Background of the Study
Financial leverage, defined as the use of borrowed funds to finance a firm's operations, significantly influences firm performance. It enhances profitability during favorable economic conditions but poses risks in periods of financial instability (Odoh & Eze, 2024). In Nigeria, where access to capital markets is constrained, firms often rely on leverage to fund growth and expansion (Okeke et al., 2023).
Flour Mills of Nigeria Plc, a leading player in the Nigerian manufacturing sector, exemplifies the strategic use of financial leverage to drive growth. However, the company's performance has been subject to fluctuations attributed to changes in debt levels, cost of borrowing, and macroeconomic conditions (Nwosu & Akinyele, 2023). Understanding the relationship between financial leverage and firm performance is crucial for optimizing capital structure decisions and enhancing shareholder value.
This study evaluates the impact of financial leverage on firm performance, using Flour Mills of Nigeria Plc as a case study. The analysis focuses on key performance metrics, including profitability, return on equity, and earnings per share.
Statement of the Problem
The optimal level of financial leverage remains a contentious issue among finance scholars and practitioners. Excessive leverage increases financial risk, while underutilization may hinder growth opportunities (Adebayo et al., 2024). In Nigeria, firms face challenges such as high-interest rates and volatile exchange rates, exacerbating the risks associated with leverage (Ogunbiyi & Abiola, 2024).
Despite its importance, the relationship between financial leverage and firm performance in Nigeria is underexplored. Existing studies often overlook sector-specific dynamics, limiting their relevance. This study addresses this gap by focusing on Flour Mills of Nigeria Plc, providing insights into the implications of leverage on firm performance in the manufacturing sector.
Objectives of the Study
To examine the relationship between financial leverage and profitability in Flour Mills of Nigeria Plc.
To analyze the impact of financial leverage on return on equity.
To evaluate the influence of financial leverage on earnings per share.
Research Questions
What is the relationship between financial leverage and profitability in Flour Mills of Nigeria Plc?
How does financial leverage impact return on equity?
What is the influence of financial leverage on earnings per share?
Research Hypotheses
H₀₁: Financial leverage does not significantly affect profitability in Flour Mills of Nigeria Plc.
H₀₂: Financial leverage has no significant impact on return on equity.
H₀₃: Financial leverage does not significantly influence earnings per share.
Scope and Limitations of the Study
The study focuses on Flour Mills of Nigeria Plc, analyzing the impact of financial leverage on performance metrics such as profitability, return on equity, and earnings per share. The findings may not be generalizable to other firms or sectors. Additionally, reliance on secondary data may pose challenges related to data accuracy and completeness.
Definitions of Terms
Financial Leverage: The use of borrowed funds to finance a firm's operations and investments.
Firm Performance: A measure of a firm's financial health and operational efficiency, often assessed through profitability, return on equity, and earnings per share.
Profitability: The ability of a firm to generate profit relative to its revenue or assets.
Return on Equity (ROE): A financial metric indicating the profitability of a firm relative to shareholders' equity.
Earnings Per Share (EPS): A measure of a company's profitability expressed as the portion of net income allocated to each outstanding share of stock.
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