· Web viewIn line with this, this study is set out to examine impact of capital structure on financial performance of quoted Food and Beverages industries in Nigeria for a ten year

JOURNAL OF LEADERSHIP, ACCOUNTING DEVELOPMENT AND INVESTIGATION RESEARCH (JLADIR)

IMPACT OF CAPITAL STRUCTURE ON FINANCIAL PERFORMANCE OF QUOTED FOOD AND BEVERAGES INDUSTRIES IN NIGERIA

1Omachona Cletus ([email protected])

+2348032714888

2Ude, A.O. ([email protected] )

+23408035727742

3Inyada, S.J. ([email protected])

+234080378078111, 2&3Department of Accounting, Kogi State University, Anyigba, Kogi State, Nigeria.

Abstract

Managers of corporate entities are usually confronted with the problem of what combination of equity and debt will best maximize returns and greater advantage in the competitive environment they operate, making an issue of the capital structure of utmost importance in the survival of firms. In line with this, this study is set out to examine impact of capital structure on financial performance of quoted Food and Beverages industries in Nigeria for a ten year period of 2008 – 20017. The objective of the study is to ascertain the impact of equity capital and debt capital on the financial performance of the selected companies. The population of the study comprises of all 21 food and beverages companies quoted on the Nigerian Stock Exchange (NSE). The variables used are capital structure proxied by equity capital (EQTC) and total debt capital (TDBTC) and Firm performance measured by profit after tax (PAT). The panel data used for analysis were obtained from the financial statements of the companies that were selected based on the availability of data. The tools of analysis are Descriptive statistics and Panel least square regression. The results show that equity capital (EQTC) and total debt capital (TDBTC) both have a significant positive impact on profitability. The study recommends that firms in the food and beverages industry in Nigeria in financial need must first consider the option increases the size of their equity either through retained earnings or by looking at the capital market for funds as that source is less risky with higher profitability, and that the choice of debt financing should the last alternative.

KEYWORDS: Capital Structure, Firm performance, Equity, Debt, Profitability.

1. Introduction

Capital structure refers to the combination of varieties of long term sources of funds and equity shares including reserves and surpluses of an enterprise. Most of the decision making processes related to the capital structure are deciding factors when determining the capital structure, a number of issues such as; cost, various taxes and rate, interest rate have been proposed to explain the variation in financial leverage across firms. The capital structure of a company is a particular combination of debt, equity and other sources of finance that it uses to fund its long-term asset. The key division in capital structure is between debt and equity (Akintoye, 2007). Debts capital could be long term debt capital or short term debt capital. Holders of debt capital are lenders and not owners of the business.

There are different factors affecting a firm's capital structure, and a firm should attempt to determine its optimal or best mix of financing. But determining the exact optimal capital structure is not a science, so after analyzing a number of factors, a firm establishes a target capital structure which it believes is optimal. Ogebe, O. P., Ogebe. J. O. and Alewi (2013) state that an appropriate capital structure is a critical decision for a business organization. Their study reiterates that this decision is important not only because of the need to maximize returns to various organizations' constituencies but also because of the impact such decisions have on an organizations' ability to deal with its competitive environment. To appreciate the effects of capital structure on financial performance is capable of resolving potential problems that exist between performance and capital structure.

Two major sources of capital are available for firms willing to raise funds for their activities. These sources are internal and external sources. The internal source refers to the funds generated from within an enterprise which is mostly retained earnings. It results from the success enterprises earned from their activities. Firms may, in the same way, look outside to source for their needed funds to enhance their activities. Any funds sourced not from within the earnings of their activities are termed external financing. The external funding may be by increasing the number of co-owners of business (through equity) or outright borrowing in the form of loans (Chechet & Olayiwola, 2014). They added that issuance of equity helps in sourcing for the fund through external financing leading to increment in the number of owners where its holders are entitled to dividends when surplus is declared and after meeting the mandatories. In the same vein, the equity holders exercise a greater decision control over the firm because they bear a larger share of risk. On the other hand, outright borrowings by a company make her a debtor to the lenders. This may be through the issuance of debentures, bonds or other forms of debt instruments. The holders of these are entitled to a fixed amount of interest to be paid before the shareholders. They have lesser control over the decision in the organization. Chechet and Olayiwola (2014) posit that for a purely equity financed firm, the whole of its after-tax cash flows (profit) is a benefit

87Volume 3 Number 1, July, 2019

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to the shareholders in the form of dividends and retained earnings. However, firms with a certain percentage of debts in their capital structure shall devote a portion of the profit after tax to servicing such debt. Capital structure decision is therefore very critical and fundamental in the life of a business

Profitability which is the proxy for firm performance in this study refers to the potential of a venture to be financially successful. This may be assessed before entering into a business or it may be used to analyze a venture that is currently operating. Khalil (2014) explains that profit is the excess of revenues over expenses for a set of a transaction and that profit will be made when goods or services are sold at a more than cost price, while a loss will be made when the goods and services are sold at less than the cost price. Profitability as a performance measure is the ability of an asset to generate profit (return on asset: ROA). It can also be measured as the rate of return on investment (ROI). Performance is key to determine the perpetuity of a business set up. It is regarded as the foremost objective of profit-oriented organizations. A well-performing business is often one that is effective and efficient in securing it a long-term success.

