can be increased (Tailab, 2014).

2.4.2 Effect of Equity on Share Performance

Equity finance refers to the risk bearing finance that is provided by the owners of the business. Equity holders’ ownership of a firm is expressed as a percentage of equity shares held by the equity holders. Equity holders are entitled to part of a firm’s profits in form of dividend. However, dividend payment is not mandatory all the time because a firm may decide to retain profits for expansion purposes. Besides, equity holders participate in the sharing of a firm’s risks and in case a firm is wound up, they are compensated last after debt holders. According to Brealey and Myers (2001), capital structure is mix of diverse securities of a firm aimed at maximizing the market value of a firm at a minimum possible cost of capital. When a firm is entirely financed by equity, all its cash flows will benefit

24 the equity holders. When equity is issued together with debt, the resultant cash flows are shared between debt holders and ordinary stock holders. However, debt holders will earn a fixed amount of return in form of interest or dividend, while equity holders will get a residual amount of return depending the business’s overall performance.

Buigut et al., (2013) in their study on the relationship between leverage and stock prices of energy sector firms listed in the NSE concluded that share prices are aversely influenced by debt and inversely influenced by equity.

2.4.3 Effect of Bonds on Share Performance

Bonds are long-term debt instruments availed to individuals and institutional investors by organizations. Unlike stocks, fewer strings are attached to bonds. However, the relationship between the organization and bondholders ends with the expiry of the bond’s repayment period. In finance, a bond is a debt instrument, whereby the debt holder is indebted to pay periodic interest to the bond holder and pay the principal amount at maturity (Balduzzi, Elton and Green, 2001).

Chen and Chou (2007) in their research found out that a company’s capital structure is negatively correlated with EPS. Muthukumaran (2012) study found out that increase of debt in a firm’s capital structure is a signal of expected higher cash flows in the future. Managers of these firms will in effect signal to the market that their firms are constructive, future performance expected to be better and therefore able to offset the additional debt. This study showed that there exists a positive correlation between firm leverage and stock price forecast.

Lawal and Ijirshar (2013) scrutinized share price indicators in the Nigerian stock exchange. Using judgmental sampling technique, 30 firms were selected. Data was collected from the Nigerian stock exchange handbooks and annual financial reports of the affected companies for the period 2006- 2010. Using regression analysis, the study revealed that financial performance and dividend payout had a positive correlation with share prices. However, debt to equity had a negative relationship with the firms’ share price market values.

2.4.4 Effect of Retained Earnings on Share Price Performance

Retained earnings which is also referred to as accumulated earnings, is an element of shareholders’ equity which represents residual income left with the company after periodic distribution of dividends to the shareholders. Retained earnings belong to the stockholders and the discretion to pay them out as dividends squarely lies with the firm’s board of directors (Bhat and Zaelit, 2014).

For a business enterprise that is always making losses, retained earnings is substituted by accumulated losses. This is an equity component that represents the total sum of loss made by a firm since its incorporation. Retained earnings is a cumulative figure for net income or loss for several periods of time. Therefore, it is possible for a firm to have retained earnings despite of recording a loss in a given period (Bhat and Zaelit, 2014).

Ebrahimi and Chadegani (2011) established that there is positive correlation between share price and retained earnings. On the contrary, Thuranira (2014), contend that earnings and share price are inversely proportional. Edmans et al. (2007) on the other hand claims that stockholders invest in shares for speculative purposes. They argue that incase a firm retains a considerable amount of profits in form of retained earnings, the potential for the firm to grow is increased thus stock price also increases.

Other studies which showed that retained earnings had a positive relationship with share price included: Al Troudi, (2013); Chughtai, Azeem and Ali, (2014); Essays, (2013); Kumar and Hundal (1986); Muhammad, (2012); Joshi, (2012), Friend and Puckett (1964); Naamon (1989); Nishat (1992); Pradhan (2003); and Khan (2009).

2.5 Chapter Summary

Chapter two has reviewed in detail the relevant literature on impact of capital structure on financial performance of firms. The chapter has scrutinized the major components of capital structure namely; debt and equity. Further, the chapter has given a critical review of the key capital structure theories. The chapter has also analyzed the research questions under study which are: the effect of capital structure on firms’ profitability and the relationship between capital structure and firms’ share performance. The next chapter which is chapter three, will discuss the research methodology to be used in the study.

CHAPTER THREE

3.0 RESEARCH METHODOLOGY

3.1 Introduction

This chapter describes the research design methodology that was used to carry out the study in order to find the solutions to the specific objectives in chapter one. In section 3.2 the chapter will discuss the research design. Section 3.3 will discuss the population and sampling design to be used in the study. Section 3.4 will be about the data analysis methods used in the research. Lastly section 3.6 will be a summary of the whole chapter.

3.2 Research Design

A research design is the structure or plan of investigation aimed at getting answers to the research questions in the study (Sukamolson, 2007). According to Odoh and Chinedum (2014), a research design is a scheme used to provide answers to the research problems. The plan on the other hand is an all-inclusive program of the study which includes an overview of what the researcher intends to do from proposal writing all the way to the final analysis of data.

Research Design is usually a framework that guides collection and analysis of data. (Thomas, 2010). The research design used in this study was descriptive research design. This type of research technique describes the characteristics associated with the subject population (Tobergte and Curtis, 2007). Descriptive design will assist in establishing and measuring the correlation between capital structure and firm performance in the study. This research used the Debt Equity ratio as the independent variable representing capital structure whereas Profit Before Tax, Profit After Tax, Return on Equity, Return on Assets were used as the dependent variables representing firm performance. Effect of debt, equity, bonds and retained earnings on stock price were used as dependent variables representing firms’ share performance. After analyzing the correlation between the independent and dependent variables, the study provided specific and relevant recommendations.

3.3 Population and Sampling Design

3.3.1 Population

According to Mofolo-Mbokane (2011), population is the total compilation of elements from which inferences are made. The larger set of observation is called the population whereas the smaller set is known as the sample. The population of this study consisted of all the ten listed commercial and service firms listed on the Nairobi Securities Exchange market. A list of these firms is shown in Appendix 5. Odoh and Chinedum (2014), describes target population as the focal point within which a researcher would like to use to generalize the results of a research.

3.3.2 Sampling Design

A sample is a proportion of the population being examined through a research study. Therefore, sampling design refers to the definite procedure that the researcher used in selecting the items from the population that will form the sample. For the purpose of this study no selection procedure was used as all the firms listed on the NSE under commercial and service sector were included in the sample.

3.3.2.1 Sampling Frame

According to Teddlie and Yu (2007), sampling frame is the list of elements from which the sample is actually drawn. In essence, this is a complete and correct list of population members only. The sampling frame for this study was the 10 commercial and service firms listed on the Nairobi Securities Exchange (NSE).

3.3.2.2 Sampling Technique

The method used in selecting elements from the population that represents the population is known as sampling technique (Etikan, 2016). In most cases, a researcher is required to describe how he/she would arrive at a sample size that was used in the research. Given that the study adopted census technique, all commercial and service firms listed on the Nairobi Securities Exchange were used in this study. Thus, the source of the list of the firms that will constitute the sample size of this study was the Nairobi Securities Exchange. McMillan and Schumacher (2014) define a census as a study where all members of the population take part in a study. Census increases the level of accuracy and reliability of a study.

3.3.2.3 Sample Size

A sample size is a number of units (persons, animals, patients, and specified circumstances) in a population to be studied (Etikan, 2016). Because this study is a census; therefore, all the 10 commercial and service firms trading on the Nairobi Securities Exchange (NSE) were used. The NSE provided the researcher with the list of commercial and service firms quoted at the bourse.

3.4 Data Collection Methods

Data collection method can be defined as the systematic process used by the researcher to collect either primary or secondary data for a study (Mofolo-Mbokane, 2011). The importance of data in research cannot be overemphasized. It holds key to the hidden meaning of information being analyzed. Data collection methods are techniques of collecting data that is relevant to the research. According to this study, secondary data was used. The secondary data was sourced from the 10 commercial and service firms listed on the NSE published financial statements, journal articles and other relevant materials from the internet and library sources (Johnston, 2014). The study used a checklist to collect secondary data from the 10 listed commercial and service firms.

3.5 Research Procedures

The researcher tested the relationship between capital structure and firms’ performance using financial information from unlisted commercial and service firms. The researcher then sought authority from the research office asking for permission to carry out the study on the commercial and service firms listed on the Nairobi securities exchange. Thereafter, the researcher sought relevant secondary information namely; audited financial statements and hand books from the NSE. Finally, the researcher analyzed data on profitability and share performance.

3.6 Data Analysis Methods

Data analysis is the process of reviewing, cleaning, converting and displaying data with the aim of highlighting useful information, suggesting conclusions and supporting decision making (Etikan, 2016). Both qualitative and quantitative methods of data analysis were used in this study. Qualitative technique refers to any sort of exploration that produces results other than by statistical procedures or other quantifiable means. This approach entails individual judgment over a matter from which it is difficult to make general

29 conclusions. According to Sukamolson (2007), quantitative research on the other hand refers to the process of attempting to explain phenomena by collecting numerical data and analyzing that data mathematically using statistics.

The quantitative information gathered was coded and evaluated using descriptive statistics. The mean and standard deviation were used to describe every variable under study. The data was analyzed using the SPSS to test the reliability of the data collected.

Correlation statistics were used in describing the degree of relationship between the independent and dependent variables used in the study. Regression analysis was used in testing the causal relationship between the dependent and independent variables in the study. Data was finally presented in tables and pie charts and analyzed qualitatively using the literature review in chapter two as the reference point.

3.7 Chapter Summary

Chapter three has dealt with research methodologies that were used by the researcher to gather and analyze data in responding to the specific objectives in this study. The chapter has discussed the research design appropriate for this study. The population used in identifying the appropriate sample and sampling techniques for the study was acknowledged. Besides, the data collection and data analysis methods suitable for the study were also identified. The next chapter which is chapter four, will discuss the findings and analysis and will display the results of this study.

CHAPTER FOUR

4.0 RESULTS AND FINDINGS

4.1 Introduction

This chapter presents the analyzed results and findings of the objectives of the study. The chapter is broken into different sections namely; Section 4.2 gives the general information of the study while section 4.3 discusses the components of capital structure employed by firms by analyzing the ten commercial and service firms listed on the Nairobi Securities Exchange. Section 4.4 describes the findings on the relationship between capital structure and firms’ profitability by analyzing its effect on Return on Equity (on both profit before tax and profit after tax). In section 4.5 the chapter highlights findings on the relationship between capital structure and firms’ share performance by analyzing the effect of debt on share performance, effect of equity on share price performance, effect of bonds on share price performance and effect of retained earnings on share price performance. Section 4.6 of the chapter presents regression analysis of the data whereby Debt to Equity ratio was used as the independent variable whereas Return on Equity, Profit Before Tax, Profit After Tax and Earnings Per Share were used as the dependent variables. Last but not least, section 4.7 presents the summary of the study.

4.2 General Information

The purpose of the research was to determine the effect of capital structure on financial performance of commercial and service firms listed on the Nairobi Securities Exchange. The specific objectives of the study were: the components of capital structure employed by firms, the effect of capital structure on firms’ profitability and the effect of financial leverage on firms’ share performance.

The commercial and service firms under examination were; Express Ltd, Kenya Airways Ltd, Nation Media Group, Standard Group Ltd, TPS Eastern Africa (Serena) Ltd and Scangroup Ltd. Others were; Uchumi supermarket Ltd, Longhorn Publishers Ltd, Deacons (East Africa) Ltd and Nairobi Business Ventures Ltd. The independent variable used in the study was the Debt to Equity Ratio. The dependent variables used were; Return on Equity, Profit Before Tax, Profit After Tax and Earnings Per Share.

4.2.1 Nature of Business

Table 4.1 below shows the companies under study namely; Express Ltd, Kenya Airways Ltd, Nation Media Group, Standard Group Ltd and TPS Eastern Africa (Serena Ltd. Others included; Scangroup Ltd, Uchumi supermarket Ltd, Longhorn Publishers Ltd, Deacons East Africa Ltd and Nairobi Business Ventures Ltd and the nature of their business in terms of the products and services they deal in.

Table 4.1: Commercial and Service Firms and their Nature of Business

COMPANY NATURE OF BUSINESS 1) Express Ltd Provides clearing and forwarding services for air and sea, as well as warehousing and logistics services. 2) Kenya Airways Ltd Engages in the international, regional, and domestic carriage of passengers and cargo through air. 3) Nation Media It is the largest private media house in East and Central Africa Group listed on the Nairobi Securities Exchange. 4) Standard Group Ltd Is a multi-media organization with investments in print and electronic media as well as outdoor advertising. 5) TPS Eastern Africa The Company, through its subsidiaries, owns and operates (Serena) Ltd hotel and lodge facilities in Eastern Africa. 6) Scangroup Ltd It is a marketing and communication group operating a multi- agency model across multiple disciplines listed on the NSE. 7) Uchumi It is a Kenya-based company engaged in the retail supermarket Ltd supermarkets operation. 8) Longhorn The company formerly known as Longhorn Kenya Limited, is Publishers Ltd engaged in publishing and selling of educational and general books in the Eastern Africa region. 9) Deacons (East Operate retail business establishments selling ladies, men’s Africa) Ltd and children’s clothing, footwear, accessories, and sporting goods amongst other items in East Africa. 10) Nairobi Business Is a Kenyan-based company that retails shoe and leather Ventures Ltd accessories under the brand name KShoe.

4.2.2 Turnover

The commercial and service firms used in this study have an annual turnover of not more than 110 Billion Kenya Shillings. Table 4.2 below shows Kenya Airways Ltd had the highest turnover of 107.8 Billion Kenya Shillings. Nation Media Group is second with an average annual turnover of 12.5 Billion Kenya Shillings. Nairobi Business Ventures Ltd had the lowest annual average turnover of 55.3 Million Kenya Shillings.

Table 4.2: Average Turnover

COMPANY AVERAGE TURNOVER IN KSHS.

1) Express Kenya Ltd 195,420,600.00

2) Kenya Airways Ltd 107,817,000,000.00

3) Nation Media Group 12,547,220,000.00

4) Standard Group Ltd 4,504,599,800.00

5) TPS Eastern Africa (Serena) Ltd 6,230,733,400.00

6) Scangroup Ltd 2,998,080,935.00

7) Uchumi supermarket Ltd 12,125,462,800.00

8) Longhorn Publishers Ltd 1,111,592,200.00

9) Deacons (East Africa) Ltd 2,180,011,400.00

10) Nairobi Business Ventures Ltd 55,294,966.00

4.2.3 Profits After Tax

From Table 4.3 below, the average after tax profit for the commercial and service firms used for the study was not more than 3 Billion Kenya Shillings. Nation Media Group had the highest Average profit after tax of 2.2 Billion Kenya Shillings, followed by Scangroup Ltd with an average annual after tax profit of 313.2 Million shillings. Kenya Airways Ltd had the lowest annual after tax loss of 12.3 Billion Kenya Shillings on average followed by Uchumi Supermarkets Ltd with an annual after tax loss of 1.3 Billion Kenya Shillings.

