Effect of Financial Leverage on Financial Performance Evidence of Quoted Pharmaceutical Companies in Nigeria

This study examines the Effect of Financial Leverage on Financial Performance: Evidence of Quoted Pharmaceutical Companies in Nigeria. This work employed three (3) financial leverage for the independent variables, debt ratio (DR); debt-equity ratio (DER) and interest coverage ratio (ICR) in determining their effect on financial performance for Return on Assets (ROA) as dependent variable. The ex-post facto research design was used for this study. The secondary data were obtained from the financial statement (Comprehensive income statement and Statement of financial position) of the selected pharmaceutical companies’ quoted on the Nigerian Stock Exchange (NSE). Descriptive statistics, Pearson correlation and regressions were employed and used for this study. The results of the analysis showed that debt ratio (DR) and debt-equity ratio (DER) have negative relationship with Return on Assets (ROA) while interest coverage ratio (ICR) has a positive relationship with Return on Assets (ROA) in Nigeria pharmaceutical industry. The analysis also revealed that all the independent variables have no significant effect on financial performance of the sampled companies. The results further suggested that only 18.5% of the variations on the dependent variable are caused by the independent variables in our model suggesting that 81.5% of the variations in financial performance are caused by other factors outside our model. Based on the above the study therefore recommend that the amount of debt finance in the financial mix of the firm should be at the optimal level so as to ensure adequate utilisation of the firms’ assets; the separation of ownerships and management in modern day corporation (companies) demands that agents must act in ways that are in line with the objectives of the principal in order to achieve enhanced earnings per share for the firm owners; companies’ management should ensure that financial decisions made by them are in consonance with shareholders’ wealth maximization objectives which encompasses the profit maximization objective of the firm; management should seek other sources of funding which may not be in the interest of equity holders and leading to an increase in returns to equity holders. Therefore, managers should employ financial leverage in a way that enhances value for their company owners’