Effect of Financial Leverage on Firms’ Financial Performance: A Study of Listed Companies in Agricultural Sector.

Abstract

Explaining the role of financial leverage in firm performance is one of the primary objectives of contemporary researches and this role remains a questionable subject which has continued to attract the attention of many researchers. This work examined the effect of financial leverage on firm financial performance of listed Agricultural firm in Nigeria. seven (7) firms in Nigeria for the period of five (5) years (2011-2015).The specific objectives of this work were aimed at determining the extent to which debt ratio, debt equity ratio, interest coverage ratio, and asset tangibility ratio affect the firm’s financial performance of listed Agricultural firms in Nigeria. This work employed four (4) financial leverage ratios for the independent variables which include debt ratio (DR), debt equity ratio (DER), interest coverage ratio (ICR), and asset tangibility ratio (TANG) in determining their effect on firm performance proxy by Earnings per Share (EPS) as dependent variable. research questions and hypotheses were formulated in line with the objectives of the study. The data were obtained from the financial statement of the listed firms on the Nigerian stock Exchange (NSE). The ex-post facto research design was used while descriptive statistics, Pearson correlation and regressions were employed for the analysis. The results and findings revealed that debt ratio and Interest coverage ratio have negative influence on earning per share and are statistically significant in driving the financial performance of agricultural firms in Nigeria, while debt equity ratio and asset tangibility are statistically insignificant in driving the financial performance of agricultural firms in Nigeria. We therefore recommend that manager’s priority should be Interest coverage and debt ratio for improvement on financial performance of Agricultural firm in Nigeria.

Key Words, Financial Leverage, Capital Structure, Debt to Equity Ratio, Gearings, Interest coverage ratio