Table 4.3: Average Profit After Tax

COMPANY AVERAGE PROFIT AFTER TAX IN KSH 1) Express Kenya Ltd (44,224,600.00) 2) Kenya Airways Ltd (12,310,800,000.00) 3) Nation Media Group 2,283,120,000.00 4) Standard Group Ltd 78,517,600.00 5) TPS Eastern Africa (Serena) Ltd 213,544,600.00 6) Scangroup Ltd 313,222,267.20.00 7) Uchumi supermarket Ltd (1,303,124,800.00) 8) Longhorn Publishers Ltd 68,435,000.00 9) Deacons (East Africa) Ltd 7,961,600.00 10) Nairobi Business Ventures Ltd 3,208,253.00

4.2.4 Assets

The Commercial and Service Firms used in the study have an average total asset base of not more than 141 Billion Kenya Shillings. From Table 4.4 below Kenya Airways Ltd had the highest average total assets base of 140.3 Billion Kenya Shillings whereas Nairobi Business Ventures Ltd had the lowest average total assets base of 78.4 Million Kenya Shillings.

Table 4.4: Average Total Assets

COMPANY AVERAGE TOTAL ASSETS ( KSHS ) 1) Express Kenya Ltd 455,106,000.00 2) Kenya Airways Ltd 140,310,200,000.00 3) Nation Media Group 11,787,340,000.00 4) Standard Group Ltd 4,105,262,200.00 5) TPS Eastern Africa (Serena) Ltd 13,925,064,200.00 6) Scangroup Ltd 12,069,042,000.00 7) Uchumi supermarket Ltd 5,763,097,200.00 8) Longhorn Publishers Ltd 920,260,400.00 9) Deacons (East Africa) Ltd 2,139,373,000.00 10) Nairobi Business Ventures Ltd 78,351,217.00

4.2.5 Net worth

From Table 4.5 below, TPS Eastern Africa (Serena) Ltd had the highest average net worth of 9.6 Billion Kenya shillings while Scangroup Ltd recorded the lowest average net worth of 7.7 Million Kenya Shillings.

Table 4.5: Average Net worth

COMPANY AVERAGE NETWORTH (KSH.)

1) Express Kenya Ltd 144,097,328.00

2) Kenya Airways Ltd 8,166,200,000.00

3) Nation Media Group 8,398,320,000.00

4) Standard Group Ltd 2,005,801,200.00

5) TPS Eastern Africa (Serena) Ltd 9,635,463,000.00

6) Scangroup Ltd 7,796,322.00

7) Uchumi supermarket Ltd 1,516,502,800.00

8) Longhorn Publishers Ltd 487,378,000.00

9) Deacons (East Africa) Ltd 1,324,958,400.00

10) Nairobi Business Ventures Ltd 25,048,619.00

4.3 Components of Capital Structure

4.3.1 Debt

Debt refers to both short term and long term types of borrowing available to the commercial and service firms under the study. Thus, the research took into consideration total liabilities.

From Figure 4.1 below, Kenya Airways Ltd is the company that used the highest average debt levels of 133 Billion Kenya shillings during the period 2012-2016. Nairobi Business Ventures Ltd used the lowest average debt levels of 53 Million Kenya shillings when compared with the other companies during the same period.

160,000,000.00 140,000,000.00 120,000,000.00 100,000,000.00 80,000,000.00 60,000,000.00 40,000,000.00

Average Debt in Kshs in Debt Average 20,000,000.00 -

Commercial and Service Firms

Figure 4.1: Average Debt Levels 4.3.2 Equity

Equity is the shareholders’ contribution towards the setting up of the commercial and service firms. In other words, it is the capital contribution by the owners of the firms. From figure 4.2 below, TPS Eastern Africa (Serena) Ltd had the highest average equity over the years under study at 9.6 Billion Kenya shillings. Scangroup Ltd had the lowest equity on average over the years as compared to the other firms during the period 2012-2016.

12,000,000,000.00 10,000,000,000.00 8,000,000,000.00 6,000,000,000.00 4,000,000,000.00 2,000,000,000.00

- AverageEquitylevel inKshs Commercial and Service Firms

Figure 4.2: Average Equity Levels

4.3.2 Other Components of Capital Structure

The study analyzed the other components of capital structure as enumerated in the literature review in chapter two of the study. The said components include: Share Capital, Share Premium, Revenue Reserves, Capital Reserves and Retained Earnings.

4.3.2.1 Share Capital

From figure 4.3 below, Kenya Airways Ltd had the highest average share capital which stood at 6.4 Billion Kenya Shillings during the period under review. Nairobi Business Ventures Ltd had the least average share capital which stood at 7.2 Million Kenya Shillings during the same period.

7000000 6000000 5000000 4000000 3000000 2000000 1000000

Kshs. "000" Kshs. Average Share capital in capital Share Average

Commercial and Service firms

Figure 4.3: Average Share Capital in Kshs.

4.3.2.2 Revenue Reserves

From Figure 4.4 below, the commercial and service firms under study had revenue reserves for the period of 2012 – 2016. Kenya Airways had the highest at 11.5 Billion Kenya Shillings. Deacons East Africa had the lowest average revenue Reserves deficit of 11.5 Million Kenya Shillings. Scangroup Ltd, Longhorn Publishers and Nairobi Business Ventures had nil average reserves. This can be translated to mean that the three companies had not set aside any funds for future growth.

14,000,000.00 12,000,000.00 10,000,000.00 8,000,000.00 6,000,000.00 4,000,000.00 2,000,000.00

"000" -

(2,000,000.00) Average Revenue Reserves Kshs. Reserves in Revenue Average

Commercial and Service firms

Figure 4.4: Average Reserves in Kshs.

4.3.2.3 Capital Reserves

The commercial and service firms under study did not have capital reserves for the period of 2012 – 2016. The Standard Group however maintained 102 thousand Kenya Shillings as capital redemption reserve during the period under study. This scenario can be translated to mean that there are no funds readily available for any possible long term capital investments or large anticipated expense to be incurred by the firms.

4.3.2.4 Retained Earnings

On average, Nation Media Group had the highest retained earnings of 6.5 Billion Kenya Shillings whereas Kenya Airways Ltd had a deficit of 11.6 Billion Kenya Shillings. This is illustrated in figure 4.5 below.

8000000 6000000 4000000 2000000 0 -2000000 -4000000

-6000000 Kshs. "000" Kshs. -8000000 -10000000

Average inErnings Retained Average -12000000 -14000000 Commercial and Service firms

Figure 4.5: Average Retained Earnings in Kshs

4.4 Relationship between Capital Structure and Firms’ Profitability

4.4.1 Express Kenya Ltd Return on Equity

Return on Equity measures the return that a firm is making on the funds invested in the capital structure. It is computed by dividing the net income or profit after tax by the shareholder’s equity or a firm’s net worth. For Express Kenya Ltd, the Return on Equity exhibited a declining trend as indicated in table 4.6 below.

Table 4.6: Express Kenya Ltd Return on Equity Ratio

Year Return on Equity Ratio %

2012 7%

2013 0%

2014 (43%)

2015 (50%)

2016 (415%)

4.4.2 Express Kenya Ltd – Profit Before Tax and Profit After Tax Ratios

Profit Before Tax Ratio is calculated by dividing Profit Before Tax by revenue. Profit After Tax ratio on the other hand is calculated by dividing Profit After Tax by a firm’s revenue. From Table 4.7 below, Express Kenya Ltd Profit Before Tax Ratio slightly increased from -6% to 0% then continued to decline through to 2016. Profit After Tax Ratio on the other hand has been decreasing proportionately with Profit Before Tax.

Table 4.7: Express Kenya Ltd Profit Before Tax and Profit After Tax Ratios

Year Profit Before Tax Ratio Profit After Tax Ratio 2012 (6%) 6% 2013 0% 0% 2014 (44%) (45%) 2015 (61%) (49%) 2016 (178%) (154%)

4.4.3 Express Kenya Ltd Debt to Equity Ratio

Debt Equity Ratio measures the extent to which a firm’s capital structure is funded by a mix of debt equity. The Ratio is computed by dividing total liabilities by total equity. Express Kenya Ltd had a Debt Equity Ratio of 150% in 2012 which decreased to 142% in 2013. However, in between 2014 and 2016, the company’s borrowing progressively increased from 165% in 2014 to 268% in 2015 and settled at 1526% in 2016. The Debt Equity Ratio for Express Kenya Ltd is illustrated in table 4.8 below

Table 4.8: Express Kenya Debt to Equity Ratio

Year Debt to Equity Ratio

2012 150%

2013 142%

2014 165%

2015 268%

2016 1526%

4.4.4 Express Kenya Ltd Debt to Equity Ratio – Return on Equity Trend Analysis

Express Kenya Ltd Debt to Equity Ratio and Return on Equity trend analysis between 2012 and 2016 exhibit an inverse relationship. As the Debt to Equity ratio was increasing, the Return on Equity ratio was decreasing as illustrated in figure 4.6 below.

2000% 1500% 1000% 500%

Ratios 0% -500% -1000% 2012 2013 2014 2015 2016 Debt to Equity Ratio 150% 142% 165% 268% 1526% Return on Equity 7% 0% -43% -50% -415% Years

Debt to Equity Ratio Return on Equity

Figure 4.6: Express Kenya Ltd Debt to Equity and Return on Equity Ratios Trend Analysis

4.4.5 Express Kenya Ltd Debt to Equity Ratio – Profit Before Tax and Profit After Tax analysis

From figure 4.7 below Debt Equity Ratio for Express Kenya Ltd does not have a relationship with Profit Before Tax and Profit After Tax Ratios. When Debt Equity Ratio increases progressively during the period under study, Pre-Tax and After Tax Profit Ratios decreases proportionately.

1800% 1600% 1400% 1200% 1000% 800% 600%

Ratios 400% 200% 0% -200% -400% 2012 2013 2014 2015 2016 Debt to Equity Ratio 150% 142% 165% 268% 1526% Profit Before Tax Ratio -6% 0% -44% -61% -178% Profit After Tax Ratio 6% 0% -45% -49% -154% Years

Debt to Equity Ratio Profit Before Tax Ratio Profit After Tax Ratio

Figure 4.7: Express Kenya Ltd Debt to Equity Ratio and Profit (Pre Tax & After Tax) Ratios Trend analysis

4.4.6 Kenya Airways Ltd Return on Equity

Kenya Airways Return on Equity decreased from 7% in 2012 to -25% in 2013 and increased to -12% in 2014. In 2015, KQs Return on Equity sky rocked to 432% and falling to 74% in 2016 as shown on table 4.9 below.

Table 4.9: Kenya Airways Ltd Return on Equity Ratio

Year Return on Equity Ratio %

2012 7%

2013 -25%

2014 -12%

2015 432%

2016 74%

4.4.7 Kenya Airways Ltd Profit Before Tax and Profit After Tax Ratios

KQs Pre Tax profit dropped from -2% in 2012 to -11% in 2013 and increased slightly to - 5% in 2014. It significantly dropped to -27% in 2015 and increased slightly to -22% in 2016. KQs Profit After Tax Ratios between 2013 and 2016 are to a greater extent related 42 and change proportionately with Profit Before Tax ratios except for the year 2012. This phenomenon can be seen on Table 4.10 below.

Table 4.10: Kenya Airways Ltd Profit Before Tax and Profit After Tax Ratios

Year Profit Before Tax Ratio Profit After Tax Ratio

2012 -2% 2%

2013 -11% -8%

2014 -5% -3%

2015 -27% -23%

2016 -22% -23%

4.4.8 Kenya Airways Debt Equity Ratio and Return on Equity analysis

There exists no relationship between Kenya Airways Debt to Equity Ratio and Return on Equity. Between 2012 and 2014 when Debt to Equity Ratio was increasing, Return on Equity was decreasing. In 2015 when Debt to Equity Ratio dropped to -3158% before rising to -544% in 2016, Return on Equity increased to 432% before dropping to 74% in 2016. This scenario is demonstrated on figure 4.8 below.

1000% 500% 0% -500% -1000%

-1500% Ratios -2000% -2500% -3000% -3500% 2012 2013 2014 2015 2016 Debt to Equity Ratio 262% 314% 451% -3153% -544% Return on Equity 7% -25% -12% 432% 74% Years

Debt to Equity Ratio Return on Equity

Figure 4.8: Kenya Airways Debt Equity and Return on Equity Ratios Trend Analysis

4.4.9 Kenya Airways Debt to Equity Ratio – Pre & After Tax Profits analysis

From figure 4.9 below, Debt to Equity ratio had been fluctuating during the period under study whereas Pre-tax and After-tax profit ratios have been moving proportionately with each other. Thus, Debt to Equity Ratio does not have any relationship with Pre – Tax and After tax profit ratios.

1000% 500% 0% -500% -1000% -1500% Ratios -2000% -2500% -3000% -3500% 2012 2013 2014 2015 2016 Debt to Equity Ratio 262% 314% 451% -3153% -544% Profit Before Tax Ratio -2% -11% -5% -27% -22% Profit After Tax Ratio 2% -8% -3% -23% -23% Year

Debt to Equity Ratio Profit Before Tax Ratio Profit After Tax Ratio

Figure 4.9: Kenya Airways Debt to Equity Ratio and Pre & After Tax Profits Analysis

4.5.0 Nation Media Group Return on Equity

Nation Media Group Return on Equity ratios have been declining by 3 percentage points between 2012 and 2015. In 2016, Return on Equity ratio dropped by 6 percentage points from 25% in 2015 to 19%. This downward trend is shown on table 4.11 below.

Table 4.11: Nation Media Group Return on Equity Ratio

Year Return on Equity Ratio %

2012 34%

2013 31%

2014 28%

2015 25%

2016 19%

4.5.1 Nation Media Group Pre& After Tax Profit Ratios

Nation Media Group Pre Tax profit and After Tax profit ratios declined steadily during the period under study. In 2012, the Pre – Tax profit was 28% whereas the After tax profit was 20%. The Pre- Tax profit dropped to 27% between 2013 and 2014 whereas the After tax profit dropped to 19% in 2013 and stabilized at 18% between 2014 and 2015 although dropped to 15% in 2016. In 2015, Profit Before Tax ratio dropped to 23% and finally to 22% in 2016. Profit Before and After Tax ratios are directly related and are changing proportionately as illustrated in table 4.12 below.

Table 4.12: Nation Media Group Pre & After Tax Profit Ratios

Year Profit Before Tax Ratio Profit After Tax Ratio

2012 28% 20%

2013 27% 19%

2014 27% 18%

2015 23% 18%

2016 22% 15%

4.5.2 Nation Media Group Debt to Equity Ratio and Return on Equity analysis

From figure 4.10 below, Debt to Equity Ratio decreased from 46% to 39% to 36% in 2012, 2013 and 2014 respectively. It then increased to 42% in 2015 before declining to 40% in 2016. Return on Equity on the other hand had been decreasing steadily over the entire study period.

50% 45% 40% 35% 30% 25%

Ratios 20% 15% 10% 5% 0% 2012 2013 2014 2015 2016 Debt to Equity Ratio 46% 39% 36% 42% 40% Return on Equity 34% 31% 28% 25% 19% Years

Debt to Equity Ratio Return on Equity

Figure 4.10: Nation Media Group Debt to Equity and Return on Equity Ratios Trend analysis 4.5.3 Nation Media Group Debt to Equity Ratio and Pre &After Tax Ratio analysis

Figure 4.11 below indicates some relationship between Debt Equity Ratio and Profit Ratios (Pre- Tax and After – Tax). Debt to Equity ratio was 46% in 2012, decreased to 39% in 2013 and further dropped to 36% in 2014. In 2015, the ratio rose to 42% and dropped to 40% in 2016. On the other hand, Pre Tax and After Tax Profit ratios either decreased or remained constant between some periods. Profit Before Tax remained the same in 2013 and 2014 at 27% whereas Profit After tax was 18% both in 2014 and 2015.