The objectives of firms revolve around ensuring that they satisfy all the stakeholders involved in the business. The manager of a firm has to make both financing and investment decisions that will aid the realization of the firm's objective. In making a financing decision, one of the priorities of the manager is to ensure that he selects the best financing mix or capital structure of the firm (Ogebe, 2013). Rasa (2012) opines that in order to optimize the capital structure of a company, it is necessary to take into account a very wide range of external and internal factors and to evaluate benefits and problems arising from the use of different financing sources.

In dealing with the issue of capital structure and its relationship with performance, there are several variables to consider. Financial performance could be measured by many accounting ratios including return on assets (ROA): return on capital employed (ROCE); and return on equity (ROE), capital structure is composed of Debt Capital and Equity Capital and non-ratios such as profit after tax (PAT). For the purpose of this study, financial performance shall be proxied by PAT and capital structure measured with Equity capital (EQTC) and Total Debt capital (TDBTC).

To a great extent, past experience and research have identified that financial constraints have been a major factor affecting the performance of corporate firms in developing countries especially Nigeria where most of the corporate bodies are unwilling to dabble into debt finances, thus majorly capitalized by equity (Lawal, Edwin, Monica & Adisa, 2014). Pratheepkanth (2011) suggests that to have knowledge of how companies finance their operations is necessary in order to examine the determinants of their financing or capital structure decisions. One of the greatest challenges confronting business executives whose entities are not buoyant to sustain themselves financially is that of choosing between issuing equity or contracting debts or utilizing both means in which case they need to strike a balance between the mix in such a way as to attain their wealth maximization objective.

Studies conducted on the relationship between capital structure and firms’ financial performance reported mixed results. Scholars including Duru, Okpe and Ugwu (2017); Alalade, Oguntodu and Adelakun (2015) and Amidu (2007) pointed out a negative relationship between profitability and capital structure. On the other hand, other Scholars such as Shafi’u, Noraza and Saleh (2017); and Kakanda, Bello and Abba (2016) reported that a positive relationship exists between a firm's capital structure and its profitability. Given the lack of consensus among scholars on this relationship, this study becomes very imperative to carry out this independent evaluation of the impact of capital structure proxied by equity capital and total debt capital on financial performance represented by profit after tax, PAT) of food and beverages industry in Nigeria.

The main objective of this study is to evaluate impact of capital structure on financial performance of the food and beverages industry in Nigeria, while the specific objectives are to: (i) ascertain the impact of Equity capital on profitability of food and beverages industries in Nigeria and; evaluate the impact of Total Debt Capital on profitability of food and beverages industries in Nigeria. In order to achieve the stated specific objectives, the following Null hypotheses were formulated: Ho1: Equity capital has no significant impact on profitability of food and beverages industries in Nigeria, and Ho2: Total Debt capital has no significant impact on profitability of food and beverages industries in Nigeria.

2.0 Literature Review2.1 Capital Structure

The concept of capital structure is generally described as the combination of debt and equity that make up the total capital of the firms. Nirajini and Priya (2013) postulate that capital structure is a financial tool that helps to determine how firms choose their financial makeup. They stated that a firm capital structure is the composition or structure of its liabilities. Capital structure in finance means the way a firm finances its assets across a blend of debt, equity or hybrid securities (Saad, 2010). Owolabi and Inyang (2012) state that a capital structure can be described as the proportionate relationship between debt and equity. They



confirm that debt is majorly made up of long term loans such as debenture while equity includes paid-up share capital, share premium, reserves, and surplus or retained earnings.

The capital structure of a company is a particular combination of debt, equity and other sources of finance that it uses to fund its long-term asset. The key division in capital structure is between debt and equity (Akintoye, 2008). Abor (2005) views the capital structure of a company as the precise mixture of debt and equity used in financing the firm’s operations. Rasa (2012) points out that improper selection of financing sources, their proportions, misjudgments about abilities to pay, may cause solvency problems and decline in the effectiveness of capital usage, profitability and value of a company. Ekpenyong and Nyong (1992) added that the shortage of finance is a critical limiting factor in industrial growth and the realization of an entrepreneur's dream.

