Effects of Leverage on the Financial Performance of Parastatals: A Case Study of Kenya Power

Financing decision lately has gained greater importance in many organizations. Balancing of debt and equity can assist in achieving optimal capital structure. Financial leverage reflects the debt amount used in the capital structure of the firm. The financial leverage employed by a firm is intended to earn more on the fixed charges funds than their relative costs. The researcher carried out a research with the aim of examining the effects of leverage on financial performance. The target population for the study constituted the management staff in finance division of Kenya Power. The population size was 120 staff from which a sample of 55 respondents was drawn. Data was collected from primary and secondary sources. Primary data was collected by use of structured questionnaires while secondary data was obtained from Kenya Powers annual audited financial reports, and periodic publications. A pilot test involving 10 respondents who were exempted from the main study was carried out prior to the main study. The study applied survey research design and data was analysed by use of descriptive and inferential statistics. The study revealed that leverage has a significant effect on financial performance. The study, therefore, concluded that optimal debt financing is essential for the organization to realize better financial performance. It was recommended that organizations should manage their costs by considering cheaper sources of funding in order to improve on financial performance.