50% 45% 40% 35% 30% 25% 20% Ratios 15% 10% 5% 0% 2012 2013 2014 2015 2016 Debt to Equity Ratio 46% 39% 36% 42% 40% Profit Before Tax Ratio 28% 27% 27% 23% 22% Profit After Tax Ratio 20% 19% 18% 18% 15%

Years

Debt to Equity Ratio Profit Before Tax Ratio Profit After Tax Ratio

Figure 4.11: Nation Media Group Debt Equity and Pre & After Tax Ratios Trend analysis

4.5.4 Standard Group Return on Equity

Standard Group Return on Equity was not stable. It fluctuated from 4% in 2012 to 8% in 2013 and 11% in 2014. In 2015, it drastically dropped to -15% then rose to 10% in 2016. The fluctuations of Standard Group are on Table 4.13 below.

Table 4.13: Standard Group Return on Equity Ratio

Year Return on Equity Ratio %

2012 4%

2013 8%

2014 11%

2015 -15%

2016 10%

4.5.5 Standard Group Pre- Tax and After Tax Ratios

Standard Group Pre- Tax profit has been fluctuating over the period under study. It decreased from 7% in 2012 to 6% in 2013, then rose to 7% in 2014. In 2015, it drastically dropped to -9% but rose to 6% in 2016. The After Tax Profit has been disproportionate with the Pre – Tax profit between 2012 and 2014 but proportionate with the Pre-Tax profit between 2015 and 2016. This correlation is as illustrated on table 4.14 below.

Table 4.14: Standard Group Pre & After Tax Profit Ratios

Year Profit Before Tax Ratio Profit After Tax Ratio

2012 7% 2%

2013 6% 3%

2014 7% 5%

2015 -9% -6%

2016 6% 4%

4.5.6 Standard Group Debt to Equity Ratio and Return on Equity

From figure 4.16 Standard Group Debt Equity Ratio has been fluctuating disproportionately with Return on Equity. When Debt Equity Ratio increased in 2012 and 2013, so did the Return on Equity. In 2014 when Debt to Equity ratio decreased, Return on Equity increased. This inverse proportionality between the two ratios continued in 2015 and 2016 as demonstrated in Figure 4.12 below.

150%

100%

50%

Ratios 0%

-50% 2012 2013 2014 2015 2016 Debt to Equity Ratio 90% 105% 86% 132% 112% Return on Equity 4% 8% 11% -15% 10% Years

Debt to Equity Ratio Return on Equity

Figure 4.12: Standard Group Debt to Equity and Return on Equity Ratios Trend Analysis 4.5.7 Standard Group Debt Equity Ratio and Pre & After Tax Profits

When the Standard Group Debt Equity Ratio increased, the Profit ratios increase and decrease. When the Debt Equity Ratio decreased, the Profit ratios increased and decreased. Thus, there was no positive relationship between the Debt to Equity Ratio and the Pre and After Tax profit ratios as shown on Figure 4.13 below.

140% 120% 100% 80% 60% 40% Ratios 20% 0% -20% 2012 2013 2014 2015 2016 Debt to Equity Ratio 90% 105% 86% 132% 112% Profit Before Tax Ratio 7% 6% 7% -9% 6% Profit After Tax Ratio 2% 3% 5% -6% 4% Years

Debt to Equity Ratio Profit Before Tax Ratio Profit After Tax Ratio

Figure 4.13: Standard Group Debt Equity and Pre & After Tax Profits Ratio analysis 48

4.5.8 TPS Eastern Africa (Serena) Ltd Return on Equity

TPS (Serena) Ltd Return on Equity decreased from 6% in 2012 to 4% in 2013 then to 3% in 2014. In 2015 the Return on Equity further dropped to -3% before increasing to 1% in 2016. Table 4.15 illustrates the changes in TPS Eastern Africa (Serena) Ltd Return on Equity.

Table 4.15: TPS Eastern Africa (Serena) Ltd Return on Equity Ratios

Year Return on Equity Ratio %

2012 6%

2013 4%

2014 3%

2015 -3%

2016 1%

4.5.9 TPS Eastern Africa (Serena) Ltd Pre & After Tax Profit Ratios

TPS Eastern Africa (Serena) Ltd profits both Pre Tax and After Tax have been decreasing though at different rates. Interestingly again both ratios rose at different rates between 2015 and 2016. Profit Before Tax rose from -3% in 2015 to 5% in 2016 while Profit After Tax rose from -5% to 2% during the same period as shown in table 4.16 below.

Table 4.16: TPS Eastern Africa (Serena) Ltd Pre &After Tax Profit Ratios

Year Profit Before Tax Ratio Profit After Tax Ratio

2012 14% 9%

2013 11% 7%

2014 3% 4%

2015 -3% -5%

2016 5% 2%

4.6.0 TPS Eastern Africa (Serena) Ltd Debt Equity Ratio and Return on Equity analysis

TPS Eastern Africa (Serena) Ltd Debt Equity Ratio has no relationship with Return on Equity because when the Debt Equity Ratio decreases, Return on Equity increases and vice versa as depicted on Figure 4.14 below.

30% 25% 20% 15% 10% Ratios 5% 0% -5% 2012 2013 2014 2015 2016 Debt to Equity Ratio 26% 17% 19% 27% 28% Return on Equity 6% 4% 3% -3% 1% Years

Debt to Equity Ratio Return on Equity

Figure 4.14: TPS Eastern Africa (Serena) Ltd Debt Equity and Return on Equity Ratios Trend analysis

4.6.1 TPS Eastern Africa (Serena) Ltd Debt Equity Ratio and Pre & After Tax Profit Analysis

From figure 4.19 below TPS Eastern Africa (Serena) Ltd Debt Equity Ratio has no association with Pre and After Tax Profit Ratios. Between 2013 and 2012 when the Debt Equity ratio decreased, both Pre and After Tax profit ratios decreased. In 2014 and 2015 when the Debt to Equity ratio increased, both Pre and After Tax profit ratios decreased. In 2016, when the Debt to Equity ratio increased, the two profit ratios increased too. This relationship is shown on Figure 4.15 below.

30% 25% 20% 15% 10%

Ratios 5% 0% -5% -10% 2012 2013 2014 2015 2016 Debt to Equity Ratio 26% 17% 19% 27% 28% Profit Before Tax Ratio 14% 11% 3% -3% 5% Profit After Tax Ratio 9% 7% 4% -5% 2% Years

Debt to Equity Ratio Profit Before Tax Ratio Profit After Tax Ratio

Figure 4.15: TPS Eastern Africa (Serena) Ltd Debt Equity and Pre &After Tax Profits Ratio Trend Analysis

4.6.2 Scangroup Return on Equity

Scangroup Return on Equity decreased from 15% in 2012 to 11% in 2013 to 7% in 2014. In 2015 the Return on Equity further dropped to 6% and finally to 5% in 2016. Table 4.17 illustrates the changes in Scangroup Ltd Return on Equity.

Table 4.17: Scangroup Return on Equity Ratios

Year Return on Equity Ratio % 2012 15% 2013 11% 2014 7% 2015 6% 2016 5%

4.6.3 Scangroup Ltd Profit Ratios Pre& After Tax Profits Scangroup Ltd profits both Pre Tax had been on a declining trend between 2012 and 2016. Profits After Tax fluctuated during the same period from 19% in 2012 to 23% in 2013, dropped to 12% in 2014 and remained constant at 10% in 2015 and 2016. This movement is shown in table 4.18 below.

Table 4.18: Scangroup Ltd Pre& After Tax Profit Ratios

Year Profit Before Tax Ratio Profit After Tax Ratio

2012 27% 19%

2013 25% 23%

2014 18% 12%

2015 17% 10%

2016 15% 10%

4.6.4 Scangroup Ltd Debt Equity Ratio and Return on Equity analysis

Scangroup Ltd Debt Equity Ratio was correlated with Return on Equity between 2012 and 2015 except for between 2015 and 2016 when the two ratios had no relationship. This trend is demonstrated in figure 4.16 below.

80% 70% 60% 50% 40%

Ratios 30% 20% 10% 0% 2012 2013 2014 2015 2016 Debt to Equity Ratio 71% 58% 56% 45% 53% Return on Equity 15% 11% 7% 6% 5% Years

Debt to Equity Ratio Return on Equity

Figure 4.16: Scangroup Ltd Debt Equity and Return on Equity Ratios Trend analysis 4.6.5 Scangroup Ltd Debt Equity Ratio and Pre & After Tax Profits Analysis

From figure 4.17 below Scangroup Ltd Debt Equity Ratio has no relationship with Pre and After Tax Profit Ratios. Between 2012 and 2013 when the Debt Equity ratio decreased, Pre Tax profit ratio decreased as the After Tax profit increased. Debt to Equity ratio was on a downward trend between 2013 and 2015 in tandem with both Pre and After Tax Profit

52 ratios. In 2016, Debt to Equity ratio rose to 53% while Pre and After Tax profit ratios decreased to 15% and 10% respectively.

80% 70% 60% 50% 40% 30% Ratios 20% 10% 0% 2012 2013 2014 2015 2016 Debt to Equity Ratio 71% 58% 56% 45% 53% Profit Before Tax Ratio 27% 25% 18% 17% 15% Profit After Tax Ratio 19% 23% 12% 10% 10% Years

Debt to Equity Ratio Profit Before Tax Ratio Profit After Tax Ratio

Figure 4.17: Scangroup Ltd Debt Equity andPre &After Tax Profit Ratios Trend Analysis

4.6.6 Uchumi Supermarket Return on Equity

Uchumi Supermarket Return on Equity fluctuated during the period of study. It increased from 10% in 2012 to 12% in 2013 then dropped to 11% in 2014. The ratio further dipped to -532% in 2015 before increasing to 172% in 2016. Table 4.19 below illustrates the changes in Uchumi Supermarket’s Return on Equity.

Table 4.19: Uchumi Supermarket Return on Equity Ratios

Year Return on Equity Ratio % 2012 10% 2013 12% 2014 11% 2015 -532% 2016 172%

4.6.7 Uchumi Supermarket Pre& After Tax Profit Ratios

Uchumi Supermarket’s Pre and After Tax profit ratios were positively correlated except for between 2013 and 2014 when the After Tax profit ratio increased from 2% to 3% while the Pre Tax ratio remained constant at 3%. This relationship is illustrated in table 4.20 below.

Table 4.20: Uchumi Supermarket Pre &After Tax Profit Ratios

Year Profit Before Tax Ratio Profit After Tax Ratio

2012 3% 2%

2013 3% 2%

2014 3% 3%

2015 -36% -34%

2016 -54% -56%

4.6.8 Uchumi Supermarket Debt Equity Ratio and Return on Equity analysis

Uchumi Supermarket Debt Equity and Return on Equity ratios fluctuated during the period under review. The two ratios were positively correlated between 2012 and 2013 but were negatively correlated between 2013 and 2016 as illustrated in figure 4.18 below.

1000%

800%

600%

400%

200% Ratios 0%

-200%

-400%

-600% 2012 2013 2014 2015 2016 Debt to Equity Ratio 86% 91% 105% 767% -338% Return on Equity 10% 12% 11% -532% 172% Years

Debt to Equity Ratio Return on Equity

Figure 4.18: Uchumi Supermarket Debt Equity and Return on Equity Ratios Trend analysis

4.6.9 Uchumi Supermarket Debt Equity Ratio and Pre& After Tax Profit Ratios Analysis

From figure 4.19 below, Uchumi Supermarket Debt Equity Ratio had a mixed relationship with Pre and After Tax Profit Ratios. But, Pre and After Tax Profit ratios were positively correlated.

1000% 800% 600% 400%

200% Ratios 0% -200% -400% 2012 2013 2014 2015 2016 Debt to Equity Ratio 86% 91% 105% 767% -338% Profit Before Tax Ratio 3% 3% 3% -36% -54% Profit After Tax Ratio 2% 2% 3% -34% -56% Years

Debt to Equity Ratio Profit Before Tax Ratio Profit After Tax Ratio

Figure 4.19: Uchumi Supermarket Debt Equity and Pre &After Tax Ratios Trend Analysis 4.7.0 Longhorn Publishers Return on Equity

Longhorn Publishers Return on Equity fluctuated during the period of study. It increased from --8% in 2012 to 24% in 2013 and dropped to 22% in 2014. The ratio further dropped to 19% in 2015 and finally settled at 11% in 2016. Table 4.21 below shows the changes in Longhorn Publishers Return on Equity.

Table 4.21: Longhorn Publishers Return on Equity Ratios

Year Return on Equity Ratio % 2012 -8% 2013 24% 2014 22% 2015 19% 2016 11%

4.7.1 Longhorn Publishers Pre& After Tax Profit Ratios

Between 2012 and 2014 and between 2015 and 2016, there existed a positive relationship between Longhorn Publishers’ Pre and After Tax profit ratios. However, between 2014 and 2015 when the Pre Tax Profit ratio remained constant at 11%, Longhorn Publishers After Tax Profit ratio increased from 7% to 8%. This relationship is demonstrated in table 4.22 below.

Table 4.22: Longhorn Publishers Pre & After Tax Profit Ratios

Year Profit Before Tax Ratio Profit After Tax Ratio

2012 -3% -3%

2013 15% 9%

2014 11% 7%

2015 11% 8%

2016 9% 7%

4.7.2 Longhorn Publishers Debt Equity Ratio and Return on Equity analysis

Longhorn Publishers Debt Equity and Return on Equity ratios were negatively correlated during the period under study. This phenomenon is illustrated in figure 4.20 below.

120% 100% 80% 60%

40% Ratios 20% 0% -20% 2012 2013 2014 2015 2016 Debt to Equity Ratio 112% 78% 72% 81% 97% Return on Equity -8% 24% 22% 19% 11% Years

Debt to Equity Ratio Return on Equity

Figure 4.20: Longhorn Publishers Debt Equity and Return on Equity Ratios Trend analysis

4.7.3 Longhorn Publishers Debt Equity Ratio and Pre & After Tax Profit Analysis

From figure 4.21 below, Longhorn Publishers Debt Equity Ratio was positively correlated between 2012 and 2015 but negatively correlated between 2015 and 2016 with After Tax Profit ratio. The firm’s Debt to Equity ratio was negatively correlated with Pre Tax profit ratio between 2012 and 2013 and between 2015 and 2016 but positively correlated between 2013 and 2014. The Pre and After Tax profit ratios were positively correlated between 2012 and 2014 but negatively correlated between 2014 and 2016.