2.1.1 Equity Capital and Profitability

Equity can be defined as a right; this is basically the possession that gives the holder right of ownership, decision making, responsibility bearing and profit or benefit sharing. Olowe (2011), stated that equity shareholders are the real owners of the company and they are entitled to all residual earnings after all fixed obligations have been settled. He stated further that the earning of equity holder is subject to variations. Equity is ordinary share capital or shareholders’ fund that is regarded as capital (ordinary) plus other reserves. Equity instrument as defined by International Accounting Standard (IAS) 32 is a contract that evidences a residual interest in the assets of an entity that remains after deducting its liabilities (Elliot, B. & Elliot, J., 2012).

The company which uses more own funding sources to finance its activity is distinguished by high financial stability but it does not exploit opportunities to increase return on invested capital together restraining its growth rates (Rasa, 2012). Greater equity ownership by insiders improves corporate performance because it aligns the monetary incentives of the manager with other shareholders, thereby mitigating the standard principal-agency problem (Jensen & Meckling, 1976). They contend that even when controlling shareholders are not involved in management, they are nonetheless more capable of monitoring and controlling managers against opportunistic behaviours that could minimize profitability. It is the equity element presents in the capital structure that motivates the debt providers to give their scarce resources to the business. Jensen and Meckling (1976) argue that greater equity ownership by insiders, that is, management and/ or directors, improves corporate performance because it aligns the monetary incentives of the manager with other shareholders, thereby mitigating the standard principal-agency problem.

2.1.2 Total Debt capital and Profitability

Debt capital can be seen as a class of source of fund which makes the holder a creditor of a firm but not a part owner and can be divided into Long term debt and Short term debts. Debt financing is a method of obtaining capital to operate by a business through borrowing money (Khalil, 2014). Businesses borrow money from a variety of commercial sources and then have to pay it back under the terms they negotiate with their source. They pay back the principal that they borrow plus whatever rate of interest they are charged. The interest rate is the rent for the use of money that is borrowed (Marks & Robbins, 2009). Companies which are well established and have demonstrated steady sales, solid collateral and profitable growth often rely on debt capital for financing their business.

Kwarbai, Olayinka, Ajibade, Ogundajo and Omeka (2016) state that even though, debt financing is riskier compared to equity, it is one of the crucial means of sourcing for a fund in executing viable investments in a firm thus enhancing the earnings. They added that the tax shield on debt interest tends to reduce the tax expenses and therefore leads to an increase in the after-tax returns. The performance of a highly geared firm is dependent on the right usage of debt capital because debt enables ownership and control retention, tax shield, increases in liquid asset and financial freedom (Olowolaju, 2013). The implementation of one of the main company's goals which are the maximization of return earned by shareholders according to Rasa (2012) can be stimulated when there is increasing part of debt capital in the structure of companies' financing sources, adding, however, that this decision leads to greater financial risk. He contends that under favourable economic conditions, increasing operating profit may result in higher net profit as well as in higher earnings per share in case of increased use of debt capital.

Fundamentally, according to the traditional capital structure approach, borrowing is the right step which increases the wealth of company's shareholders, at least to the level beyond which debt will have a negative effect on the weighted average cost of capital and, accordingly, on shareholders' wealth. The company, that uses debt capital benefits because interest is tax-exempt. Thus, the increase in financial leverage leads to decrease of the weighted average cost of capital due to lower cost of debt capital, so the value of the company is increasing (David & Olorunfemi, 2010). Increasing levels of debt in a firm’s capital structure increases its after-tax cost, negatively affecting corporate financial performance (Adesina, J. B., Nwidobie & Adesina, O. O., 2015)

Debt financing raises the pressure of managers to perform but implies interest payment obligations that must be satisfied by managers, and the company may come under the threat of bankruptcy if these obligations are not satisfied. Consequently, a positive influence of leverage on corporate profitability should exist (Jensen & Meckling, 1976). Debt financing sources may also



exert different effects on managerial incentives and resolve moral hazard issues. In addition, when ownership and control over a firm are diluted, managerial optimality rather than shareholders optimality should be considered (Zwiebel, 1996). If more of debt is employed, the threat of liquidation, debt servicing, which may eventually result to loss of jobs to the managers will result to cost reduction thereby leading to efficiency and subsequently improved performance. Using excessive amounts of external financing can result in the over‐leveraging of a company, which means the business has extensive obligations to institutional and individual investors who can disrupt the company’s operations and financial returns (Olokoyo, 2013).

2.2 Theoretical framework

This study is anchored on trade-off theory as discussed below:

2.2.1 Trade-Off Theory (Myers, 1984)

The term Trade-off Theory is used by different authors to describe a family of related theories. Management running a firm evaluates the various costs and benefits of alternative leverage plans and strives to bring a trade-off between them. Often, it is assumed that an interior solution is obtained so that marginal costs and marginal benefits are balanced. Thus, Trade-off Theory implies that the company's capital structure decision involves a trade-off between the tax benefits of debt financing and the costs of financial distress. When firms adjust their capital structure, they tend to move toward a target debt ratio that is consistent with theories based on tradeoffs between the costs and benefits of debt.

