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The Impact Of Leverage On Profitability Of Listed Healthcare Firms In Nigeria

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TABLE OF CONTENTS

 

Title page————————————————————————————— i

Declaration————————————————————————————- ii

Certification———————————————————————————– iii

Dedication————————————————————————————- iv

Acknowledgments—————————————————————————— v

Abstract—————————————————————————————- vi

Table of contents—————————————————————————- vii

List of tables                                                                                                                                               x

                                                             CHAPTER ONE

INTRODUCTION—————————————————————— 1-8

  • Background to the Study—————————————————————– 1
  • Statement of the Problem—————————————————————– 4
  • Objectives of the Study——————————————————————- 6
  • Statement of Research Hypotheses—————————————————— 6
  • Scope of the Study———————————————————————— 7
  • Significance of the Study—————————————————————– 8
  • Summary————————————————————————————- 8

 

                                                             CHAPTER TWO

LITERATURE  REVIEW  AND  THEORETICAL FRAME  WORK—————————————————————————————————– 9-35

  • Introduction——————————————————————————————— 9
  • Concept of Capital Structure——————————————————————————————— 9
  • Leverage a  Component  of Capital Structure——————————————————————————————— 10
  • Theoretical Factors  Influencing  the  Use of Leverage——————————————————————————————— 12
  • Types and  Measurement of Leverage——————————————————————————————— 16

2.6          Concept of Profitability  –  –  –  –  —  –  –  –  —  –  –  –  –  –               21

  • Measurement of Profitability——————————————————————————————— 23
  • Leverage and Profitability——————————————————————————————— 27
  • Theoretical Framework——————————————————————————————— 33

 

  • Summary                                                                                                                      35

 

 

 

                                                         CHAPTER THREE

 

RESEARCH  METHODOLOGY—————————————————————————————————– 36-41

3.1          Introduction —  –  —  –  —  –  —  –  –  —  –  —  —  –  —–  –  —  –  ——- 36

  • Research Design———————————————————————- 36
  • Sources and  Methods  of Data Collection—————————————– 36
  • Population and Sample Size                                                ——————— 37
  • Model Specification-  –  —————————————————- ———————————————————————————– 38

3.6          Variable Measurement   ——-   —-   —–   —-    ——-   —-   —– —-   —– 39

  • Techniques of Data Analysis——————————————————- 41
  • Summary 41

 

                                                     CHAPTER FOUR

DATA  PRESENTATION,  ANALYSIS AND DISCUSSION——————————————————————————————————– 42–53

  • Introduction——————————————————————————————— 42
  • Descriptive Statistics and Correlation Result——————————————————————————————— 42
  • Results and Discussions——————————————————————————————— 45
  • Discussion of Findings 52
  • Policy Implications of Findings                                                                                                                                    52
  • Summary——————————————————————– 53

CHAPTER FIVE

SUMMARY,  CONCLUSIONS AND RECOMMENDATIONS————————-54—————————————————————————————————- 57

5.1         Summary——————————  —  —-  —  ——  —-  —  —-  —  —— 54

  • Conclusions——————————————————————————————— 55
  • Recommendations————————————————————————————————- 56
  • Areas for future research———————————————————— 57

REFERENCES—————————————————————————————— 58-64

APPENDICES———————————————————————– 65

CHAPTER ONE INTRODUCTION

 

  • Background to the study

 

The term capital structure refers to the combination of diverse option and financial framework in which a firm uses to finance in its trading, operating and investing activities. It largely consists of external debt, external equity and internal equity (Ong & Teh, 2011; Chowdhury & Chowdhury, 2010). Depending on the need of the firm, the financial manager may chose to use any of the available sources of capital or a combination of all, and that forms the firms capital structure. The survival, sustenance and profitability of a firm hinges on its capital structure; hence, it is so crucial and very important to the firm. According to Prasad, Green and Murinde (2013) capital structure of a firm is a major prerequisite to the firms ability to succeed by making profit and satisfying its shareholders and other contributor of capital. Prasad et al (2013) identified improper financing strategy and capital structure as leading factors to business collapse in developing countries. However, the bane of financial managers in developing and developed countries would be finding the right balance or proportion of capital structure mix that suits their respective economies and businesses.