120% 100% 80% 60%

40% Ratios 20% 0% -20% 2012 2013 2014 2015 2016 Debt to Equity Ratio 112% 78% 72% 81% 97% Profit Before Tax Ratio -3% 15% 11% 11% 9% Profit After Tax Ratio -3% 9% 7% 8% 7% Years

Debt to Equity Ratio Profit Before Tax Ratio Profit After Tax Ratio

Figure 4.21: Longhorn Publishers Debt Equity and Pre &After Tax Profit Ratios Trend Analysis

4.7.4 Deacons (East Africa) Return on Equity

Deacons (East Africa) Return on Equity kept on varying from year to year. It increased from -3% in 2012 to 13% in 2013 and dropped to 4% in 2014. The ratio increased to 8% in 2015 and finally dropped to -24% in 2016. Table 4.23 below indicates the changes in Deacons (East Africa)Return on Equity.

Table 4.23: Deacons (East Africa Return on Equity Ratios

Year Return on Equity Ratio % 2012 -3% 2013 13% 2014 4% 2015 8% 2016 -24%

4.7.5 Deacons (East Africa) Pre & After Tax Profit Ratios

Deacons (East Africa) Pre and After Tax profit ratios were positively correlated throughout the period under study as indicated in table 4.24 below.

Table 4.24: Deacons (East Africa) Pre &After Tax Profit Ratios

Year Profit Before Tax Ratio Profit After Tax Ratio

2012 -2% -2%

2013 9% 10%

2014 5% 3%

2015 6% 5%

2016 -17% -12%

4.7.6 Deacons (East Africa) Debt Equity Ratio and Return on Equity analysis

There existed no relationship between Debt Equity and Return on Equity ratios in Deacons (East Africa) Ltd during the period under review. This is illustrated in figure 4.22 below.

120% 100% 80% 60% 40%

20% Ratios 0% -20% -40% 2012 2013 2014 2015 2016 Debt to Equity Ratio 66% 46% 39% 64% 95% Return on Equity -3% 13% 4% 8% -24% Years

Debt to Equity Ratio Return on Equity

Figure 4.22: Deacons (East Africa) Debt Equity and Return on Equity Ratios Trend analysis

4.7.7 Deacons (East Africa) Debt Equity Ratio and Pre & After Tax Profit Analysis

From figure 4.23 below, Deacons (East Africa) Debt Equity Ratio was negatively correlated with both Pre and After Tax profit ratios except for between 2014 and 2015 when

58 the relationship was positive. Pre and After Tax profit ratios were however positively correlated for the entire research period.

120% 100% 80% 60% 40%

Ratios 20% 0% -20% -40% 2012 2013 2014 2015 2016 Debt to Equity Ratio 66% 46% 39% 64% 95% Profit Before Tax Ratio -2% 9% 5% 6% -17% Profit After Tax Ratio -2% 10% 3% 5% -12% Years

Debt to Equity Ratio Profit Before Tax Ratio Profit After Tax Ratio

Figure 4.23: Deacons (East Africa) Debt Equity and Pre & After Tax Profit Ratios Trend Analysis

4.7.8 Nairobi Business Ventures Return on Equity

Nairobi Business Ventures Return on Equity depicted a fluctuating trend. It increased from 10% in 2013 to 41% in 2014, dropped to 6% in 2015 and eventually rose to 9% in 2016. Table 4.25 below indicates the changes in Nairobi Business Ventures Ltd Return on Equity.

Table 4.25: Nairobi Business Ventures Return on Equity Ratios

Year Return on Equity Ratio %

2012 -

2013 10%

2014 41%

2015 6%

2016 9%

4.7.9 Nairobi Business Ventures Profit Ratios (Pre- Tax & After Tax)

Nairobi Business Ventures Pre and After Tax profit ratios were positively related with one another as shown in table 4.26 below.

Table 4.26: Nairobi Business Ventures Pre& After Tax Profit Ratios

Year Profit Before Tax Ratio Profit After Tax Ratio

2012 - -

2013 3% 2%

2014 15% 11%

2015 5% 4%

2016 7% 5%

4.8.0 Nairobi Business Ventures Debt Equity Ratio and Return on Equity analysis

Nairobi Business Ventures Debt Equity and Return on Equity ratios were positively correlated. This is illustrated in figure 4.24 below.

350% 300% 250% 200% 150% Ratios 100% 50% 0% 2012 2013 2014 2015 2016 Debt to Equity Ratio 306% 321% 146% 212% Return on Equity 10% 41% 6% 9% Years

Debt to Equity Ratio Return on Equity

Figure 4.24: Nairobi Business Ventures Debt Equity and Return on Equity Ratios Trend analysis 4.8.1 Nairobi Business Ventures Debt Equity Ratio and Pre & After Tax Profit Analysis

From figure 4.25 below, Nairobi Business Ventures Debt Equity Ratio had a positive relationship with both its Pre and After Tax profit ratios during the research period.

350% 300% 250% 200%

150% Ratios 100% 50% 0% 2012 2013 2014 2015 2016 Debt to Equity Ratio 306% 321% 146% 212% Profit Before Tax Ratio 3% 15% 5% 7% Profit After Tax Ratio 2% 11% 4% 5% Years

Debt to Equity Ratio Profit Before Tax Ratio Profit After Tax Ratio

Figure 4.25: Nairobi Business Ventures Debt Equity and Pre &After Tax Profit Ratios Trend Analysis

4.8.2 Relationship between Debt Equity Ratio and Return on Equity

From table 4.27 below there is no defined correlation between Debt Equity Ratio and Return on Equity. This is due to the fact that when the weighted average Debt Equity Ratio of the commercial and service firms increases the weighted Average Return on Equity either increases or decreases by different margins.

Table 4.27: Weighted Average Debt Equity Ratios & Return on Equity Ratios Analysis

Company Debt Equity Ratios 2012 2013 2014 2015 2016 Average Express (K) Ltd 150% 142% 165% 268% 1526% 450% Kenya Airways Ltd 262% 314% 451% -3153% -544% -534% Nation Media Group 46% 39% 36% 42% 40% 41% The Standard Group Ltd 90% 105% 86% 132% 112% 105% TPS (E.A) Serena Ltd 26% 17% 19% 27% 28% 23% Scangroup Ltd 71% 58% 56% 45% 53% 57% Uchumi Supermarket Ltd 86% 91% 105% 767% -338% 142% Longhorn Publishers Ltd 112% 78% 72% 81% 97% 88% Deacons (E.A) Ltd 66% 46% 39% 64% 95% 62% Nairobi Business Ventures - 306% 321% 146% 212% 246% Ltd Average 101% 120% 135% -158% 128% Company Return on Equity Ratios 2012 2013 2014 2015 2016 Average Express (K) Ltd 7% 0% -43% -50% -415% -100% Kenya Airways Ltd 7% -25% -12% 432% 74% 95% Nation Media Group 34% 31% 28% 25% 19% 27% The Standard Group Ltd 4% 8% 11% -15% 10% 3% TPS (E.A) Serena Ltd 6% 4% 3% -3% 1% 2% Scangroup Ltd 15% 11% 7% 6% 5% 9% Uchumi Supermarket Ltd 10% 12% 11% -532% 172% -65% Longhorn Publishers Ltd -8% 24% 22% 19% 11% 14% Deacons (E.A) Ltd -3% 13% 4% 8% -24% 0% Nairobi Business Ventures - 10% 41% 6% 9% 17% Average 8% 9% 7% -10% -14%

4.8.3 Relationship between Debt Equity Ratio and Pre Tax profit

There is no correlation between Debt Equity Ratio and Profit Before Tax Ratios because when the Average weighted Debt Equity Ratio increases or decreases, the Average weighted Profit Before Tax ratio either moves in the same direction, or moves in the opposite direction. This is clarified on table 4.28 below.

Table 4.28: Weighted Average Debt Equity Ratios & Pre Tax Profit Ratio Analysis.

Company Debt Equity Ratios 2012 2013 2014 2015 2016 Average Express (K) Ltd 150% 142% 165% 268% 1526% 450% Kenya Airways Ltd 262% 314% 451% -3153% -544% -534% Nation Media Group 46% 39% 36% 42% 40% 41% The Standard Group Ltd 90% 105% 86% 132% 112% 105% TPS (E.A) Serena Ltd 26% 17% 19% 27% 28% 23% Scangroup Ltd 71% 58% 56% 45% 53% 57% Uchumi Supermarket Ltd 86% 91% 105% 767% -338% 142% Longhorn Publishers Ltd 112% 78% 72% 81% 97% 88% Deacons (E.A) Ltd 66% 46% 39% 64% 95% 62% Nairobi Business Ventures Ltd - 306% 321% 146% 212% 246% Average 101% 120% 135% -158% 128% Company Profit Before Tax Ratios 2012 2013 2014 2015 2016 Average Express (K) Ltd -6% 0% -44% -61% -178% -58% Kenya Airways Ltd -2% -11% -5% -27% -22% -13% Nation Media Group 28% 27% 27% 23% 22% 25% The Standard Group Ltd 7% 6% 7% -9% 6% 3% TPS (E.A) Serena Ltd 14% 11% 3% -3% 5% 6% Scangroup Ltd 27% 25% 18% 17% 15% 21% Uchumi Supermarket Ltd 3% 3% 3% -36% -54% -16% Longhorn Publishers Ltd -3% 15% 11% 11% 9% 9% Deacons (E.A) Ltd -2% 9% 5% 6% -17% 0% Nairobi Business Ventures - 3% 15% 5% 7% 8% Average 7% 9% 4% -7% -21%

4.8.4 Relationship between Debt Equity Ratio and After Tax profit

From table 4.29 below, there was no relationship between Debt Equity Ratio and Profit After Tax Ratio due to the fact that when the Average weighted Debt Equity Ratio increases, the average weighted Profit After Tax Ratio either increases or decreases.

Table 4.29: Weighted Average Debt Equity Ratios & Profit After Tax Ratio Analysis.

Company Debt Equity Ratios 2012 2013 2014 2015 2016 Average Express (K) Ltd 150% 142% 165% 268% 1526% 450% Kenya Airways Ltd 262% 314% 451% -3153% -544% -534% Nation Media Group 46% 39% 36% 42% 40% 41% The Standard Group Ltd 90% 105% 86% 132% 112% 105% TPS (E.A) Serena Ltd 26% 17% 19% 27% 28% 23% Scangroup Ltd 71% 58% 56% 45% 53% 57% Uchumi Supermarket Ltd 86% 91% 105% 767% -338% 142% Longhorn Publishers Ltd 112% 78% 72% 81% 97% 88% Deacons (E.A) Ltd 66% 46% 39% 64% 95% 62% Nairobi Business Ventures - 306% 321% 146% 212% 246% Ltd Average 101% 120% 135% -158% 128% Company Profit After Tax Ratios 2012 2013 2014 2015 2016 Average Express (K) Ltd 6% 0% -45% -49% -154% -48% Kenya Airways Ltd 2% -8% -3% -23% -23% -11% Nation Media Group 20% 19% 18% 18% 15% 18% The Standard Group Ltd 2% 3% 5% -6% 4% 2% TPS (E.A) Serena Ltd 9% 7% 4% -5% 2% 4% Scangroup Ltd 19% 23% 12% 10% 10% 15% Uchumi Supermarket Ltd 2% 2% 3% -34% -56% -17% Longhorn Publishers Ltd -3% 9% 7% 8% 7% 6% Deacons (E.A) Ltd -2% 10% 3% 5% -12% 1% Nairobi Business Ventures - 2% 11% 4% 5% 6% Average 6% 7% 2% -7% -20%

4.5 Effect of capital structure on the firms’ share performance 4.5.1 Express (K) Ltd Debt Equity Ratio

Debt Equity Ratio measures the extent to which a firm’s capital structure is funded by either debt or equity. Debt Equity Ratio is calculated by dividing a firm’s total liabilities by its total equity. Express (K) Ltd Debt Equity Ratio was 150% in 2012 and dropped to 142% in 2013. In 2014, it rose to 165%, then to 268% in 2015 and finally shot at 1526% in 2016. The Debt Equity Ratio for Express (K) Ltd is illustrated in table 4.30 below.

Table 4.30: Express (K) Ltd Debt Equity Ratio

Year Debt Equity Ratio 2012 150% 2013 142% 2014 165% 2015 268% 2016 1526%

4.5.2 Express (K) Ltd Earnings Per Share

Earnings Per Share is a ratio that measures the amount of net income earned per share of common stock outstanding. It is calculated by dividing the net income by the weighted average number of common shares outstanding. Express (K) Ltd Earnings Per Share was Kshs. 0.37 in 2012, it dropped to Kshs. 0.01 in 2013 and further dropped to Kshs. (2.18) in 2014. In 2015 Earnings Per Share increased to Kshs (1.7) then to Kshs. 2.74 in 2016.The Earnings Per Share for Express (K) Ltd is illustrated in table 4.31 below.

Table 4.31: Express (K) Ltd Earnings Per Share

Year Earnings Per Share

2012 0.37

2013 0.01

2014 (2.18)

2015 (1.70)

2016 2.74

4.5.3 Express (K) Ltd Debt Equity Ratio and Earnings Per Share

The trend analysis between Express (K) Ltd Debt Equity Ratio and Earnings Per Share is not steady. This implies that there was no correlation between the two ratios. When Debt Equity Ratio increased, the Earnings Per Share either increased or decreased. This is depicted on figure 4.26 below.

1800% 1600% 1400% 1200% 1000% 800% 600%

Ratios 400% 200% 0% -200% -400% 2012 2013 2014 2015 2016 Debt to Equity Ratio 150% 142% 165% 268% 1526% EPS (Kshs) 0.37 0.01 -2.18 -1.7 -2.74

Years

Debt to Equity Ratio EPS (Kshs)

Figure 4.26: Express (K) Ltd Debt Equity and EPS Trend Analysis

4.5.4 Kenya Airways Debt Equity Ratio

KQs Debt Equity Ratio gradually grew from 262% in 2012 to 314% in 2013 and settling at 451% in 2014. In 2015, the firm’s Debt Equity ratio drastically dropped to -3,153% but rose to -544% in 2016. The Debt Equity Ratio for KQ is shown in table 4.32 below.

Table 4.32: Kenya Airways Debt Equity Ratio

Year Debt Equity Ratio

2012 262%

2013 314%

2014 451%

2015 -3,153%

2016 -544%

4.5.5 Kenya Airways Ltd Earnings Per Share

Kenya Airways Earnings Per Share have been fluctuating during the period under study. EPS dropped from Kshs. 3.58 in 2012 to Kshs. (6.35), rose to Kshs. (2.25) in 2014. In 2015, KQs EPS dropped to Kshs (17.21) and further dropped to Kshs. (17.53) in 2016. The Earnings Per Share for Kenya Airways Ltd is shown in table 4.33 below.

Table 4.33: Kenya Airways Earnings Per Share

Year Earnings Per Share (Kshs)

2012 3.58

2013 (6.35)

2014 (2.25)

2015 (17.21)

2016 (17.53)

4.5.6 Kenya Airways Ltd Debt Equity Ratio and Earnings Per Share

There was no relationship between Kenya Airways Debt Equity Ratio and Earnings Per Share. The two variables exhibited trends that moved in opposite directions for most of the years during the research period as depicted on figure 4.27 below.

