Strategic Orientation Practices on Performance of Audit Firms in Nairobi County, in Kenya

Capital structure decision is among the key financial decisions that are taken by firms because capital mix has an effect on the financial performance. Theoretical foundations on capital structure have found various conclusions where Modigliani and Miller argued on the irrelevance of debt on capital structure and agency theory to stress on the importance of debt in capital structure to control the actions of management. No agreement exists on the nature of the optimal capital structure that enhances financial performance from the two that is theoretical and different empirical studies. The aim of this study was to ascertain the effect of capital structure on financial performance of small and medium enterprises in Thika Sub-County. The sample size of 40 firms was drawn using convenient random sampling. The independent variables for the study were capital structure measured by the ratio of debt to equity, asset turnover measured by the ratio of total sales to total assets and firm size measured by a log of total assets. Financial performance was the dependent variable and was measured by return on assets. Secondary data was collected over a five 5 year time frame (January 2013 to December 2017) annually. The descriptive cross-sectional research design was employed for the study and the relationship between variables established using multiple linear regression analysis. Data analysis was undertaken using the SPSS software. The study found that, there was a negative and statistically significant correlation between debt ratio, firm size and financial performance. Positive and insignificant correlation was noted between asset turnover and financial performance of small and medium enterprises in Thika Sub-County. The research therefore recommends when SMEs are setting their capital structure they should strike a balance between the tax savings benefit of debt and bankruptcy costs linked with borrowing. Also recommends adequate measures should be put in place by owners of these businesses to improve and grow their financial performance by strategically marketing their sales.