Financial Leverage and Performance of Manufacturing Firms in Nigeria

This study investigated the influence of financial leverage on the financial performance of manufacturing firms in Nigeria. It specifically assess the effect of the Interest Coverage Ratio (ICR) on the Return on Assets (ROA) in manufacturing companies in Nigeria and also analyze the impact of the Debt Servicing Ratio (DSR) on the Return on Assets (ROA) in manufacturing companies in Nigeria from the period of from 2000 to 2023. The research targeted a population of 200 manufacturing firms, utilizing a sample size of 50 firms selected through stratified random sampling techniques A quantitative research design was employed, focusing on secondary data collection methods. Data were sourced from the financial statements of the sampled manufacturing firms, the Central Bank of Nigeria, and the Nigerian Stock Exchange. Multiple regression techniques were applied to analyze the relationships between financial leverage and firm performance, particularly regarding profitability indicators such as ROE and operational metrics. The findings revealed that the Interest Coverage Ratio (ICR) did not have a statistically significant effect on the Return on Assets (ROA) of manufacturing companies in Nigeria with a coefficient of 0.18 and a p-value of 0.52. This implies that, despite a company’s capacity to cover its interest payments, this financial capability does not directly contribute to higher profitability in terms of efficient asset utilization. Conversely, the Debt Servicing Ratio (DSR) exhibited a negative and statistically significant impact on ROA with a coefficient of -0.45 and a p-value of 0.03, indicating that higher DSR adversely affected profitability. The study highlighted a significant positive correlation between moderate levels of financial leverage and improved profitability, while excessive debt levels negatively impacted operational efficiency due to increased interest burdens.