1000% 500% 0% -500% -1000% -1500% Ratios -2000% -2500% -3000% -3500% 2012 2013 2014 2015 2016 Debt to Equity Ratio 262% 314% 451% -3153% -544% EPS (Kshs) 3.58 -6.35 -2.25 -17.21 -17.53 Years

Debt to Equity Ratio EPS (Kshs)

Figure 4.27: Kenya Airways Ltd Debt Equity and EPS Trend Analysis

4.5.7 Nation Media Group Debt Equity Ratio

Nation Media Group Debt Equity Ratio have been fluctuating. They decreased from 46% in 2012 to 39% in 2013 then to 36% in 2014. In 2015, the firm’s Debt Equity ratio increased to 42% but dropped to 40% in 2016. The Group’s Debt Equity Ratio fluctuations are illustrated in table 4.34 below.

Table 4.34: Nation Media Group Debt Equity Ratio

Year Debt Equity Ratio

2012 46%

2013 39%

2014 36%

2015 42%

2016 40%

4.5.8 Nation Media Group Earnings Per Share

Generally, Nation Media Group Earnings Per Share have gradually declined over the research period. EPS increased from Kshs. 13.33 in 2012 to Kshs. 13.4 in 2013. In 2014, EPS dropped to Kshs. 13.1, then to Kshs. 11.8 in 2015 and Kshs. 8.9 in 2016. Trend analysis for Nation Media Group Earnings Per Share is shown in table 4.35 below.

Table 4.35: Nation Media Group Earnings Per Share

Year Earnings Per Share (Kshs)

2012 13.33

2013 13.4

2014 13.1

2015 11.8

2016 8.9

4.5.9 Nation Media Group Debt Equity Ratio and Earnings Per Share

There was no relationship between NMG Debt Equity Ratio and Earnings Per Share. Whereas the EPS graph exhibited a downward moving trend, the Debt Equity ratio graph displayed a more or less straight line curve. This is illustrated in figure 4.28 below.

1600% 13.33 13.4 1400% 13.1 11.8 1200% 1000% 8.9 800%

Ratios 600% 400%

200% 46% 39% 36% 42% 40% 0% 2012 2013 2014 2015 2016 Debt to Equity Ratio 46% 39% 36% 42% 40% EPS (Kshs) 13.33 13.4 13.1 11.8 8.9 Years

Debt to Equity Ratio EPS (Kshs)

Figure 4.28: Nation Media Group Debt Equity and EPS Trend Analysis 4.6.0 The Standard Group Debt Equity Ratio

The Standard Group Debt Equity Ratio has been unstable. It increased from 90% in 2012 to 105% in 2013; dropped to 86% in 2014, suddenly rose to 132% in 2015 and finally dropped to 112% in 2016. The Standard Group Debt Equity Ratio variations is illustrated in table 4.36 below.

Table 4.36: The Standard Group Debt Equity Ratio

Year Debt Equity Ratio

2012 90%

2013 105%

2014 86%

2015 132%

2016 112%

4.6.1 The Standard Group Earnings Per Share

The Standard Group Earnings Per Share have been changing during the period under study. EPS decreased from Kshs. 2.56 in 2012 to Kshs. 2.41 in 2013. In 2014, EPS increased to Kshs. 2.57 but dropped to Kshs (2.95) in 2015. In 2016, EPS rose to Kshs. 2.14. Trend analysis for the Standard Group Earnings Per Share is given in table 4.37 below.

Table 4.37: The Standard Group Earnings Per Share

Year Earnings Per Share (Kshs)

2012 2.56

2013 2.41

2014 2.57

2015 (2.95)

2016 2.14

4.6.2 The Standard Group Debt Equity Ratio and Earnings Per Share

There was no relationship between the Standard Group Debt Equity Ratio and Earnings Per Share. Whereas the EPS graph displayed a zig-zag downward and upward moving trend, the Debt Equity ratio graph exhibited a gentle upward and downward moving trend. This movement is demonstrated on figure 4.29 below.

300% 200% 100% 0%

-100% Ratios -200% -300% -400% 2012 2013 2014 2015 2016 Debt to Equity Ratio 90% 105% 86% 132% 112% EPS (Kshs) 2.56 2.41 2.57 -2.95 2.14 Years

Debt to Equity Ratio EPS (Kshs)

Figure 4.29: The Standard Group Debt Equity and EPS Trend Analysis

4.6.3 TPS Eastern Africa (Serena) Debt Equity Ratio

TPS Eastern Africa (Serena) Debt Equity Ratio has been increasing in a decreasing proportion between 2013 and 2016 except for between 2012 and 2013. It decreased from 26% in 2012 to 17% in 2013 but kept on increasing in a decreasing proportion thereafter. TPS Eastern Africa (Serena) Debt Equity Ratio movement is shown in table 4.38 below.

Table 4.38: TPS Eastern Africa (Serena) Debt Equity Ratio

Year Debt Equity Ratio

2012 26%

2013 17%

2014 19%

2015 27%

2016 28%

4.6.4 TPS Eastern Africa (Serena) Earnings Per Share

TPS Eastern Africa (Serena) Earnings Per Share have been decreasing gradually; Kshs. 3.6 in 2012, Kshs. 2.26 in 2013, Kshs. 1.35 in 2014 and Kshs. (1.63) in 2015. However, in 2016, EPS slightly rose to Kshs. 0.54. Trend analysis for TPS Eastern Africa (Serena) Earnings Per Share is given in table 4.39 below.

Table 4.39: TPS Eastern Africa (Serena) Earnings Per Share

Year Earnings Per Share (Kshs)

2012 3.6

2013 2.26

2014 1.35

2015 (1.63)

2016 0.54

4.6.5 TPS Eastern Africa (Serena) Debt Equity Ratio and Earnings Per Share

There was no correlation between TPS Eastern Africa (Serena) Debt Equity Ratio and Earnings Per Share. As EPS showed a zig-zag downward and upward moving trend, the Debt Equity ratio graph exhibited a gentle upward and downward moving trend. This movement is as shown in figure 4.30 below.

400%

300%

200%

100% Ratios 0%

-100%

-200% 2012 2013 2014 2015 2016 Debt to Equity Ratio 26% 17% 19% 27% 28% EPS (Kshs) 3.6 2.26 1.35 -1.63 0.54 Years

Debt to Equity Ratio EPS (Kshs)

Figure 4.30: TPS Eastern Africa (Serena) Debt Equity and EPS Trend Analysis 4.6.6 Scangroup Debt Equity Ratio

Scangroup Debt Equity Ratio has been decreasing from 2012 to 2015 but increased in 2016 as shown in table 4.40 below. Debt Equity ratio dropped from 71% in 2012 to 58% in 2013. It continued with the downward trend to 56% in 2014 and further dropped to 45% in 2015. In 2016 however, the ratio rose to 53%.

Table 4.40: Scangroup Debt Equity Ratio

Year Debt Equity Ratio

2012 71%

2013 58%

2014 56%

2015 45%

2016 53%

4.6.7 Scangroup Earnings Per Share

Scangroup Earnings Per Share were Kshs. 2.2 in 2012 and rose to Kshs. 2.6 in 2013. However, in 2014, it dropped to Kshs. 1.5 and stabilized at Kshs. 1.1 in 2015 and 2016. Trend analysis for Scangroup Earnings Per Share is given in table 4.41 below.

Table 4.41: Scangroup Earnings Per Share

Year Earnings Per Share (Kshs)

2012 2.2

2013 2.6

2014 1.5

2015 1.1

2016 1.1

4.6.8 Scangroup Debt Equity Ratio and Earnings Per Share

The relationship between Scangroup Debt Equity Ratio and Earnings Per Share is mixed. Between 2012 and 2013, the correlation was negative. Between 2013 and 2015, a positive correlation was displayed. Between 2015 and 2016, the Debt Equity ratio increased from 45% to 53% while the Earnings Per Share remained constant at Kshs. 1.12. This movement is illustrated in figure 4.31 below.

300%

250%

200%

150% Ratios 100%

50%

0% 2012 2013 2014 2015 2016 Debt to Equity Ratio 71% 58% 56% 45% 53% EPS (Kshs) 2.21 2.6 1.5 1.12 1.12 Years

Debt to Equity Ratio EPS (Kshs)

Figure 4.31: Scangroup Debt Equity and EPS Trend Analysis

4.6.9 Uchumi Supermarket Debt Equity Ratio

Uchumi Supermarket Debt Equity Ratio exhibited an upward trend until 2016 when it dropped. The ratio rose from 86% in 2012 to 91% in 2013 and further increased to 105% in 2014. In 2015, it increased significantly to 767% only to drop considerably to -338% in 2016. This phenomenon is demonstrated in table 4.42 below.

Table 4.42: Uchumi Supermarket Debt Equity Ratio

Year Debt Equity Ratio

2012 86%

2013 91%

2014 105%

2015 767%

2016 -338%

4.7.0 Uchumi Supermarket Earnings Per Share

Uchumi Supermarket Earnings Per Share grew gradually from Kshs. 1.03 in 2012 to Kshs. 1.35 in 2013 and Kshs. 1.45 in 2014. In 2015, EPS slumped to Kshs. (10.77) but improved

74 slightly to Kshs. (9.86) in 2016. Trend analysis for Uchumi Supermarket Earnings Per Share is given in table 4.43 below.

Table 4.43: Uchumi Supermarket Earnings Per Share

Year Earnings Per Share (Kshs)

2012 1.03

2013 1.35

2014 1.45

2015 (10.77)

2016 (9.86)

4.7.1 Uchumi Supermarket Debt Equity Ratio and Earnings Per Share

The relationship between Uchumi Supermarket Debt Equity Ratio and Earnings Per Share was varied. Between 2012 and 2014, the relationship between the two ratios was positive. Between 2014 and 2016, the correlation was negative. The scenario is illustrated on figure 4.32 below.

1000%

500%

Ratios -500%

-1000%

-1500% 2012 2013 2014 2015 2016 Debt to Equity Ratio 86% 91% 105% 767% -338% EPS (Kshs) 1.03 1.35 1.45 -10.77 -9.86 Years

Debt to Equity Ratio EPS (Kshs)

Figure 4.32: Uchumi Supermarket Debt Equity and EPS Trend Analysis

4.7.2 Longhorn Publishers Debt Equity Ratio

Longhorn Publishers Debt Equity Ratio has been fluctuating over the years under study. In 2012, the ratio dropped from 112% to 78% in 2013 to 72% in 2014. The trend was reversed in 2015 when the ratio rose to 81% and finally to 97% in 2016. This is illustrated in table 4.44 below.

Table 4.44: Longhorn Publishers Debt Equity Ratio

Year Debt Equity Ratio

2012 112%

2013 78%

2014 72%

2015 81%

2016 97%

4.7.3 Longhorn Publishers Earnings Per Share

Longhorn Publishers Earnings Per Share were on the upward trend from 2012 to 2015 but the trend reversed in 2016. EPS grew from a low of Kshs. (0.38) in 2012 to Kshs. 1.61 in 2013 and Kshs. 1.62 in 2014. The climax of the forward movement was experienced in 2015 when the ratio rose to Ksh. 0.7 before slightly dropping to Kshs. 0.66 in 2016. Trend analysis for Longhorn Publishers Earnings Per Share is given in table 4.45 below.

Table 4.45: Longhorn Publishers Earnings Per Share

Year Earnings Per Share (Kshs)

2012 (0.38)

2013 1.61

2014 1.62

2015 0.70

2016 0.66

4.7.4 Longhorn Publishers Debt Equity Ratio and Earnings Per Share

200%

150%

100%

Ratios 50%

-50% 2012 2013 2014 2015 2016 Debt to Equity Ratio 112% 78% 72% 81% 97% EPS (Kshs) -0.38 1.61 1.62 0.7 0.66 Years

Debt to Equity Ratio EPS (Kshs)

Figure 4.33: Longhorn Publishers Debt Equity and EPS Trend Analysis 4.7.5 Deacons (East Africa) Debt Equity Ratio

Deacons (East Africa) Debt Equity Ratio begun on a downward trend before it reversed. It dropped from 66% in 2012 to 46% in 2013 and a further drop to 39% in 2014. In 2015, the ratio rose to 64% and finally settled at 95% in 2016. The said movement is illustrated in table 4.46 below.

Table 4.46: Deacons (East Africa) Debt Equity Ratio

Year Debt Equity Ratio

2012 66%

2013 46%

2014 39%

2015 64%

2016 95%

4.7.6 Deacons (East Africa) Earnings Per Share

Deacons (East Africa) Earnings Per Share dropped from Kshs. 0.99 in 2012 to Kshs. (0.37) in 2013. However, in 2014, the trend reversed and the EPS moved to Kshs. 0.50 and further increased to Kshs. 0.92 in 2015 although finally dropped to Kshs. (2.24) in 2016. An analysis of Deacons (East Africa) Earnings Per Share for the period under review is as given in table 4.47 below.

Table 4.47: Deacons (East Africa) Earnings Per Share

Year Earnings Per Share (Kshs)

2012 0.99

2013 (0.37)

2014 0.50

2015 0.92

2016 (2.24)

4.7.7 Deacons (East Africa) Debt Equity Ratio and Earnings Per Share

The relationship between Deacons (East Africa) Debt Equity Ratio and Earnings Per Share was varied. The relationship was positive between 2012 and 2013, negative between 2013 and 2014, positive between 2014 and 2015 and finally, negative between 2015 and 2016. This correlation is illustrated on figure 4.34 below.

150% 100% 50% 0% -50% -100% Ratios -150% -200% -250% 2012 2013 2014 2015 2016 Debt to Equity Ratio 66% 46% 39% 64% 95% EPS (Kshs) 0.99 -0.37 0.5 0.92 -2.24 Years

Debt to Equity Ratio EPS (Kshs)

Figure 4.34: Deacons (East Africa) Debt Equity and EPS Trend Analysis

4.7.8 Relationship between Debt Equity Ratio and Firm’s share performance

From table 4.48 below, there is no definite correlation between Debt Equity Ratio and firms’ share performance. This is supported by the fact that an increase in the weighted average Debt Equity Ratio of the commercial and service firms either increases or decreases the weighted average EPS by different margins.

Table 4.48: Weighted Average Debt Equity Ratios & Earnings Per Share Analysis

Company Debt Equity Ratios 2012 2013 2014 2015 2016 Avera ge Express (K) Ltd 150% 142% 165% 268% 1526% 450% Kenya Airways Ltd 262% 314% 451% -3153% -544% -534% Nation Media Group 46% 39% 36% 42% 40% 41% The Standard Group Ltd 90% 105% 86% 132% 112% 105% TPS (E.A) Serena Ltd 26% 17% 19% 27% 28% 23% Scangroup Ltd 71% 58% 56% 45% 53% 57% Uchumi Supermarket Ltd 86% 91% 105% 767% -338% 142% Longhorn Publishers Ltd 112% 78% 72% 81% 97% 88% Deacons (E.A) Ltd 66% 46% 39% 64% 95% 62% Nairobi Business Ventures - 306% 321% 146% 212% 246% Ltd Average 101% 120% 135% -158% 128% Company Earnings Per Share Analysis 2012 2013 2014 2015 2016 Avera ge Express (K) Ltd 0.37 0.01 -2.18 -1.7 -2.74 -1.25 Kenya Airways Ltd 3.58 -6.5 -2.25 -17.21 -17.53 -7.98 Nation Media Group 13.33 13.4 13.1 11.8 8.9 12.11 The Standard Group Ltd 2.56 2.41 2.57 -2.95 2.14 1.35 TPS (E.A) Serena Ltd 3.6 2.26 1.35 -1.63 0.54 1.22 Scangroup Ltd 2.21 2.60 1.50 1.12 1.12 1.71 Uchumi Supermarket Ltd 1.03 1.35 1.45 -10.77 -9.86 -3.36 Longhorn Publishers Ltd -0.38 1.61 1.62 0.70 0.66 0.84 Deacons (E.A) Ltd 0.99 -037 0.50 0.92 -2.24 -7.37 Nairobi Business Ventures ------Average 3.03 -2.21 1.96 -2.19 -2.11

4.6 Regression Analysis

Regression analysis refers to the statistical tool used for investigating the relationships between variables. It shows the direction towards which the relationship between variables is moving. Generally, the researcher seeks to establish the underlying effect of one variable upon another, which in this study is the correlation between Debt Equity Ratio with; Return on Equity, Profit Before Tax, Profit After Tax and Earnings Per Share. Data relating to variables of interest was assembled and regression was employed to estimate the quantitative effect of the independent variable on the dependent variable. Besides, the research considered the degree of confidence that the estimated relationship is perceived close to the true relationship.

