Effect of Short-term Debt to Total Assets Ratio on Financial Performance of Medium-sized and Large Enterprises in Kenya

Abstract

The purpose of this study was to establish the effect of short-term debt to total assets ratio on the financial performance of medium-sized and large enterprises in Kenya. The study drew on secondary data consisting of audited financial statements from 60 large enterprises listed at the NSE and 30 medium-sized enterprises which are among the Top-100 medium-sized enterprises totaling to 90 enterprises for a six year period (2011 to 2016). The main objective of the study was to establish the effect of short-term debt to total assets ratio on financial performance of medium-sized and large enterprises in Kenya. Short-term debt to total assets ratio was used as capital structure proxy while ROE and ROA were used as measures of financial performance. The study was anchored on positivism paradigm and guided by the following capital structure theories: Irrelevance theory, static trade-off theory, pecking order theory and free cash flow theories. Descriptive statistics (mean and standard deviation) and inferential statistics (Pearson Correlation, simple regression) were used to analyze data. Simple regression was used to establish the extent the independent variable (SDTAR) affected the dependent variable (financial performance) while Pearson correlation was used to measure strength of the effect of short-term debt to total assets ratio on financial performance. The hypothesis was tested using calculated value of F and the critical value of F. The study established that SDTAR had a significant negative effect on ROE and ROA. In conclusion the study established that a decrease in financial performance was attributed to an increase in short-term debts total assets ratio. It was recommended that the enterprises reduce the usage of short-term debts in financing operations so as to improve their financial performance. It was also recommended that future studies to look into the effects of credit terms or policies to establish the cost of short-term debts in Kenya, and further studies to be undertaken to investigate into other factors that account for the variability in financial performance of medium-sized and large enterprises in Kenya.

Keywords: Short-term Debt, Total Assets, Financial Performance, Capital Structure