Analysis of Debt Financing on Corporate Financial Performance

Abstract

Series of efforts by managers and finance providers have focused on an appropriate mixture of debt and equity as a wrong mix which would impact on the performance and ultimate survival of the company. This study therefore, investigates the impact of debt financing on the performance of non-financial companies listed in the Nigerian Securities Exchange (NSE). To achieve this objective, secondary data from the annual reports and financial statements of 41 non-financial listed companies for the period of 2015-2018 were used. Panel data regression results revealed that debt financing represented by Total debt ratio has opposing significant impact on performance of companies as measured by ROCE and EPS. The results also revealed that although a negative relationship exists between total debt ratio and performance measures of ROCE and EPS, the relationship with EPS is an insignificant one. The study concludes that debt financing has a significant impact on the financial performance of non-financial companies in Nigeria. The study therefore recommends that managers of listed non-financial companies should reduce the reliance on long term debt as a source of finance in order to enhance performance. Also effective financial management should be put in place by managers which should identify viable investment opportunities, implement and adequately allocate long term debt finance among the competing opportunities. Continuous monitoring is essential to ensure that the financial objective (ROCE) of the company is achieved which in turn would lead to an increase in the value of the company (EPS).