2.2.2 The Theory Relevant to the Study

This study is anchored on the Trade-off Theory (Myers, 1984) because the theory postulates that firm needs to objectively assess the various costs and benefits of alternative debt portfolios and strives to bring a trade-off between them so that impending costs and expected benefits are balanced.

2.3 Empirical Review

Musah (2018) examines the effect of capital structure (measures as short term debt ratio, long term debt ratio, and total debt ratio) on profitability (measured as Return on Assets and Return on equity of commercial banks in Ghana. The study sampled 23 banks over a six-year period from 2010 to 2015 and extracted data from the annual of these banks. Data were analysed using descriptive statistics, correlation analysis as well as panel regression analysis. The results showed that banks in Ghana are highly leveraged with debt financing constituting 84% of total capital out of which 77% is short term debt despite the increase in the minimum equity capital of these banks. The regression analysis revealed that short term debt ratio and long term debt ratio are negatively related to the profitability of banks in Ghana. However, total debt ratio was positively associated with profitability of Banks in Ghana. The results show that commercial banks in Ghana’s reliance on short term financing (deposits) reduce banks profitability. He recommended that banks should shift their financing focus from deposits to other sources and that firms should always choose the right mix of short term and long term debt that will maximize the profitability of the bank.

Duru, Okpe and Ugwu (2017) examine the effect of capital structure on the financial performance of Food and Beverages companies in Nigeria. Relevant Secondary data were collected from Cadbury, Nestle and Unilever Plc annual and financial reports respectively. The researcher adopted ex-post facto research design. Ordinary Least Square Regression Techniques were used to test the Hypotheses and to ascertain the causal effect among variables. The findings revealed that short term debt and Total debt have a negative and insignificant effect on profit after tax of Food and Beverages industries in Nigeria while Long term debt and debt to Equity show a positive and an insignificant effect on profit after tax of Food and Beverages in Nigeria. They recommended that Firms must look at increasing the size of their equity either through retained earnings or by looking at the stock exchange market for funds.

Oladele, Omotosho and Adeniyi (2017) investigate the effect of capital structure on the performance of Nigerian listed manufacturing firms from 2004-2013. This is to determine the overall impact of capital structure on corporate performance of Nigerian quoted firms by establishing the relationship that exists between the capital structure choices of firms in Nigeria and their return on assets, return on equity, sales growth and earnings per share as proxies to measure corporate performance. For the purpose of this study, secondary data obtained from the Nigerian stock exchange fact book was utilized. Multiple regression was used as a tool of data analysis and the result of the findings revealed that capital structure has no significant effect on return on equity but has a significant effect on return of assets, earnings per share and sales growth. They recommended that the management of Nigerian quoted manufacturing firms should work very hard to optimize the capital structure of their quoted firms in order to increase the returns on equity, assets and earnings per share.

Kakanda, Bello and Abba (2016) assess the effect of capital structure on the financial performance of listed Consumer goods companies in Nigerian. All consumer goods companies quoted on the Nigerian Stock Exchange are considered the population for this study while seven (7) out of these firms whose accounting year-ends 31 December are considered as the sample. Secondary data was sourced from the annual financial reports of the sampled firms which were obtained from African Financial



website and official website of the Nigerian Stock Exchange. The study used ex-post facto research design to examine the relationship between independent and dependent variables while controlling for other variables. Descriptive statistics, correlation, and hierarchical multiple regression analyses were carried out to test the hypotheses developed in the study. The study found that there is a positive and significant relationship between a firm's capital structure and corporate financial performance. The study specifically found that short-term debt (STD) has no significant positive effect on return on equity (ROE) while Long-term debt (LTD) has a positive relation and significant effect on ROE. They recommended that firms should consider the mixture of equity and debt since they are major determinants of corporate performance.

Nwude, Itiri, Agbadua, and Udeh (2016) investigate the impact of debt structure on the performance of Nigerian quoted firms. It was conducted using 12-year annualized panel data spanning the period 2001-2012 for a cross-section of 43 firms from different sectorial classifications. The data were collated from the annual reports of the sampled firms and Nigerian Stock Exchange factbooks. The study employed three regression estimations (Pooled OLS, Fixed Effects and Random Effects) as a result of unobserved heterogeneity in the dataset. The result from the regression estimations showed that debt structure has a negative and significant impact on the performance of Nigerian quoted firms within the period under review. The study concludes that debt structure contributes negatively to the performance of Nigerian quoted firms, thereby agree with pecking order theory. They recommended that there is a need for Nigerian quoted firms to balance the trade-off between the benefits of debt and bankruptcy costs, implying that a firm needs to choose debt ratio at certain proportion to be better off.

