Effects Of Financial Leverage On Company Performance
(A Case Study Of Nigeria Bottling Company)
Financial leverage, the strategic use of debt to increase returns, plays a pivotal role in shaping a company’s performance. By utilizing debt capital alongside equity, businesses can amplify their returns on investment. However, this strategy is not without risks, as it can also magnify losses. The impact of financial leverage on company performance is intricate and involves a delicate balance. On the positive side, it can enhance profitability through the leveraged acquisition of assets and the exploitation of favorable interest rates. Conversely, excessive leverage can heighten financial vulnerability, particularly during economic downturns or interest rate fluctuations, thereby exposing the company to solvency risks. Thus, prudent management of financial leverage is imperative for companies to strike a harmonious equilibrium between risk and reward, ensuring sustainable and resilient performance over time.
The project topic “Effect of financial leverage on company performance”, has to do with the use of external finds (dept and equity) in generating profit for their firm company which its primary aim is maximization of shareholder welfare, wealth and also profit.
I shall make use of primary data, a questionnaires which will be drafted (to be presented for onward approval) and interviews.
I shall lay hand on books, management journals and periodical. However, the rudiments of the study will be considered, also a general overview of the effects of using dept and equity as a source of financial to Nigeria bottling of financing as mentioned above generated heated debates, I shall touch on it.
The study will critically analyses the possible effects of financial leverage on the performance of companies by trying to establish a relationship between the level debt carried by firms and their level of performance given debt carried by firs and their level of performance given economic conditions that prevail during the time of my research.
I shall take a backward book on the company performances from 2000-003 to ascertain the ratio analysis and also know the graphical behaviour. The financial structures of he companies under study from 200-200 will be put under consideration.
I shall apply Regression and correlation analysis methods to measure the average amount of a change in one variable that is associated with until increase or decrease in amount of another variable.
Correlation stands there to test the efficiency of he Regression with respect of he company under study This research work will be made-up of five chapters. I can only comment on chapter one for now (other chapters will be) formulated and presented in due (course).
Chapter one: The introductory chapter, deals with background of the study, purpose and scope of he study, statement of hypothesis, significance of he study, limitation of he study and definition of terms
Finally, the findings, recommendation and conclusion.
Title page
Certification
Dedication
Acknowledgement
Proposal
CHAPTER ONE
Introduction
1.1 Background of he study
1.2 Statement of the problem
1.3 Objective of he study
1.4 Research question
1.5 Research hypothesis
1.6 Significant f the study
1.7 Scope and limitation
1.8 Definition of terms
CHAPTER TWO
Literature review
2.1 background of the company under study
2.2 The concept of financial leverage
2.3 The degree of financial leverage
2.4 The effects of financial leverage
2.5 Business risk
CHAPTER THREE
Research design and methodology
3.1 Research design
3.2 Population of he study
3.3 Sample and sampling techniques
3.4 Source of data collection
3.5 Method of data collection
3.6 Method of data presentation
3.7 Method of data analysis
CHAPTER FOUR
Presentation and analysis of data
CHAPTER FIVE
5.1 Findings
5.2 Recommendation
5.3 Conclusion
level of dept financing employed does not effect the performance of the firms under study.
HI: The level of dept financing employed effects the performance of the firms under study.
HYPOTHESIS 3
HO: The state of economy measured by the grass domestic project does not affect the performance of Nigeria Bottling Company PLC.
HI: The state of the economy measured by the grass domestic products the performances of the firm under study.
NOTE:
HO: Implies Null Hypothesis
HI: Implies Alternative Hypothesis.
1.4 SIGNIFICANCE OF THE STUDY
The significant of the study is to enable us to evaluate how the economy effect the performance of the Nigeria Bottling Company PLC.
This study will therefore enhance an understanding on how financial leverage can be said to thrive well in an economy that is forming in that as dept employed more founds to increase, for investment and as such profit fends to increase.