 

In a bid to understanding how leverage affects firms, there is need to understand profitability and its influence on leverage choices. Profitability, which is usually regarded as the lifeblood of a business venture, is another key ingredient that affects managers decisions on the use of leverage in firms capital structure (Ali & Iman, 2011). For newly established business enterprise, the use of leverage as a finance option may be for stability and expansion but for old existing firms the need for leverage might be different. Policies on the use of leverage are expected to change in the event where profit is involved. Profitability as a key aspect of business survival may have different types of impact on the firms capital structure and this effect may range from positive to negative territories (Adeyemi & Oboh, 2011; Ali & Iman, 2011; Akintoye, 2018; Titan & Zetium, 2017). Having said the above, the relevance of leverage to firms value was questioned in the famous work of Modigliani and Miller of 1958, where they argued that capital structure has no relevance on the value of the firm under the perfect market condition settings. However, many researchers questioned this proposition, among which, is the work of Jensen and Meckling (1976), they postulated that the amount of leverage in a firms capital structure affects the managers choice of operating activities and that it has a bearing on the overall firm performance and its total value. Many other researchers argued that capital structure has an effect on the overall value of firms only that this effect ranges from positive to negative (Ali & Iman, 2011; Oke & Afolabi, 2018 and Abor, 2015). Pragmatically, the conclusion reached by previous research, which ranges from positive to negative shows the uniqueness of each countrys economy in terms of its market size, product, industry, management culture and financial strength. Thus, every economy should be given a closer look in order to understand how capital structure affects them.

 

The importance of capital to firms sustainability cannot be over emphasized because at every stage of any company, capital is always important. Capital is needed to start a business venture, it is highly important at firms growth stage and it is a potent killer for business when it is not properly managed (Iorpev & Kwanum, 2012; Alexader & Jonas, 2011). While it is agreed that capital is important to a firm, the argument remains; what should constitute good leverage structure and what components will greatly affect the chances of making  profit. In bolstering this point, Modigliani and Miller (1963) posited that a good capital structure should be one formed completely with debt because interest payment on debt will lower tax return and that will form a shield for the firms profit. Meziane (2017) explained that the gains of using debt to finance the activities of a firm is in the discipline it exerts on the managers and the tax benefit it gets in return. So it is assumed that the more protection from tax liability the better the profit.

 

Private firms are setup with the objective of providing qualitative services and cater for the need of the growing population; Healthcare firms are in this area needed as alternative to government establishments. Aside from the objective of qualitative services, the most important objective is to make profit and harmonize all other potentials to maximize shareholders wealth. Profitability is a vital and important aspect of every business venture as it can influence the financial policy of such venture. If profit dwindles, financial managers may jack up firms leverage in other to increase investment for the expectation of more profit. Where the leverage level of an organization is jacked up, bankruptcy risk will increase and this can poise a great risk to the shareholders interest (Jensen & Meckling, 1976; Meziane, 2017; Iorpev & Kwanum, 2012). For the protection of these contributors of capital, there is need to re-examine if there is actual need for leverage in a firms capital structure and what effect does it have on profitability.

 

With the recent downturn in the global economy, re-shuffling in the Nigerian Stock Exchange (NSE) and reforms and innovations in the entire financial system of the country, one issue that has received attention and great debate in the research parlance is decisions on capital structure and how such decisions affects firms value. Arguments such as what constitute optimal capital structure, what determines capital structure and impact of capital structure on profitability of firms are leading topics in the research space. More importantly, the attention given to how leverage affects profitability is unequaled but the result and conclusion reached are conflicting.

 

Based on the static trade-off theory, it is assumed that the use of leverage will increase profitability and firms value. The assumption is that there should be evidence in support of leverage having a positive effect on profitability of listed healthcare firms in Nigeria. Hence, leverage should be positively related to Return on asset (ROA), Return on Equity (ROE) and Earnings per Share (EPS) accordingly. The contention here is that, reality poises an unstable platform for the use of leverage, there is an ever changing market, uncertain economic policies and financial policies and a whole lot of other uncertainties. The crux of the matter is; what effect will leverage have on profitability of Nigerian listed healthcare firms considering the ever-changing environment in which business ventures operates. Most of the well-articulated works on capital structure from developed economies have yielded diverse results and conclusions, even local research conducted in this area have been fraught with inconsistent result and conclusions. Inconsistencies in result could be due to economic differences, industries specifics and method used in those studies as explained by Onaolapo and Kajola (2010). Adopting the result of work done in developed economies as a working basis for developing or emerging economy like Nigeria could be misleading because they have advance market and economy, which are not in the same settings as in developing countries. This research focuses on the Listed Healthcare firms in Nigeria.

 

 

1.2                Statement of the Problem

 

It is no doubt that one key objective of financial managers is to manage firms resources in a way to maximize profit and in order to achieve this objective, more attention is needed to be focused on how profitability can be affected positively by the use of leverage. In a situation where there is no enough knowledge, the wrong application of leverage could increase bankruptcy risk, thereby putting the going concern of the firm at jeopardy and eventual loss for the owners. On the other hand, under utilization of leverage could cause profit to erode due to tax liability, since interest on debt is tax deductible.