Nwaolisa and Chijindu (2016) determine the influence of financial structure on profitability with special reference to oil and gas firms in Nigeria. Ten (10) out of the fourteen (14) listed oil and gas firms in the Nigerian Stock Exchange were selected. The financial data from 1993 to 2013 were collected from the Nigerian Stock Exchange factbook of various issues as relevant. Variation in profitability albeit return on assets, return on equity, profit before tax and earnings per share were regressed on debt-equity amalgam and tax using the pooled ordinary least square, fixed effect and random effect models. After the estimation, results revealed that financial structure has a negative influence on profitability of oil and gas firms measured by return on assets, return on equity, profit before tax and earnings per share. They recommend that oil and gas firms in Nigeria should fund their operations with more of equity capital.

Alalade, Oguntodu and Adelakun (2015) investigate the effect of gearing on ROA, ROE and ROCE on selected food product companies in Nigeria. The methodology adopted was the non-probabilistic technique through the use of purposive sampling. The population of the study comprises of food product companies that have been quoted on the floor of Nigerian Stock Exchange over five (5) years between 2009 and 2013. The data were collected through the published annual report of the firms selected. The findings revealed that gearing has no significant effect on ROA, ROE and ROCE. They recommended that the management should reduce the level of gearing in order to enhance profitability performance and embark on more promotion to make their product acceptable by the consumer.

Isola and Akanni (2015) investigate the factors responsible for the financing decision of firms in Nigeria. To achieve this, 63 non-financial firms listed on the Nigerian stock exchange were selected based on data availability for the period of 2001 to 2010. Financial firms were excluded because of their similar regulatory framework and in order to ease the comparability of results. While most studies focused on debt-ratio as a measure of leverage, the present study uses the ratio of total debt and total assets. The empirical findings from the static panel regression analysis confirm that Nigerian firms tend toward internal financing through retained earnings, equity and other short term funds, against long term financing majorly through debts and other long term loans. They recommended that further empirical investigation is needed to reflect the macroeconomic and institutional influence on the capital choice of Nigerian firms.

Adesina, J. B., Nwidobie and Adesina, O. O. (2015) determine the impact of post-consolidation capital structure on the financial performance of Nigeria quoted banks. The study used profit before tax as a dependent variable and two capital structure variables (equity and debt) as independent variables. The sample for the study consists of ten (10) Nigerian banks quoted on the Nigerian Stock exchange (NSE) and period of eight (8) years from 2005 to 2012. The required data and information for the study were gathered from published annual reports. Ordinary least square regression analysis of secondary data shows that capital structure has a significant positive relationship with the financial performance of Nigeria quoted banks. They recommended that the management of quoted banks in Nigeria should consistently use debt and equity capital in financing to improve earnings.

Lawal, Edwin, Monica and Adisa (2014) examine the effect of capital structure on firm’s performance with a case study of manufacturing companies in Nigeria from 2003 to 2012 with the purpose of providing a critical appraisal of the need and importance of capital structure. Descriptive and regression research technique was employed to consider the impact of some key variables such as Returns on asset (ROA), Returns on equity (ROE), Total debt to total asset (TD), Total debt to equity ratio (DE) on firm performance. Secondary data was employed using data derived from ten (10) manufacturing companies. They observed that capital structure measures (total debt and debt to equity ratio) are negatively related to firm performance. They recommended that firms should use more of equity than debt in financing their business activities, in as much as the value of a business can be enhanced using debt capital.



Chechet and Olayiwola (2014) examine capital structure and profitability of the Nigerian listed firms from the Agency Cost Theory perspective with a sample of seventy (70) out of population of two hundred and forty-five firms listed on the Nigerian Stock Exchange (NSE) for a period of ten (10) years: 2000 - 2009 with the aid of the NSE Fact Book covering the period under review. Panel data for the firms are generated and analyzed using fixed-effects, random-effects and Hausman Chi-Square estimations. Two independent variables which served as a surrogate for the capital structure were used in the study: debt ratio , DR and EQT while profitability as the only dependent variable. The result shows that DR is negatively related with PROF, the only dependent variable but EQT is directly related to PROF. They recommended that rightful and correct combination of equity and debt must be ensured with equity given priority over debt.

Adeyemi and Oboh (2011) examine effects of corporate capital structure (financial leverage) on the market value of a selection of firms listed on the Nigerian Stock Exchange. Both primary and secondary data were obtained for analysis employing both descriptive and inferential statistics for analysis. A sample size of 150 respondents and 90 firms were selected for both primary data and secondary data respectively. Descriptive statistics were used to analyse the primary data, while Chi-Square was used to draw an inference of the perceived relationship between capital structure and firm value. The results show that a positively significant relationship exists between a firm’s choice of capital structure and its market value in Nigeria. They recommended that listed firms in Nigeria should strategically plan and manage their capital structure in order to maximize their market values.

