Effect of financial leverage on financial performance of sugar firms in western kenya

Kenya Sugar sub-sector accounts for 7.5% of the National GDP and 15% of the Agricultural GDP. These firms have been experiencing poor financial performance with an average after tax profit of -24% for the period 2010-2018. Some of these firms have faced frequent closures with a case of Miwani sugar firm being put under receivership back in the year 2000. However, a section of these firms have been thriving. The inconsistency in these sugar firm’s financial performance points out to the contribution of financial leverage as presumed by the trade-off and the theories of ROA and ROE. The purpose of this study was to determine financial leverage and financial performance relationship in sugar firms in Western Kenya. The study was anchored on the trade-off theory and the theories of ROA and ROE. The study used correlation research design. The target population was 8 sugar firms found in Western Kenya that were in operation during the study period. The firms were pooled for10 years resulting to 80 data points. The result show that financial leverage is a significant negative predictor of financial performance with (R2 =.1290, p=.0001) (coeff= -.0765) implying that12.9% of the variance in financial performance of sugar firms in Western Kenya was explained by financial leverage. The negative coefficient revealed that for every one unit increase in financial leverage, there was an ensuing drop in financial performance of these firms by 0.0765, an implication that most of the Kenyan sugar firm had incorporated borrowed funds in their financial structure beyond the optimal levels. The study concludes that financial leverage had a statistically significant negative effect on financial performance. The study recommends that sugar firms should reduce their leverage levels to optimal levels to enhance their financial performance. The findings are deemed to be of use to academia as a basis for further research in finance.