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

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A common phenomenon in the financial reports of Nigerian pharmaceutical companies is the volume of short-term and long-term liabilities that forms a considerable size of their capital structure. Explaining the role of financial leverage in companies' financial performance is one of the primary objectives of contemporary researches and this role remains a questionable subject which has continued to attract the attention of many researchers. The main objective of this study is to determine the effect of financial leverage on financial performance of the Nigeria pharmaceutical companies over a period of twelve (12) years (2001 - 2012) for the three (3) selected companies. This work employed three (3) financial leverage for the independent variables such as: 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 16.4% of the variations on the dependent variable are caused by the independent variables in our model suggesting that 83.6% of the variations in financial performance are caused by other factors outside our model. Based on the above findings, the researchers now recommend that companies' management should ensure that financial decisions made by them are in consonance with the shareholders' wealth maximization objectives which encompasses the profit maximization objective of the firm. 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 management should also monitor the interest charged on debt financing to avoid liquidation of the company.