2.3.1 The gap in Literature

The unending disagreement over the exact impact of capital structure on financial performance of quoted food and beverages industries in Nigeria, coupled with the difficulty encountered in selecting the most appropriate capital mix makes this study very necessary. This in addition to the scanty nature of existing works on capital structure and profitability of the food and beverage industry in Nigeria in particular, presented a gap which this study fills.

3.0 Methodology

This study utilizes the ex post facto research design because of the availability of the data in a secondary form obtainable from financial statements of the selected food and beverages companies in Nigeria. The sample size of 10 companies was selected based on the complete availability of data for the period under study. Panel least square regression (PLS) was used for the analyses because of the nature of the data.

3.1 Model Specification

The specified model for this study as used by Chechet and Olayiwola (2014) is expressed as follows:

PAT = f (EQTC + TDBTC)………………………………………….. 1

Representing the above equation econometrically, it becomes

PATit = β0 + β1EQTCit +β2TDBTCit +μit ……………………………………2 (Model)

Where: PAT = an indicator for profit after tax (a proxy for the Dependent Variable)

β0 = Intercept term (a constant)β1 = Coefficient of Equity Capitalβ2 = Coefficient of Total Debt CapitalEQTCit = a predictor for an Independent Variable proxy (Equity capital) TDBTCit = a predictor representing an Independent Variable proxy (Total Debt capital)μit = Stochastic error term (representing the combined effect of omitted variables)it = Time series and f = Functional relationship.

Variable Measurement and Justification

Variable Type Measurement JustificationProfit After Tax (PAT) Dependent Variable Profit for the year after

interest and taxDuru, Okpe and Ugwu (2017).Nwaolisa and Chijindu (2016)

Equity Capital(EQTC)

Independent Variable Total shareholders’ fund Adeyemi and Oboh, (2011)

Total Debt Capital Independent Variable Lawal, Edwin, Monica



(TDBTC) Value of total assets financed by debt

andAdisa(2014)

Source: Researcher’ compilation.

3.2 Data Presentation and Analysis

The attached appendix shows the values for Profit after Tax, equity capital composition and the Total debt capital composition of the 10 companies used in this study for the 10 years from 2008-2017.

The selected quoted food and beverages companies are Nasco-allied PLC, Nigerian Brewery PLC, Nestle Foods PLC, Northern Nig. Flour Mills PLC, Unilever PLC, Guinness, PZ PLC, Honeywell PLC, Dangote Flour Mills PLC and Dangote Sugar Refinery PLC.

3.2.1 Descriptive Statistics

Table 2 shows the Descriptive statistics of the variables using EViews 9.0 software.

PAT EQTY TDBTC Mean 8900788 32602973 37160642 Median 4304955 28794277 35306671 Maximum 43080349 1.78E+08 1.39E+08 Minimum -14078794 -4271 24480 Std. Dev. 11810029 37163344 34102916 Skewness 1.287903 2.240516 1.039175 Kurtosis 4.014158 8.826143 3.591556Jarque-Bera 31.61107 222.8473 19.26158 Probability 0 0 0.000066 Sum 8.81E+08 3.23E+09 3.68E+09 Sum Sq. Dev. 1.37E+16 1.35E+17 1.14E+17 Observations 99 99 99

Source: Researcher’ computation with EViews 9.0



The results in table 2 above show the descriptive statistics for the overall data set. The mean and the median displayed a high level of consistency, as their values are within the range of minimum and maximum values of the series. This is evidence that the series is evenly spread. The standard deviation displays the extent of dispersion of the series.

Tests for NormalitySkewness: This is the test of the asymmetry of the series. The series skew only positively indicating that it is not normally distributed. Kurtosis: The values under kurtosis are all greater than 3 indicating abnormal distribution Jargue-Bera (JB) test of normality.JB Test is a goodness-of-fit test on whether sample data have the skewness and kurtosis matching a normal distribution in a series. From the above analysis, all the probability values of Jarque-Bera statistic are less than 0.05 or 5%: (PAT) 0.000000; (EQTC) 0.000000 and (TDBTC) 0.000066. This implies that all the variables are not normally distributed.

3.2.2 Regression Analysis

Table 3 below shows the output of the regression analysis of the series

Dependent Variable: PATMethod: Panel Least SquaresDate: 10/01/18 Time: 12:41Sample: 2008 2017Periods included: 10Cross-sections included: 10Total panel (unbalanced) observations: 99

Variable Coefficient Std. Error t-Statistic Prob.