4.6.1 Regression Analysis on Debt Equity Ratio and Return on Equity

The study sought to establish the underlying effect of one variable on another variable. Debt to Equity Ratio was used as the independent variable while Return on Equity was the dependent variable.

Table 4.49: Debt Equity and Return on Equity Model Summary

Model Summary

Adjusted R Model R R Square Square Std. Error of the Estimate

1 .802a .643 .635 .71766 a. Predictors: (Constant), Debt Equity Ratio

The table 4.49 above provided the R and R Square values. The R value representing simple correlation was 0.802, indicating a high level of correlation. The R Square value indicated how much of Return on Equity which was the dependent variable, can be explained by the independent variable, Debt to Equity Ratio. In this case, 64.3% could be explained, which is significant.

Table 4.50: Debt to Equity Ratio and Return on Equity Anova

ANOVAa

Sum of Model Squares df Mean Square F Sig.

1 Regression 44.458 1 44.458 86.320 .000b

Residual 24.721 48 .515

Total 69.179 49

a. Dependent Variable: Return on Equity

b. Predictors: (Constant), Debt Equity Ratio

The ANOVA (Analysis of variance) in table 4.50above indicates the significance with which the regression model predicted the outcome variable. The statistical significance P- value 0.000 is less than 0.05. The F- distribution table value for, F (1, 48) at 5% level of significance was 4.04. This figure is smaller than the F- critical value of 86.32. Therefore, critical analysis of both P value and F critical value indicates that the model of regression was significant. Thus the model is a good predictor of the dependent variable.

4.6.2 Regression Analysis on Debt to Equity and Profit Before Tax

The research did regression using Debt Equity Ratio as the independent variable while Profit Before Tax was used as the dependent variable. The aim was to establish whether or not there existed a significant relationship between the two variables.

Table 4.51: Debt to Equity Ratio and Profit Before Tax Model Summary

Model Summary

Adjusted R Model R R Square Square Std. Error of the Estimate

1 .669a .447 .436 4469121529.00000 a. Predictors: (Constant), Debt Equity Ratio

In table 4.51 above the R value was 0.669, which represented the simple correlation and, therefore, indicated a higher degree of correlation. The R Square value indicated how much of the dependent variable, Profit Before Tax, can be explained by the independent variable, Debt Equity Ratio. From the analysis 44.7% could be explained, which was lower.

Table 4.52: Debt to Equity Ratio and Profit Before Tax Anova

ANOVAa

Sum of Model Squares df Mean Square F Sig.

1 Regression 77503694270 1 775036942700000000000 38.804 .000b 0000000000. .000 000

Residual 95870626780 48 19973047250000000000. 0000000000. 000 000

Total 17337432100 49 00000000000 .000 a. Dependent Variable: Profit Before Tax b. Predictors: (Constant), Debt Equity Ratio

The ANOVA (Analysis of variance) table 4.52 indicated the significance with which the regression model predicted the outcome variable. The statistical significance P=0.000 is less than 0.05. Using the F- distribution table, the table value F (1, 48) with α =0.05 was 4.09 which is smaller than the F- critical value of 38.804. Both P value and F critical value indicates that the model of regression was significant hence, a good predictor of the dependent variable.

4.6.3 Regression Analysis on Debt to Equity and Profit After Tax

The research did regression using Debt Equity Ratio as the independent variable while Profit After Tax was used as the dependent variable. The aim was to ascertain causal relationship between the two variables.

Table 4.53: Debt to Equity Ratio and Profit After Tax Model Summary

Model Summary Adjusted R Model R R Square Square Std. Error of the Estimate 1 .664a .440 .429 4085006845.00000 a. Predictors: (Constant), Debt Equity Ratio

In table 4.53above the R value was 0.664, which represented the simple correlation and, therefore, indicated a higher degree of correlation between Debt Equity and Profit After Tax ratios. The R Square value of 44% indicated how much of the dependent variable, Profit After Tax, can be explained by the independent variable, Debt Equity Ratio. Thus, the extent was low.

Table 4.54: Debt to Equity Ratio and Profit After Tax Anova

ANOVAa Sum of Model Squares df Mean Square F Sig. 1 Regression 63025680640 1 6302568064000000 37.769 .000b 0000000000. 00000.000 000 Residual 80098948420 48 1668728092000000 0000000000. 0000.000 000 Total 14312462910 49 00000000000 .000 a. Dependent Variable: Profit After Tax b. Predictors: (Constant), Debt Equity Ratio

The ANOVA (Analysis of variance) table 4.54 indicated the significance with which the regression model predicted the outcome variable. The statistical significance P-value 0.000 is less than 0.05. Besides, the F- Distribution table figure for 1 tailed test, 48 degrees of freedom with 5% level of significance was 4.09 which was smaller than F- critical value, 37.769. Therefore, the extent to which the model can be used to predict the dependent variable is significant.

Table 4.55: Debt to Equity Ratio and Earnings Per Share Model Summary

Model Summary

Adjusted R Model R R Square Square Std. Error of the Estimate

1 .265a .070 .051 7.74182 a. Predictors: (Constant), Debt Equity Ratio

In table 4.55 above the R value was 0.265, which represented the simple correlation and, therefore, indicated a lower degree of correlation between Debt Equity and Earnings Per Share. The R Squared value of 7% indicated how much of the dependent variable, Earnings Per Share, can be explained by the independent variable, Debt Equity Ratio. Thus, the extent was low.

Table 4.56: Debt to Equity Ratio and Earnings Per Share Anova

ANOVAa

Sum of Mean Model Squares df Square F Sig.

1 Regression 217.642 1 217.642 3.631 .063b

Residual 2876.916 48 59.936

Total 3094.558 49 a. Dependent Variable: Earnings Per Share b. Predictors: (Constant), Debt Equity Ratio

The ANOVA (Analysis of variance) table 4.56 indicated the significance with which the regression model predicted the outcome variable. The statistical significance P of 0.06 is greater than 0.05. With the F- distribution table, the F (1, 48) with α =0.05 figure was 4.04 which is greater than F- critical value= 3. 631. Critical analysis of both P value and F critical value, indicates that the model of regression was insignificant. Therefore, the model cannot be used to predict the dependent variable.

4.7 Chapter Summary The chapter has provided results and findings based on secondary data obtained from published accounts of the commercial and service firms listed on the NSE. The chapter has analyzed; the components of capital structure employed by firms, effect of capital structure on firm profitability and the relationship between capital structure and firms’ share performance. The next chapter provides the summary, discussions, conclusions and recommendations of the findings.

CHAPTER FIVE

5.0 DISCUSSION, CONCLUSIONS AND RECOMMENDATIONS

5.1 Introduction

The preceding chapter scrutinized the data collected so that the researcher could come up with the findings. In this chapter, the outcomes are deliberated and inferences are made out of the deliberations. Consequently, recommendations for further research or improvement are suggested. This chapter is further broken into various sections namely; section 5.2 gives the summary of the chapter, section 5.3 is the discussion about the study, section 5.4 narrates the conclusions of the study and last but not least, section 5.5 discusses the recommendations for improvement.

5.2 Summary of the Study

This chapter presents the summary of the findings. The purpose of the research was to assess the effect of capital structure on the financial performance of the commercial and service firms listed on the Nairobi Securities Exchange. The following were the specific objectives of the study: to determine the components of capital structure employed by firms, to evaluate the effect of capital structure on firms’ profitability and to analyze the effect of capital structure on firms’ share performance.

The study utilized secondary data that was obtained from the archives of the ten active companies listed in the NSE, under the commercial and service firms as at 31st December, 2016. Thus, the study constituted a census survey for a period of 5 years (from 2012-2016). The secondary data sources used in the study included; review of the concerned firms’ profiles, recommendations from previous studies, audited accounts, internet, books, journals and magazines among others. The secondary data from the annual audited financial statements between 2012 and 2016 was entered into Microsoft Excel. The following financial ratios were calculated; Debt to Equity Ratio, Return on Equity, Profit Before Tax and Profit After Tax. The quantitative information gathered was coded and evaluated using descriptive statistics. The mean and standard deviation were used to describe every variable under study. The data was analyzed using the Statistical Package for Social Sciences (SPSS) to test the reliability of the data collected.

The study established that Debt and Equity are the key components of capital structure. The proportion of the mix of debt and equity vary from firm to firm. After analyzing the ten commercial and service firms quoted in the Nairobi Securities Exchange, the study established that Debt to Equity ratio varies from one firm to another. Thus there is no ideal ratio representing the mix of debt and equity in firms’ capital structure. The study also revealed that the higher the debt levels, the lower the financial performance measured in terms of Return on Equity, Pre and After Tax Profits. This was the case with Express (K) Ltd.

The study further established that there exist other elements of capital structure for example; share capital, share premium, reserves and retained earnings. Regarding share capital, the study revealed that there was no correlation between share capital and firms’ profitability. As regards share premium and reserves, Kenya Airways Ltd had the highest on average at 8.6 Billion and 13.8 Billion Kenya Shillings respectively compared to the other firms. However, the company had the highest retained earnings deficit of 29 Billion Kenya Shillings on average for the period 2012-2016. This partly explains the company’s poor performance.

Regarding the correlation between capital structure and Return on Equity from statistical data analysis, the study established that there was no significant relationship. The research analyzed the movement of weighted average of Debt to Equity ratio compared with the movement of Return on Equity weighted average. The study found out that when the average weighted Debt to Equity ratio moves in one direction, the average weighted Return on Equity either moves in the same direction or in the opposite direction.

The study further established that there was no significant correlation between financial leverage and firms’ financial performance. However, an analysis of Pre and After tax profits, the study proved that tax plays an important role in the firms’ capital structure. Firstly, firms with high debt to equity ratio enjoy a tax shield hence improved profitability. Secondly, taxation reduces a firms’ profit which would otherwise be apportioned as retained earnings to finance the firms’ capital structure.

5.3 Discussion 5.3.1 Components of capital structure employed by firms

The study found out that the two major components of capital structure are debt and equity. How a firm balances the mix of debt and equity in its capital structure is the big question

87 in capital structure literature. Empirical studies have proved that there is no optimal capital structure since different companies have different capital structure needs.

The study established that debt and equity are the major components of capital structure in all the 10 companies in the study. This is consistent with Modugu (2013) paper on an overview of capital structure decisions. From this study, it was established that firms are financed by either debt or equity. It is therefore imperative that management determines the best mix of debt and equity for a firm at any given point in time.

All the ten firms used in the research are quoted on the Nairobi Securities Exchange. This means that the firms are better placed to borrow from the public through the stock exchange compared to unlisted firms. The study agrees with Andani and Al-hassan (2007),in their study of financing decisions applicable in listed and non-listed firms in Ghana. The study found out that the Ghanaian Stock Exchange contributed immensely towards the financing of listed firms as opposed to non-listed firms.

The 10 firms in the study used varying mix of debt and equity year after year to finance their respective capital structures. Firms like Express (K) Ltd, Kenya Airways, the Standard Group, Uchumi Supermarket and Nairobi Business Ventures used more debt than equity while companies like Nation Media Group, TPS Eastern Africa (Serena), Scangroup, Longhorn Publishers and Deacons East Africa used more equity than debt. The study concurs with the proponents of capital structure, Modigliani and Miller (1958) who asserted that the mix of Debt and Equity is dependent of the pecking order and trade off theories of financial leverage.

Afrasiabishani, Ahmadinia and Hesami (2012) suggest that for a firm to achieve an optimal capital structure, there is need for tradeoff among the effects of taxes, both corporate and personal, bankruptcy and agency costs, etc. The trade-off theory recommends that firms should consider having debt in their capital structure at reasonable proportions and strive to attain and maintain that in the long run. By so doing, a firm stands to benefit immensely from the advantages associated with use of debt as a source of finance. One of the benefits of using debt is the advantage of enjoying tax savings. However, use of too much debt in a firm’s capital structure may lead to financial distress costs. Therefore, as the name suggests, there should be a trade-off between tax advantage and the risk associated with the potential of high financial distress costs.

Regarding the pecking order theory, Njenga (2014) established that firms prefer the use internal finance for instance, use of retained earnings over external financing for instance, debt financing. If external source of financing is adopted by a firm, then measures should be put in place to minimize the possible costs associated with external financing. Thus the financing likely to take the following order; debt finance first, followed by the issuance of preferred shares and finally issuance of ordinary shares. Empirical studies carried out in the past support both theories.

When firms with Retained Earnings (Deficit) were compared, Kenya Airways Ltd had the lowest average Retained Earnings with a deficit of 29 Billion Kenya Shillings for the period 2012-2016. Surprisingly, the company had the lowest Debt to Equity ratio. The study therefore contradicts the pecking order theory which stipulates that a firm should resort to more debt if internal sources of finances are not enough (Myers, 2001). Similarly, TPS Eastern Africa (Serena) with the highest average Retained Earnings of 2.4 Billion Kenya Shillings during the period under was not the firm with the lowest Debt to Equity ratio to support the pecking order theory.

The study however is in agreement with Chen, Jung and Chen (2011) research on the explanation of capital structure by the pecking order theory. The study found out that a firm’s potential to grow is positively correlated with its capital structure. Thus, growing firms demand for finances is high. These firms will opt to go for external sources of financing to bridge the gap.

According to Jahanzeb, Saif, Bajuri, Karami and Ahmadimousaabad (2013), none of the two theories; the trade-off or pecking order theory can stand on its own. Firms ought to keenly scrutinize these theories and strike a balance on the extent to which both theories can be applied in the firm because these firms are not homogenous. For example, according to Nwude, Itiri, Agbadua and Ude (2016), the higher the Debt to Equity ratio, the higher the chances for a firm to face bankruptcy.

5.3.2 Effect of Capital Structure on firms’ profitability

Regression analysis of the study indicated that the relationship between capital structure and Return on Equity was high and there was significant statistical correlation between the two variables. Regarding profitability, the correlation between financial leverage and both Pre and After Tax profits was high. Thus, tax has an effect on financial leverage. However, as regards to the extent with which the dependent variable can be explained by the

89 independent variable measured by R Squared, the correlation was low for both Pre and After Tax profits.