The study will be of almost importance to the school library, students in management and for future project writers and research who will wish to use it as reference to their own study.
1.5 SCOPE AND LIMOTATION OF THE STUDY
The scope of this study centers around the company within the manufacturing sector of the Nigerian economy. “NIGERIA BOTTLING COMPANY PLC”. Analysis on the company. I.e. historically. Operationally and structurally. Ration analysis would also be carried out in order to reach a final objective conclusion
The limitation of the study includes data, since data used are only data in published reports for financial analysis. The confidentially of such data the firm reserved to themselves. Given the economic trend i.e. inflationary effects which affects the level of activity of the firm, which includes firm with dept financing also.
1.6 DEFINITION OF TERMS
1. FINANCE
This is the system by which the income of a company is raised and administered. It deals with methods for supplying capital needed to acquire, development and operate real property
2. FINANCING INVESTMENT
This id the purchase of sound stock or bound compared to real investment in a capital asset such as real estate or plant and machinery.
3. FINANCIAL LEVERAGE
This is the use of external financing in order to raise the profit of the company that employs it. It has effect on the per share earnings of the common stock of a company when large sums must be paid for bound interest or preferred stock dividend on both, before the common stock is established to share in earning
Financial leverage may be advantageous for the common stock when earning are good enough but may work against the common stock when earning decline.
4. DEPT FINANCING
This is the long term borrowing of money for business, usually in exchange for dept securities, for the purpose of obtaining working capital or other founds necessary to operational needs
5. EQUITY FINANCING
This is the acquisition of money for capital or operating purposes in exchange for a share or shares in the business being financed.
Effects Of Financial Leverage On Company Performance:
Financial leverage refers to the use of debt or borrowed capital to finance a company’s operations and investments. It can have both positive and negative effects on a company’s performance, depending on how effectively it is managed and the prevailing economic conditions. Here are some of the key effects of financial leverage on company performance:
Positive Effects:
- Increased Return on Equity (ROE): Financial leverage can amplify a company’s return on equity. When a company uses debt to finance its operations and the return on its investments exceeds the cost of borrowing, it can result in higher ROE for shareholders.
- Tax Benefits: The interest on debt is typically tax-deductible. This means that the more debt a company has, the lower its taxable income, which can lead to lower overall tax expenses. This can positively impact a company’s net income.
- Business Expansion: Debt can be used to fund expansion initiatives, such as opening new locations, developing new products, or acquiring other businesses. This can help a company grow faster and increase its market share.
- Flexibility: Debt can provide a level of flexibility in managing a company’s capital structure. It allows companies to use their equity for other purposes, such as rewarding shareholders through dividends or stock buybacks.
Negative Effects:
- Financial Risk: One of the primary risks of financial leverage is financial distress. If a company cannot meet its debt obligations (interest and principal payments), it may face bankruptcy or have to sell assets to cover its debts. This can lead to a decline in shareholder value.
- Interest Costs: The interest payments on debt are a fixed cost, which means they must be paid regardless of a company’s financial performance. High levels of debt can lead to significant interest expenses that can eat into profitability, especially when interest rates are high.
- Reduced Flexibility: While debt can provide flexibility, it also comes with obligations. Companies must make regular debt payments, which can limit their ability to respond to changing market conditions or invest in new opportunities.
- Credit Rating: High levels of debt can negatively impact a company’s credit rating. A lower credit rating can result in higher interest rates on future debt issuances and make it more difficult to raise capital.
- Market Perception: Investors and analysts often view excessive leverage as a sign of financial risk. This can lead to a lower stock price and reduced access to capital markets.
In summary, financial leverage can have both positive and negative effects on a company’s performance. It can magnify returns and provide opportunities for growth but also increase financial risk and fixed interest costs. Effective management of financial leverage is crucial, as excessive debt or poor debt management can lead to serious financial problems for a company. The appropriate level of leverage depends on the company’s industry, financial stability, and overall strategy.