Effect of Financial Structure on Profitability of Petroleum Firms in Kenya

Abstract

The petroleum sector in Kenyan is highly regulated by the government such that, the government sets prices for most of the energy products. This study was to determine how the financial structure is critical to the profitability of Kenya’s petroleum firms. Petroleum being an essential commodity in global business development and particularly in developing economies, it is expected that increasing number of petroleum firms over time is as a result of good returns that in the sector hence attraction of more investors. To the contrary, competition has been eating up the profits, thus something needs to be done by the firms concerned to ensure profits are boosted. The study’s main objective was to assess the effect financial structure on profitability of petroleum firms in Kenya. Other objectives included the evaluation of the effects of debt finance on profitability, to establish the effect of share capital finance on profitability, to examine the effect of trade credit finance on profitability, to assess the effect retained earnings on profitability besides the moderating effect of firm size on profitability of petroleum firms in Kenya. Besides. A positivist philosophy was adopted with the research design that included a thematic analysis. The results helped finalize the conceptual framework of the primary study, which was in form of a secondary data collection sheet. The study adopted descriptive research design. Census technique was used to arrive at 35 firms drawn from petroleum firms in Kenya. Primary data was collected by use of Questionnaires while in the collection of secondary data secondary collection sheet was used. Using collected data, then univariate tests were carried out to provide a deep insight for both parametric (t-test) and non-parametric test (Pearson correlation coefficient). In multivariate analysis, hierarchical multiple regression analysis models were used to determine the type of the relationship that existed between the independent and dependent variables. Data was edited, cleaned, codded and categorized. Quantitative analysis featuring the inferential and descriptive statistics was applied in analyzing data and thereafter, interpretation was done followed by data presentation using graphs and tables with relevant inferences, frequencies and percentages being used to describe and summarize relevant findings. On the other hand inferential statistics used included a regression model, correlation analysis, Anova and chi square respectively. The study findings indicated that all the components of the financial structure had a significant negative influence on petroleum firm’s profitability. For share capital it’s backed by the fact that it dilutes decision making and ownership of the firm as when shares are sold it presents an opportunity to own shares of the firm, a freehand for management exercise decision making professional judgment without undue influence from shareholders. Trade credit has a positive influence has it is cheaper and there is a closer relationship that boosts confidence between suppliers and the relevant enterprises. Therefore it can be concluded that each element of the financial structure adopted by the firm has a significant contribution on firm’s profitability. Firms should endeavor to employ more equity and less of debt to finance their operations as this is based on the revelation that employment of debts is a major recipe for reducing profitability. Management must consider using trade credit finance as apriority ahead of debt as debt reduces profitability. The study further recommends the need to institute appropriate regulatory mechanisms meant to cushion investors from loss of their hard earned wealth and hence restore confidence in their investments. At policy level, the study recommends that the government should introduce initiatives aimed at lowering the high interest rates associated with borrowed capital (debt finance). The applicability of the study results may therefore be restrictive. And thus in that regard, the study recommends a similar study be carried out within larger jurisdictions that could present unique economic and regulatory dynamics.