The research established that there was weak-to-no correlation between capital structure and firms’ profitability for the commercial and service firms listed on the Nairobi Securities Exchange. This was arrived at after analyzing the weighted average Debt to Equity ratio and Return on Equity and profitability ratios of the 10 firms used in the study for the period 2012- 2016. This was in tandem with a study on non-financial firms listed on the Cairo Stock Exchange, Egypt during the period 1997-2005. The study depicted a weak-to-no impact relationship between financial leverage and firm performance.

The study revealed that firms with more debt and less equity performed poorly in terms of profitability. This meant that firms like Kenya Airways, Uchumi supermarket, Express (K) Ltd and Nairobi Business Ventures had the wrong mix of debt and equity in their respective capital structures hence, dismal performance. The study is in agreement with (Ubesie, 2016) research on the relationship between capital structure and financial performance of Nigerian Quoted conglomerates.

On the flipside, the study established that how a firm manages its Debt to Equity ratio over a certain period of time plays a crucial role in determining future performance. This implies that a well-managed mix of Debt and Equity will yield better results. This concurs with the study to the effect that the finance manager’s main role in an organization is to effectively manage it. By so doing, the shareholders wealth is maximized as reflected by improved profitability (Iram, 2015).

Combination of debt and equity in a firm’s capital structure determines the risks and returns. From the study, firms with high debt levels in the capital structure are exposed to high risks. This concurs with(Edi and Binti, 2012) study which revealed that although debt financing increases a firm’s risk for future investments, it also affects the firm’s profitability.

In the recent past, Kenya Airways and Uchumi supermarket have recruited new CEOs hoping to turnaround these firms. These are corporate governance measures undertaken by firms whose performance is on the downward trend. The study concurs with Pratheepkanth and Lanka (2011) who researched on effect of capital structure on financial performance of selected firms listed on the Colombo Stock Exchange, Sri Lanka. The study established that there is a positive correlation between a firm’s corporate governance with its

90 ownership. Managers strive to maximize shareholders’ wealth by working round the clock towards improved profitability.

The study is in agreement with Muzir and Erol (2011) research on the triangle relationship relating to size of the firm, performance and financial leverage of firms based in Turkey. The study established that the effect of firm size on firm performance and sustainability is directly proportional with the mode of financing for expansion. The study found out that although debt financing increases firms’ risk exposure, it increases a firm’s expectations for better returns. And if the risk exposure is not adequately covered by positive returns, then the business enterprise is likely to get wound up. On the flipside, if the trend can be reversed, the firm will report good performance and can attract investors.

5.3.3 Effect of Capital Structure on firms’ share performance

Earnings Per Share is a portion of a firm’s earnings that is attributable to each ordinary shareholder, after all the necessary taxes have been deducted and preferred dividends paid. When computing, the figure is arrived at by simply dividing profit after tax earned in a given period of study by the total number of outstanding shares during the same period. Since the number of outstanding shares keep on fluctuating, a weighted average is usually used (Besey 2006, p.20).

According to the regression analysis, there is no significant correlation between capital structure and Earnings Per Share of the commercial and service firms quoted on the Nairobi Securities Exchange. There was also no significant statistical correlation between the two variables. This is evident from the analysis of the Debt to Equity ratio and Earnings Per Share of the 10 firms used in the study during the period 2012-2016. The study concurs with Elangkumaran and Nimalathasan(2013) study on the impact of leverage on earnings per share and share price of 20 firms in Sri Lanka listed on the Colombo Stock Exchange (CSE). The study was conducted between 2007 and 2012.

5.4 Conclusion 5.4.1 Components of Capital Structure employed by firms

Financial leverage is made up of two major elements namely; debt and equity. Empirical studies have shown that there is no ideal mix of debt and equity applicable to all firms. Each individual firm should strive to come up with a blend of these two components of capital structure that will guarantee profitability and avoid bankruptcy. One such way to achieve this, is applying some of the commonly used capital structure theories into practice.

For example, the pecking order theory advocates for prioritization of internal mechanisms of financing such as retained earnings over external sources of financing such as debt financing.

It is evident from the study that companies listed in the bourse can raise funds through public offers easily than unlisted firms. Therefore, companies should take advantage of this avenue of easy access to funds to come up with an appropriate mix of debt and equity that will guarantee the firm with growth in earnings and perpetual growth. Managers should remember that Debt to Equity ratio is a measure of risk and bankruptcy. High Debt ratio in a firm’s capital structure exposes the firm to the risk of bankruptcy.

5.4.2 Effect of Capital Structure on firms’ profitability

The mix of debt and equity has a long-term implication on firms’ survival. Different firms apply different mix of capital structure that suits them. Firms should employ capital structure effectively to meet its short term and long term obligations. This will ensure that earnings are improved and risk is minimized most of the time.

As mentioned earlier, firm’s profitability is dependent on the composition of debt both short term and long term. At the same time, wrong mix of debt and equity may increase a firm’s investment risk. Managers play a crucial role in trying to come up with the most viable mix of debt and equity in firm’s capital structure. This calls for good corporate governance practices on the part of management.

From regression analysis on the effect of financial leverage on firms’ profitability, the research concluded that there is high degree of correlation between capital structure and firm performance. The research established that the higher the debt, the higher the tax savings received by firms. The company managers should therefore maintain an optimal capital structure so as to be able to achieve better efficiency levels in business. This is in agreement with Nasimi (2016) study on the effect of financial leverage on some 30 firms quoted on the London Stock Exchange during the period 2005-2014.

5.4.3 Effect of Capital Structure on firms’ share performance

This study investigated the effect of capital structure on firms’ share performance measured by Earnings Per Share. The regression analysis on 5 years’ data from 2012 to 2016 revealed that there is insignificant positive correlation between capital structure and firm’s Earnings Per Share. The study is in agreement with Ubesie (2016) study on Nigerian listed

92 conglomerates between 2011 and 2015, but contradicts Ramachandran and Madhumathy (2016) study on the effect of capital structure on the Indian textile Industry.

5.5 Recommendations 5.5.1 Recommendation for Improvement

5.5.1.1 Components of Capital Structure employed by firms.

Firms ought to balance the composition of debt and equity in their capital structure in a manner that is cost effective and not detrimental to its future growth. Firms should therefore apply the relevant capital structure theories. According to the pecking order theory, just as the name suggests, firms should give priority to internal sources of financing before venturing into debt. The trade-off theory on the other hand promulgates the use of debt considering the tax benefits a firm is likely to reap for considering debt financing.

5.5.1.2 Effect of Capital Structure on firms’ profitability

The researcher has studied the effect of capital structure on financial performance of commercial and service firms listed on the Nairobi Securities Exchange over the period of 2012-2016 by using one independent variable, Debt to Equity ratio and four dependent variables namely; Return on Equity, Profit Before Tax, Profit After Tax and Earnings Per Share. If other researcher(s) wants to carry out another research on the same topic, then the researcher should consider incorporating more independent variables in the study and the period of the study must be more than 5 years for better results.

In addition, the firm should adopt an optimal capital structure and effective management team capable of turning around the firm’s fortunes in terms of improved profitability while at the same time minimizing the firm’s risk of bankruptcy. Besides, management and shareholders ought to be aware of other external factors that may have an impact on the firm’s performance.

5.5.1.3 Effect of Capital Structure on Earnings Per Share

The only measure of share performance used in the study was the Earnings Per Share. If someone wants to conduct another study on this topic, the researcher must consider other measures of share performance such as the price earnings ratio and market price per share.

5.5.2 Recommendation for Further Research

Finally, since past studies by various scholars that were aimed at coming up with an optimal range of the mix of debt and equity applicable to various firms have not been successful, further studies on the subject remain relevant.

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APPENDICES

Appendix 1: Cover Letter

Kizito O. Omukaga

United States International University-Africa,

P.O. BOX 14634, 00800.

Nairobi.

5th September, 2017.

CEO

Nairobi Securities Exchange,

Nairobi.

Dear Sir/ Madam,

Re: Request for Secondary Data

I am carrying out research on the effects of capital structure on financial performance of commercial and service firms listed on the NSE for the period 2012 - 2016. This is in partial fulfillment of the requirement of the Masters in Business Administration (MBA) degree Program at the United States International University.

Kindly provide me with financial data for the twelve commercial and service firms listed on the NSE for the five-year period 2012 to 2016 as per attached collection sheet.

Thank you in advance.

Yours sincerely,

Kizito O. Omukaga

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Appendix 2: Study Questionnaire

This research is a partial fulfillment for the requirement for the degree of Masters in Business Administration (MBA).The purpose of this study is to investigate on the effect of capital structure on financial performance of commercial and service sector firms on the NSE in Kenya for the period 2012-2016. Please note that any information you give will be treated with utmost confidentiality and will never be used for any other purpose other than for this project. Your cooperation and participation will be highly appreciated. I look forward to your swift response.

SECTION A: BIO DATA Kindly answer all the questions either by ticking in the boxes or writing in the spaces provided. 1. Gender? Male Female 2. Age Group? 20-25 years 31-35 years 26-30 years 36 years and over 3. What is your current position? Senior level management Supervisory level Middle level management General staff [ ] Other (Specify): 4. Education Primary Undergraduate Secondary [ ] Post Graduate Middle level College Doctoral Other (Specify): 5. How long have you worked for this organization? Less than 2 years 6-8 years 3-5 years 9 years and over

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SECTION B: COMPONENTS OF CAPITAL STRUCTURE EMPLOYED BY FIRMS

Kindly indicate the extent to which the following attributes of capital structure apply to your firm. Please (ƴ) tick appropriately on a scale of 1-5. 1- Strongly Disagree, 2- Disagree, 3- Uncertain, 4- Agree, 5- Strongly Agree.

Strongly Disagree Disagree Uncertain Agree Strongly Agree 1. The firm has a mix of debt and equity in its 1 2 3 4 5 capital structure

2. The firm’s capital structure is 100% equity 1 2 3 4 5

3. The firm’s capital structure is made of debt 1 2 3 4 5 only

4. Investors are likely to invest in a firm where 1 2 3 4 5 shareholders have a stake

5. Equity element in a firm’s capital structure 1 2 3 4 5 is attractive to lenders

6. The trade-off and pecking order theories are 1 2 3 4 5 important in discussing capital structure

7. There are tax savings associated with use of 1 2 3 4 5 debt as a source of financing

8. Excessive use of debt can lead to higher 1 2 3 4 5 financial distress costs

9. Firms rank internal sources of finance 1 2 3 4 5 higher than external sources

10. There exist other elements of capital 1 2 3 4 5 structure for instance share capital and share premium other than debt and equity

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SECTION C: EFFECT OF CAPITAL STRUCTURE ON A FIRM’S PROFITABILITY

Please tick the extent to which you agree with the following statements on effect of capital structure on a firm’s profitability. Please (ƴ) tick appropriately on a scale of 1-5. 1- Strongly Disagree, 2- Disagree, 3- Uncertain, 4- Agree, 5- Strongly Agree.

Strongly Disagree Disagree Uncertain Agree Strongly Agree 1. Capital structure decisions are crucial to a 1 2 3 4 5 firm’s profitability

2. Capital structure decisions improves 1 2 3 4 5 performance and maximizes shareholders’ wealth 3. A firm’s future profitability is dictated by 1 2 3 4 5 the mix of debt and equity in its capital structure. The higher the debt, the higher the risk of making future profits 4. Capital structure size or debt ratio size 1 2 3 4 5 impacts a firm’s profitability. 5. High levels of debt in a firm’s capital 1 2 3 4 5 structure may cause liquidity problems 6. Linking firm’s management with 1 2 3 4 5 shareholding improves profitability 7. Return on equity or shareholders wealth 1 2 3 4 5 increases when a firm they have invested in earn higher returns for its shareholders 8. In order to evaluate the link between capital 1 2 3 4 5 structure and firm’s profitability, Debt to Equity ratio may be used as the independent variable whereas Return on Equity and Return on Assets may be used as the dependent variables 9. A firm’s profit margin is measured by the 1 2 3 4 5 return on sales 10. Empirical evidence about the impact of 1 2 3 4 5 capital structure on firm performance is conflicting and mixed

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SECTION D: IMPACT OF CAPITAL STRUCTURE ON FIRMS’ SHARE PERFORMANCE Please tick the extent to which you agree with the following statements on the impact of capital structure on a firm’s share performance. Please (ƴ) tick appropriately on a scale of 1-5. 1- Strongly Disagree, 2- Disagree, 3- Uncertain, 4- Agree, 5- Strongly Agree.

Strongly Disagree Disagree Uncertain Agree Strongly Agree 1. Capital structure is a composition of a firm’s 1 2 3 4 5 liabilities which impacts on the firm’s share price performance 2. Equity returns are affected by a firm’s 1 2 3 4 5 earnings per share 3. Higher profits mean better share price 1 2 3 4 5 4. Higher debt ratios could be used to gauge 1 2 3 4 5 future cash flows and hence, may result in shifts in a firm’s share prices 5. Better financial performance is positively 1 2 3 4 5 correlated with better share prices 6. Some shareholders invest in shares for 1 2 3 4 5 speculative purposes. The higher the retained earnings, the potential for the firm to grow is increased thus stock price also increases 7. Interest on debt is not taxed thus have a 1 2 3 4 5 positive impact of firm’s share price 8. Dividends paid to equity holders reduces a 1 2 3 4 5 firm’s profits and may have a negative effect on the firm’s stock prices 9. The relationship between retained earnings 1 2 3 4 5 and share price is mixed 10. The mix of debt and equity is aimed at 1 2 3 4 5 maximizing firm value at the minimum possible cost of capital

THANK YOU FOR TAKING YOUR TIME TO COMPLETE THE QUESTIONNAIRE

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Appendix 3 (a): Express Kenya Ltd Data Collection Instrument in Kshs.

2012 2013 2014 2015 2016 TURNOVER 229,908,000.00 387,494,000.00 173,033,000.00 123,851,000.00 62,817,000.00

PRE -TAX (13,236,000.00) (1,696,000.00) (76,435,000.00) (75,734,000.00) (112,007,000.00)

NET PROFIT 13,028,000.00 229,000.00 (77,352,000.00) (60,089,000.00) (96,939,000.00)

TOTAL ASSETS 495,609,000.00 480,525,000.00 477,922,000.00 441,898,000.00 379,576,000.00

CURRENT LIABILITIES 161,491,000.00 161,186,000.00 126,591,000.00 96,575,000.00 114,737,000.00

NON CURENT 135,831,000.00 120,823,000.00 171,123,000.00 225,204,000.00 241,659,000.00 LIABILITIES SHARE CAPITAL 177,019,000.00 177,019,000.00 177,019,000.00 177,019,000.00 177,019,000.00

SHARE PREMIUM 10,502,000.00 10,502,000.00 10,502,000.00 10,502,000.00 10,502,000.00

RETAINED EARNINGS - - - (199,924,000.00) (286,819,000.00)

REVENUE RESERVES

CAPITAL RESERVES

RESERVES 10,766,000.00 1,095,000.00 (7,313,000.00) 132,522,000.00 122,654,966.00

TOTAL LIABILITIES 297,322,000.00 282,009,000.00 297,714,000.00 321,779,000.00 356,396,000.00 ( DEBT )

EQUITY ( shareholders )

TOTAL EQUITY 198,287,000.00 198,516,000.00 180,208,000.00 120,119,000.00 23,356,640.00

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Appendix 3 (b): Kenya Airways Ltd Data Collection Instrument in Kshs.