EQTC 0.195467 0.032325 6.046942 0.0000TDBTC 0.074268 0.035226 2.108355 0.0376

C -231872.4 1076118. -0.215471 0.8299

R-squared 0.633977 Mean dependent var 8900788.Adjusted R-squared 0.626352 S.D. dependent var 11810029S.E. of regression 7219091. Akaike info criterion 34.45219Sum squared resid 5.00E+15 Schwarz criterion 34.53083Log likelihood -1702.383 Hannan-Quinn criter. 34.48401F-statistic 83.13933 Durbin-Watson stat 0.600639Prob(F-statistic) 0.000000

Source: Researcher’s computation using EViews software



R- Squared (Goodness of Fit or Coefficient of determination) adjusted for degree of freedom, stood at a value of 0.63 which means that about 63% of the variation in the observed behaviour of profit after tax (PAT) /within the period of study is jointly caused by the independent variables namely EQTC and TDBTC. The remaining 37% was accounted for by other variables not captured in this study including but not limited to, management efficiency, the board size, board composition, internal control system among others. Table 3 further shows F. Statistics which displays the fitness (or overall significance) of this model. F-statistic value of 83.13933 and the estimated Prob. value of 0.0000 (1% level of significance) indicates that the model estimation is fit.

Regression Coefficients

Table 3 above shows equity capital (EQTC) has a coefficient of 0.195467, t-stat value of 6.046942 and probability of 0.0000 (at 1% significance), meaning that EQTC has a significant positive impact on the profitability (PAT) of food and beverages companies in Nigeria such that a unit increase in equity capital brings about 0.195 value increase in profit after tax (PAT) during the ten year period under study.

The table also shows Total Debt Capital has a coefficient of 0.074268, a t-stat of 2.108355 and prob. value of 0.0376 (at 5% significance) implying that TDBTC has a positive significant impact on the profitability (PAT) of food and beverages companies in Nigeria such that a unit increase in total debt capital brings about 0. 074 value increase in profit after tax (PAT) during the ten year period under study.

3.3 Test of Hypotheses

To be able to examine impact of capital structure on profitability of food and beverages companies in Nigeria for the period under study, the formulated hypotheses were tested using the Panel Least Square Regression results as follows:

Table 3 above reveals that equity capital has a significant positive impact on the profitability of food and beverages companies in Nigeria at 1% level of significance of 0.0000. Based on this, the null hypothesis one which states that EQTC has no significant impact on profitability is rejected.

Table 3 also shows that Total Debt Capital has a significant positive impact on the profitability of food and beverages companies in Nigeria as indicated by the significance level of 0.0376 which is at 5% level of significance. Based on this, the null hypothesis two is also rejected.

3.4 Discussion of Findings

This study reveals that equity capital (EQTC) has a significant positive impact on the profitability of food and beverages companies in Nigeria between 2008 and 2017. This is in consonance with Chechet and Olayiwola (2014) who found a positive and significant impact of equity on profitability, but it disagrees with Duru, Okpe and Ugwu (2017) who reported that debt to equity has an insignificant impact on profitability.

The study reveals further that TDBTC has a significant positive impact on the profitability of food and beverages companies in Nigeria between 2008 and 2017. This finding is in complete agreement with Nwude, Itiri, Agbadua and Udeh (2016); Ahmad, Abdullah, and Roslan (2012); Bam, Bhandari, Shakya and Jyoti (2015)who found a significant impact of total debt on profitability, but it is in contrast with Rehman, Fatima and Ahmad(2012), and Khan (2012) whose reports were that total debt capital has an insignificant impact on profitability.

3.5 Conclusion and Recommendations

The broad objective of this study is to examine the impact of capital structure on the profitability of the food and beverages industry in Nigeria for a ten year period spanning from 2008 and 2017. Capital structure was Proxied by Equity capital (EQTC) and Debt capital (DBTC) while profitability is proxied by profit after tax (PAT). In order to achieve the objective, the study adopts Descriptive statistics and Panel Least Square Multiple regression model to conduct the analysis with the aid of Eviews 9.0 software. Data analysed were sourced from the financial statements of the various food and beverages companies used for the study. Empirical results from the regression estimation indicate that both EQTC and DBTC have a significant positive impact on the profitability of food and beverages companies in Nigeria. The equation in the model demonstrated a good fit from the coefficient of determination (R2: 0.63) f-statistic 83.1393, and prob. value of 0.0000).

In light of the above findings, the following recommendations are made:



i) Firms in the food and beverages industry in financial need must first consider the option of increasing the size of their equity either through retained earnings or by looking at the capital market for funds. This is because equity financing is less risky and has shown to have higher profitability.

ii) That food and beverages industry operators in Nigeria should exercise caution in going for debt financing to ensure that the cost of the debt does not exceed the anticipated gains and that the choice of debt financing if it becomes the last resort, should first be for the less risky long term debts.

