Abstract
The objective of this research was to establish the impact of debt finance on the profitability of a firm using A furniture retail company (pseudo name “A”) as a case study. The mixed methods approach was employed quantitative data from financial statements and qualitative data from interviews. The target population was 25, hence the researchers used a population census, 24 participants assisted in the research. The statistical method used for analysing secondary data was STATA 11. The regression model and variables incorporated were debt ratio, which was the independent variable, and the return on asset ratio, which was the dependent variable, and the measure of profitability in this particular research. Main findings from the research indicated that debt financing was significantly and statistically negatively affecting the return on assets of the company. The regression yielded a p-value of 0.018 and a coefficient of 0.9992 thus confirming a 99.92% that the variability in profitability is well explained by the independent variable used in this research which is debt finance. The study recommends companies to carry out an in-depth cost-benefit analysis of debt financing to ensure optimum profitability especially for small and private limited companies in a volatile economy (Zimbabwe).
Highlights
A number of studies have been done previously and were focusing on the relationship existing between debt financing and financial performance of manufacturing firms in the developed countries, others focused on companies that are listed on the stock exchange
Muturi, and Ngumi (2016), Kartikasari and Merianti (2016), Kirmi (2017), and Acheampong (2014) agree that debt finance makes up the capital structure of firms and has been seen to be having a positive relationship with return on asset, which can be used as a measure of financial performance
The subject matter is centred on determining the impact of debt finance on firm profitability, there are a cause and effect relationship being analysed in the research and this can be best addressed using the quantitative research methodology as there is a need for statistical representation
Summary
A number of studies have been done previously and were focusing on the relationship existing between debt financing and financial performance of manufacturing firms in the developed countries, others focused on companies that are listed on the stock exchange. On the other hand, Vatavu (2014) recognised a negative relationship between debt finance and profitability as organisations were forced to meet and pay the agreed accrued interests even if when the cash flows are very low in the organisation. They agreed that continuous borrowing scares away potential investors, as it is widely considered risky to invest in a company whose operations are financed by debt especially those investors who are risk-averse. All the previous researches mainly focused on listed companies and manufacturing companies in developed countries and some of which in developing countries as well, providing a gap for the researchers to explore and analyse the impact of debt financing on the profitability of private limited companies in the retail business using a local trading company as a case study
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