2012 2013 2014 2015 2016 TURNOVER 98,860,000,000.00 116,158,000,000.00 107,897,000,000.00 106,009,000,000.00 110,161,000,000.00

PRE -TAX (2,146,000,000.00) (4,861,000,000.00) (26,099,000,000.00) (10,826,000,000.00) (29,712,000,000.00)

NET PROFIT 1,660,000,000.00 (7,864,000,000.00) (3,382,000,000.00) (26,225,000,000.00) (25,743,000,000.00)

TOTAL ASSETS 77,432,000,000.00 165,112,000,000.00 122,696,000,000.00 148,657,000,000.00 187,654,000,000.00

CURRENT LIABILITIES

NON CURENT LIABILITIES SHARE CAPITAL 2,308,000,000.00 7,482,000,000.00 7,482,000,000.00 7,482,000,000.00 7,482,000,000.00

SHARE PREMIUM - 8,670,000,000.00 8,670,000,000.00 8,670,000,000.00 8,670,000,000.00

RETAINED EARNINGS - - - (42,503,000,000.00) (15,676,000,000.00)

REVENUE RESERVES 18,042,000,000.00 13,441,000,000.00 10,070,000,000.00 - -

CAPITAL RESERVES

RESERVES - 3,557,000,000.00 3,557,000,000.00 3,557,000,000.00 5,497,000,000.00

TOTAL LIABILITIES 60,266,000,000.00 97,928,000,000.00 194,082,000,000.00 ( DEBT ) 127,185,000,000.00 188,026,000,000.00

EQUITY ( shareholders )

TOTAL EQUITY 23,023,000,000.00 31,209,000,000.00 28,229,000,000.00 (5,963,000,000.00) (35,667,000,000.00)

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Appendix 3 (c): Nation Media Group Data Collection Instrument in Kshs.

2012 2013 2014 2015 2016 TURNOVER 11,324,800,000.00 12,346,800,000.00 13,373,700,000.00 13,351,300,000.00 12,339,500,000.00

PRE -TAX 3,504,600,000.00 3,587,100,000.00 3,624,000,000.00 2,823,200,000.00 2,460,000,000.00

NET PROFIT 2,510,300,000.00 2,533,200,000.00 2,460,500,000.00 2,222,700,000.00 1,688,900,000.00

TOTAL ASSETS 12,174,100,000.00 10,677,400,000.00 11,444,200,000.00 11,944,300,000.00 12,696,700,000.00

CURRENT LIABILITIES NON CURENT LIABILITIES SHARE CAPITAL 392,800,000.00 471,400,000.00 471,400,000.00 471,400,000.00 471,400,000.00

SHARE PREMIUM

RETAINED 5,563,100,000.00 6,176,900,000.00 6,765,400,000.00 7,076,200,000.00 6,859,500,000.00 EARNINGS REVENUE RESERVES

CAPITAL RESERVES

RESERVES 116,800,000.00 119,200,000.00 63,300,000.00 (56,400,000.00) (89,100,000.00)

TOTAL LIABILITIES 3,353,900,000.00 3,200,800,000.00 3,176,200,000.00 3,743,000,000.00 3,471,200,000.00 ( DEBT ) EQUITY ( shareholders )

TOTAL EQUITY 7,323,500,000.00 8,243,400,000.00 8,768,100,000.00 8,953,700,000.00 8,702,900,000.00

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Appendix 3 (d): The Standard Group Data Collection Instrument in Kshs.

2012 2013 2014 2015 2016 TURNOVER 3,617,816,000.00 4,818,808,000.00 4,782,649,000.00 4,488,399,000.00 4,815,327,000.00

PRE -TAX 265,364,000.00 300,680,000.00 326,083,000.00 (395,801,000.00) 269,475,000.00

NET PROFIT 76,614,000.00 164,463,000.00 242,593,000.00 (289,603,000.00) 198,521,000.00

TOTAL ASSETS 3,501,548,000.00 4,162,469,000.00 4,101,749,000.00 4,355,614,000.00 4,404,931,000.00

CURRENT LIABILITIES

NON CURENT LIABILITIES SHARE CAPITAL 408,654,000.00 408,654,000.00 408,654,000.00 408,654,000.00 408,654,000.00

SHARE PREMIUM 39,380,000.00 39,380,000.00 39,380,000.00 39,380,000.00 39,380,000.00

RETAINED EARNINGS

REVENUE RESERVES

CAPITAL RESERVES 102,000.00 102,000.00 102,000.00 102,000.00 102,000.00

RESERVES 1,168,075,000.00 1,365,487,000.00 1,534,490,000.00 1,252,721,000.00 1,428,014,000.00

TOTAL LIABILITIES 1,662,646,000.00 2,133,894,000.00 1,893,707,000.00 2,478,041,000.00 2,328,837,000.00 ( DEBT ) EQUITY ( shareholders )

TOTAL EQUITY 1,838,902,000.00 2,028,395,000.00 2,208,042,000.00 1,877,573,000.00 2,076,094,000.00

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Appendix 3 (e): TPS Eastern Africa (Serena) Ltd Data Collection Instrument in Kshs.

2012 2013 2014 2015 2016 TURNOVER 5,343,960,000.00 6,814,334,000.00 6,337,210,000.00 6,189,360,000.00 6,468,803,000.00

PRE -TAX 721,516,000.00 755,717,000.00 220,101,000.00 (210,976,000.00) 325,301,000.00

NET PROFIT 493,588,000.00 451,001,000.00 274,419,000.00 (280,613,000.00) 129,328,000.00

TOTAL ASSETS 15,815,800,000.00 11,183,940,000.00 13,517,985,000.00 13,168,419,000.00 15,939,177,000.00

CURRENT LIABILITIES NON CURENT LIABILITIES SHARE CAPITAL 148,211,000.00 182,174,000.00 182,174,000.00 182,174,000.00 182,174,000.00

SHARE PREMIUM

RETAINED 2,379,290,000.00 2,575,064,000.00 2,603,955,000.00 2,309,434,000.00 2,189,362,000.00 EARNINGS REVENUE RESERVES

CAPITAL RESERVES

RESERVES 5,150,300,000.00 6,573,489,000.00 6,372,503,000.00 6,026,257,000.00 6,026,257,000.00

TOTAL LIABILITIES 2,098,640,000.00 1,761,950,000.00 1,988,387,000.00 2,577,136,000.00 2,705,993,000.00 ( DEBT ) EQUITY ( shareholders )

TOTAL EQUITY 7,927,235,000.00 9,685,351,000.00 9,596,165,000.00 10,556,075,000.00 10,412,489,000.00

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Appendix 3 (f): Scangroup Ltd Data Collection Instrument in Kshs.

2012 2013 2014 2015 2016 TURNOVER 3,922,763,000.00 3,838,912,000.00 5,125,162,000.00 5,022,408,000.00 4,835,073,000.00

PRE -TAX 1,069,566,000.00 963,093,000.00 912,277,000.00 875,271,000.00 725,925,000.00

NET PROFIT 752,009,000.00 867,358,000.00 625,476,000.00 478,672,000.00 460,380,000.00

TOTAL ASSETS 8,361,646,000.00 13,486,398,000.00 12,744,583,000.00 13,284,104,000.00 12,468,479,000.00

CURRENT LIABILITIES NON CURENT LIABILITIES SHARE CAPITAL 284,789,000.00 378,865,000.00 378,865,000.00 378,865,000.00 378,865,000.00

SHARE PREMIUM 1,754,388,000.00 8,296,150,000.00 8,281,817,000.00 8,281,817,000.00 8,281,817,000.00

RETAINED EARNINGS

REVENUE RESERVES 2,236,625,000.00 (540,567,000.00) (147,545,000.00) 86,598,000.00 320,150,000.00

CAPITAL RESERVES

RESERVES

TOTAL LIABILITIES 3,462,015,000.00 4,697,880,000.00 4,741,473,000.00 3,864,219,000.00 4,677,759,000.00 ( DEBT ) EQUITY ( shareholders )

TOTAL EQUITY 4,899,630.00 8,126,450.00 8,542,631.00 8,604,260.00 8,808,639.00

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Appendix 3 (g): Uchumi Supermarket Ltd Data Collection Instrument in Kshs.

2012 2013 2014 2015 2016 TURNOVER 6,427,143,000.00 13,918,530,000.00 14,368,643,000.00 14,457,687,000.00 11,455,311,000.00

PRE -TAX 403,343,000.00 485,902,000.00 452,749,000.00 (3,440,054,000.00) (4,157,156,000.00)

NET PROFIT 273,977,000.00 357,010,000.00 384,288,000.00 (3,600,289,000.00) (3,930,610,000.00)

TOTAL ASSETS 4,941,888,000.00 5,573,533,000.00 6,884,853,000.00 6,412,996,000.00 5,002,216,000.00

CURRENT LIABILITIES NON CURENT LIABILITIES SHARE CAPITAL 1,327,133,000.00 1,327,133,000.00 1,327,133,000.00 1,824,808,000.00 1,824,808,000.00

SHARE PREMIUM

RETAINED EARNINGS REVENUE RESERVES

CAPITAL RESERVES

RESERVES 1,330,677,000.00 1,598,279,000.00 2,030,181,000.00 (3,922,185,000.00) (1,085,453,000.00)

TOTAL LIABILITIES 2,284,078,000.00 2,648,121,000.00 3,527,539,000.00 5,673,641,000.00 7,099,593,000.00 ( DEBT ) EQUITY ( shareholders ) TOTAL EQUITY 2,657,810,000.00 2,925,412,000.00 3,357,314,000.00 739,355,000.00 (2,097,377,000.00)

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Appendix 3 (h): Longhorn Publishers Ltd Data Collection Instrument in Kshs.

2012 2013 2014 2015 2016 TURNOVER 775,943,000.00 1,033,295,000.00 1,396,834,000.00 848,377,000.00 1,503,512,000.00

PRE -TAX (25,949,000.00) 151,327,000.00 147,226,000.00 96,916,000.00 139,277,000.00

NET PROFIT (22,465,000.00) 93,918,000.00 94,933,000.00 71,726,000.00 104,063,000.00

TOTAL ASSETS 612,488,000.00 685,019,000.00 747,531,000.00 689,320,000.00 1,866,944,000.00

CURRENT LIABILITIES

NON CURENT LIABILITIES SHARE CAPITAL 58,500,000.00 58,500,000.00 58,500,000.00 - -

SHARE PREMIUM 5,039,000.00 5,039,000.00 5,039,000.00 - -

RETAINED EARNINGS 225,220,000.00 329,917,000.00 378,050,000.00 - -

REVENUE RESERVES

CAPITAL RESERVES - - - 380,378,000.00 947,567,000.00

RESERVES

TOTAL LIABILITIES 323,729,000.00 299,153,000.00 313,211,000.00 308,942,000.00 919,377,000.00 ( DEBT ) EQUITY ( shareholders )

TOTAL EQUITY 288,759,000.00 385,866,000.00 434,320,000.00 380,378,000.00 947,567,000.00

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Appendix 3 (i): Deacons (East Africa) Ltd Data Collection Instrument in Kshs.

2012 2013 2014 2015 2016 TURNOVER 2,488,000,000.00 1,792,000,000.00 1,927,669,000.00 2,383,297,000.00 2,309,091,000.00

PRE -TAX (38,000,000.00) 164,000,000.00 88,170,000.00 141,595,000.00 (385,057,000.00)

NET PROFIT (38,000,000.00) 179,000,000.00 61,403,000.00 113,750,000.00 (276,345,000.00)

TOTAL ASSETS 1,954,114,000.00 1,983,049,000.00 1,961,882,000.00 2,516,140,000.00 2,281,680,000.00

CURRENT LIABILITIES

NON CURENT LIABILITIES SHARE CAPITAL 308,896,000.00 308,896,000.00 308,896,000.00 308,896,000.00 308,896,000.00

SHARE PREMIUM 548,803,000.00 548,803,000.00 548,803,000.00 548,803,000.00 548,803,000.00

RETAINED EARNINGS 321,219,000.00 499,756,000.00 561,159,000.00 674,909,000.00 336,818,000.00

REVENUE RESERVES

CAPITAL RESERVES

RESERVES (4,451,000.00) (3,782,000.00) (7,132,000.00) (20,314,000.00) (21,885,000.00)

TOTAL LIABILITIES 779,647,000.00 629,376,000.00 550,156,000.00 969,239,000.00 1,109,048,000.00 ( DEBT ) EQUITY ( shareholders )

TOTAL EQUITY 1,174,467,000.00 1,353,673,000.00 1,411,726,000.00 1,512,294,000.00 1,172,632,000.00

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Appendix 3 (j): Nairobi Business Ventures Ltd Data Collection Instrument in Kshs.

2012 2013 2014 2015 2016 TURNOVER - 45,255,091.00 71,972,163.00 74,139,620.00 85,107,960.00

PRE -TAX - 1,576,957.00 11,101,828.00 3,918,556.00 6,318,757.00

NET PROFIT - 1,103,870.00 7,771,280.00 2,742,989.00 4,423,130.00

TOTAL ASSETS - 45,088,517.00 79,493,569.00 111,760,039.00 155,413,964.00

CURRENT LIABILITIES -

NON CURENT - LIABILITIES SHARE CAPITAL - 100,000.00 100,000.00 18,000,000.00 18,000,000.00

SHARE PREMIUM -

RETAINED EARNINGS - 1,103,870.00 8,875,150.00 11,618,139.00 16,041,269.00

REVENUE RESERVES -

CAPITAL RESERVES -

RESERVES -

TOTAL LIABILITIES - 33,984,647.00 60,618,419.00 66,339,566.00 105,570,361.00 ( DEBT ) EQUITY ( shareholders ) -

TOTAL EQUITY - 11,103,870.00 18,875,150.00 45,420,473.00 49,843,603.00

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Appendix 4: Earnings Per Share Analysis

COMPANY EARNINGS PER SHARE 2012 2013 2014 2015 2016 1) Express (K) Ltd 0.37 0.01 -2.18 -1.70 -2.74 2) Kenya Airways Ltd 3.58 -6.50 -2.25 -17.21 -17.53 3) Nation Media Group 13.33 13.40 13.10 11.80 8.90 4) The Standard Group Ltd 2.56 2.41 2.57 -2.95 2.14 5) TPS (E.A) Serena Ltd 3.60 2.26 1.35 -1.63 0.54 6) Scangroup Ltd 2.21 2.60 1.50 1.12 1.12 7) Uchumi Supermarket Ltd 1.03 1.35 1.45 -10.77 -9.86 8) Longhorn Publishers Ltd -0.38 1.61 1.62 0.70 0.66 9) Deacons (E.A) Ltd 0.99 -37.00 0.50 0.92 -2.24 10) Nairobi Business Ventures - - - - - Ltd

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Appendix 5: Sample Frame

Commercial and Service firms listed on the Nairobi Securities Exchange as at 31st December, 2016 1) Express Ltd 2) Kenya Airways Ltd 3) Nation Media Group 4) Standard Group Ltd 5) TPS Eastern Africa (Serena) Ltd 6) Scangroup Ltd 7) Uchumi supermarket Ltd 8) Longhorn Publishers Ltd 9) Deacons (East Africa) 10) Nairobi Business Ventures Ltd Source: NSE 2017

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