 

With this dilemma in mind, both foreign and local researchers have not been able to come to a unified conclusion. The works of Oke and Afolabi (2017), Akintoye (2018), Dare and Shola (2010), Onaolapo and Kajola (2010), Omorogie and Erah (2010) have contributed to the subject but their findings and conclusions are at disparity. It is in the wake of these inconsistent results that sprung the idea to revisit the subject matter. Common to previous research, their considered period or span of study is considered short. Most of these studies

e.g Nour (2012); Meysam, Shaer and Soleimani (2012) and Ali and Iman (2011) use a time span lesser than ten years which might not be enough for the variables to adequately form a pattern, as insinuated by Onaolapo and Kajola (2010).Previous researches like Osuji and Odita (2012), Uwalomwa and Uadile (2012), Muhammad et al (2012), Ali and Iman (2011) amongst others favour the use of multiple sectors or a combination of firms from different sectors of the economy, this could influence the result and conclusion reached by those studies. Every sector of the economy has its own different specifics, which could have a significant effect on the result and conclusion reached. Hence, carrying out a study that will focus on a specific sector is sure to give a more reliable result and a truer picture of relationship among the variables.

In research, time is of paramount importance, a timely research is needed in order to have a close glimpse of recent reality and previous research cannot satisfy that because it will be un- wholly to apply their result, conclusion and recommendation on current state of events. In order to be abreast with recent reality, it is necessary to carry out fresh research on the subject matter of leverage and profitability in the Nigerian healthcare sector. This research seeks to fill this gap and add to existing knowledge by using current data from the firms listed in this sector to answer questions like; does leverage really affect profitability? If it does, in what ways does it affect profitability in the Nigerian healthcare sector; negatively or positively? In addition, what aspect of profitability is affected by leverage? What measure of leverage better impacts profitability of listed Healthcare Firms in Nigeria?

 

1.3                   Objectives of the Study

In view of the statement of problems above, the general objective of the study is to examine the impact of leverage on profitability of listed healthcare firms in Nigeria. The specific objectives of the study are:

  1. To examine the impact of total debt on profitability of listed healthcare firms in Nigeria;
  2. To investigate the impact of long-term debt on profitability of listed healthcare firms in Nigeria;
  • To evaluate the impact of short-term debt on profitability of listed healthcare firms in Nigeria.

1.4                     Statement of Research Hypotheses

To achieve the aims of this study, the objectives are hypothesized as follows:

 

H01: Total debt has no significant impact on profitability of listed healthcare firms in Nigeria.

H02: Long-term debt has no significant impact on profitability of listed healthcare firms in Nigeria.

H03: Short-term debt has no significant impact on profitability of listed healthcare firms in Nigeria.

 

 

 

1.5                   Scope of the Study

 

This study covers a period of ten years spanning from 2011 to 2020. The study period encompass the period before the global economic meltdown, which can be referred to as a stable economic period. The global economic meltdown was also within this period, which caused lots of panic in the global market and had a ripple effect on the domestic capital markets. The revival or recovery period where it can be said that the economy is regaining a better shape is also covered within this scope.

 

Hence, this period of study was carefully chosen to capture all the financial activities and indices limited to leverage and profitability of the Nigerian healthcare sector during those phases of economy and to use the data from the period to determine how leverage impacts profitability. The measure of Leverage is limited to total debt, long-term debt and short-term debt because loan covenant are generally written in book value and are easy to obtain. The measure of profitability is also limited to return on asset, return on equity and earnings per share. These measures reflect managements view of profit used in measuring their efficiency and shareholders view of profit accrued to them. Significance of the Study

 

In a country forging new economic policies of which its effect has a direct bearing on the capital market and firms who want to source for fund. It is of paramount importance to provide better understanding of how the source and type of capital can influence performance of a firm.

Firstly, financial analysts who are faced with the hurdles of projecting and analyzing how the future of a firm would look like would be equipped with better knowledge of what may influence the future of the firm. Financial managers who are faced with the dilemma of making the best decision about capital structure would have better knowledge on what should be considered before considering the use of leverage.

Secondly, potential investors and shareholders need guidance to make informed decision about the right firm to put in their hard earn money. This research work will help potential investors understand if high leverage is indeed a good indicator for investment decision.

Lastly, the research work follows the popular concept of causality between leverage and profitability or performance indicators by taking into consideration effect of capital structure element (Leverage) on profitability. This work adds to the existing body of knowledge by using and testing recent data on the subject matter of leverage in listed healthcare firms especially in developing and emerging economy, such as Nigeria.

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