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Appendix

S/NO. COMPANY YEAR ID PAT EQTC TDBTC1 NASCOALL PLS 2008 1 1,298,293 3848961 517784

2009 1 1,842,346 4631532 7226682010 1 1,648,321 4756483 27533092011 1 2,203,695 5664556 43823862012 1 2,766,308 6577581 41119612013 1 2,699,542 6892626 45385412014 1 1,867,038 6307306 62485792015 1 2,105,645 7088236 92065902016 1 2,415,183 8046227 165570402017 1 5,343,592 11535212 18588035

2 NB PLC 2008 2 25,700,593 32229181 315580432009 2 27,910,091 46570094 227884452010 2 30,332,118 49279276 454676732011 2 38,434,033 78304741 849993632012 2 38,042,714 93447892 1033191102013 2 43,080,349 112359185 951149792014 2 42,520,253 171882830 1208632712015 2 38,049,518 172233465 1269936382016 2 28,396,777 165805542 1272763392017 2 33,009,292 178150934 117083944

3 NESTLE PLC 2008 3 8,331,599 9031240 201283122009 3 9,783,578 10543935 367078672010 3 12,602,109 14897115 459312822011 3 16,496,453 23209984 545183092012 3 21,137,275 34185562 547776562013 3 22,258,279 40594801 676126792014 3 22,235,640 35939643 701224242015 3 23,736,777 38007074 81207979



2016 3 7,924,968 30878075 1387078572017 3 33,723,730 44878177 101925951

4 NORTHERN NG 2008 4 57,586 666015 1692332FLOUR MILL 2009 4 2,469,513 868239 5823347

2010 4 365,730 1150476 4695622011 4 455,595 1649241 24488992012 4 -21,776 1353145 20159682013 4 225,145 1605717 20177002014 4 233,545 1773912 14927032015 4 -199,558 1480063 9436482016 4 -197,240 1250937 4888232017 4 -16,234 1239578 3097866

5 UNILEVER PLC 2008 5 5,285 10 372 257702009 5 3,659 12536 244802010 5 4,598 15078 260892011 5 4,623 14921 325912012 5 4,948 15716 304502013 5 5,263 14815 306982014 5 5,515 14263 337642015 5 5,259 16082 362162016 5 5,567 16980 394492017 5 6,686 16387 45898

6 GUINNESS PLC 2008 6 11,860,880 36862557 381157852009 6 13,541,189 31524701 423440362010 6 13,736,359 34199119 450333672011 6 17,927,934 40283492 518915402012 6 14,671,195 40352504 621816682013 6 11,863,726 46039111 427558912014 6 9,573,480 45061717 464265152015 6 7,794,899 48341376 403937442016 6 -2,015,886 41660605 474620042017 6 1,923,720 42943015 45868378

7 PZ PLC 2008 7 3,950,935 32714196 143887192009 7 4,818,611 35565450 164968372010 7 5,301,742 38707544 190479082011 7 5,217.53 33281387 215384172012 7 2,410,498 31216197 179329122013 7 7,650,265 44116061 258595632014 7 6,949,985 40574761 284271532015 7 6,556,814 41436794 237154702016 7 3,148,196 40900644 310272042017 7 4,811,169 42272665 44949648

8 HONEYWELL PLC 2008 8 816,452 5190480 10051863



2009 8 209,107 5399587 107628582010 8 1,948,396 14275123 112525352011 8 2,412,769 15815570 171682842012 8 2,600,712 17385356 316356282013 8 3,351,564 20605248 432251912014 8 1,120,267 20315834 476276102015 8 -3,023,852 16362599 596839772016 8 4,304,955 52334665 608170482017 8 4,426,978 56391664 68443349

9 DANGOTE FLOUR 2008 9 1,704,092 23157859 439151112009 9 5,359,861 26749581 353066712010 9 3,753,248 26489154 420007552011 9 920,383 26352592 553548052012 9 -3,138,119 22714.473 515254682013 9 -4,480,648 18233825 458821142014 9 -4,159,302 14074523 398094282015 9 -14,078,794 -4271 556746682016 9 12,110,356 28794277 479258702017 9 12,557,722 39488048 89853892

10DANGOTE SUGAR 2008 10 21,871,047 32627198 25546191

2009 10 13,185,599 41612797 370944242010 10 11,282,240 39089653 228075962011 10 7,403,597 39133709 336810122012 10 10,796,416 46269159 367822912013 10 13,537,612 53817512 367822912014 10 11,908,690 58526202 387616022015 10 12,659,855 66386057 402852762016 10 14,198,693 74584750 1010092292017 10 37,822,608 99207358 96857307

Sources: Financial statements of the companies.


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· Web viewIn line with this, this study is set out to examine impact of capital structure on financial performance of quoted Food and Beverages industries in Nigeria for a ten year