The Influence of Firm Specific Determinants on Financial Performance in the Power Industry

Mafumbate J,Mafuka A,Ndlovu U,Gavhure P

doi:10.22610/jebs.v9i5(j).1906

Abstract

This study concentrates on the impact of firm specific determinants on financial performance in the power industry. The firm specific determinants used in this study as independent variables were capital structure, firm size and liquidity whilst ROA, ROI and profitability were used as proxies of financial performance. Modigliani and Miller (1958) argue that capital structure has no impact on financial performance whilst the Trade-off theory suggests that the ideal capital structure that helps firm remain financially healthy is the trade-off between cost of leverage and the advantages of debt. Beyond that trade-off point, a firm will start making losses. The target population included 60 employees from all the 5 subsidiaries of the Holding company and researchers used 40 respondents as sample size to enhance reliability. A relationship was established between firm specific determinants and financial performance as measured by ROA, ROI and profitability. The results showed a negative but significant relationship between capital structure and financial performance and they support the pecking order theory which suggests that capital structure is a significant determinant of financial performance. Firm size and financial performance were also negatively related. However, a significant positive relationship was established between liquidity and financial performance. From the findings the researchers concluded that firm specific factors have a significant impact on financial performance. Researchers therefore recommend that ZESA holdings should use its internal funds such as retained earnings and more equity than debt when financing its activities so as to reduce leverage costs which lead to poor performance.

Highlights

Given the dynamism that characterise today’s business environment, the corporate financial performance of any business, plays the role of increasing its market value, and leads towards the growth and prosperity of the economy as a whole (Mehari and Aemiro, 2013)
It further explains that a percentage increase in capital structure and firm size leads to a decrease in financial performance by 4.5% and 6.7% respectively
It further explains that a percentage increase in capital structure and firm size leads to a decrease in financial performance by 5.9% and 35% respectively when measured by profitability

Summary

Introduction

Given the dynamism that characterise today’s business environment, the corporate financial performance of any business, plays the role of increasing its market value, and leads towards the growth and prosperity of the economy as a whole (Mehari and Aemiro, 2013). The prominence of financial performance has of late gained momentum and has enticed the attention, interests and comments from researchers, the public, management of corporate entities and financial gurus. The holding utility has external obligation amounting to USD 426 million and about USD 98 million of trade creditor arrears for power imports (News Day October 18 2010). According to the financial gazette of 2013 the power utility, ZESA Holdings, was burdened with an outrageous debt amounting to US$800 million. This rendered the state’s power supply position unsafe, and obstructed endeavours to improve the struggling economy. The financial statements indicated that some of the organizations’ debts have gone for almost two decades without being repaid and are long overdue (Financial Gazette, June 2014)

Methods

Results

Conclusion