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07030248044CHAPTER ONE
INTRODUCTION
The primary consideration in a financing decision is how an organization will obtain the funds necessary to fulfill its investment needs. The financial manager often decides what is the best balance of debt and equity that should make up an organization's capital structure in order to improve its performance and maximize shareholder wealth (Zhang & Yu, 2016). This choice involves figuring out what kind of capital structure an organization should have. The choice is crucial because it affects an organization's capacity to respond to its competitive environment. This is true not simply because investor and owner equity returns must be maximized (Alslehat, & Altahtamouni, 2014). Organizations who seek to acquire this competitive advantage must raise the necessary finances. Nevertheless, obtaining more finance than is necessary may not be beneficial because it will not grow an organization's productive base but rather its financing costs, which will have a detrimental effect on its financial performance(Altahtamonui, 2005). Equity and debt are the two main forms of funding that are available to organizations. One of the key elements of a company's capital structure is debt. It serves as a method of getting money for their commercial endeavors (Zietlow, Hankin, & Seidner, 2007). Finding the ideal capital structure has been a subject of ongoing discussion among scholars and investigators in the field of corporate finance over the past few decades, notwithstanding the growth of the debt-financing structure(Onyenwa & Glory, 2017). Many contemporary businesses have yet to determine the ideal level of debt that maximizes shareholder value. The importance of consumer products companies to the economy cannot be overstated. The Nigerian government at all levels has also highlighted their contribution to job creation and poverty alleviation(Otunba, 2019). These businesses must figure out how to find finance for expansion, though. The decision between debt and equity (capital structure), which also affects the decision on debt structure, can be used to source the cash that a firm needs to finance both new and ongoing initiatives (Singh & Bansal; 2016). Long-term debt and short-term debt are both possible types of debt. In a company's statement of financial position, short-term debt is defined as an obligation with a maturity period of one year or less. Long-term debt, on the other hand, is defined as an obligation with a maturity period of more than one year, such as bonds.Debt capital is the money that a company obtains through borrowing. It is a loan given to a business, usually for growth capital, and is typically repaid at a later time. Because subscribers to debt capital are essentially debtors rather than owners of the business, it differs from equity or share capital.Unlike debt capital, which is repaid to investors in the usual course of business, equity capital is invested money. It symbolizes the risk capital invested by the owners through the purchase of common stock (common shares) of a corporation (Pandey, 2010).
The financial performance of an institution is influenced by its financial mix. An organization's financial performance may be impacted by debt, which is a component of its financial mix. When a company uses more debt than equity, it is required to pay interest to the loan holders, and timely debt repayment is reliant on the success of the company in question.When a company responds slowly to interest payments, the debt holders might not be motivated to contribute more, and if the company uses more debt than equity, its profitability may suffer because its source of funding is dwindling. As a result, the organization's overall performance might suffer (Kale, 2014). Financial leverage is a sort of funding, not a source, that assesses the extent to which businesses borrow money to finance their assets. A corporation uses financial leverage to boost profits from fixed charges funds over costs, thus as debt grows, financial leverage also grows.When using financial leverage, a company's main goal is to boost the return to shareholders during good economic times. Based on the supposition that fixed-cost funds (such loans from financial institutions and other sources or debentures) can be acquired at a cost lower than the firm's rate of Return on Investment, debt financing plays a role in enhancing the return to shareholders.The firm's performance, on the other hand, is a measurement of what the company has accomplished and is a sign of favorable circumstances throughout time (Kale 2014). The goals of performance measurement are to gather highly relevant data regarding cash flow, the uses of corporate finances, and their efficiency and effectiveness. Additionally, managers can use data about the success of the company to make the best decisions (Almajali, Alamro & Al-Soub, 2012). The performance of the company, and most especially its profitability, which may be supported by efficient leveraging, is a key factor in determining the firm's survival and continuity. Given that the consumer goods industry in Nigeria is the largest sector and since funding requirements (leverage) are not the same for all businesses, this study has a particular focus on consumer goods companies (Nifemi, 2018). Thus, it is important to know if the use of leverage affects the performance of Consumer Goods Companies and to what extent?
Academics, the government, financial regulators, and international institutions have been eager to learn whether debt affects an organization's financial performance. Studies on the connection between different financial choices and performance have yielded conflicting, ambiguous, and contradictory findings. These investigations, which were all conducted outside of Nigeria, include Yazdanfar and Ahman (2015) and Prempeh, Sekyere, and Asare (2016). To the best of the researcher's knowledge, few researches have been conducted on this subject matter in Nigeria they include: Oyakhire (2019), Nwude and Anyalechi (2018), Innocent, Ikechukwu and Nnagbogu (2014) and Akingunola, Olawale, and Olaniyan (2017) focused on other debt variables of interest coverage, debt ratio and debt to equity, while the performance proxies used are return on assets, return on equity, Tobin's Q and gross profit margin. This study, which will focus on the debt finance variable of short-term debts and use net profit margin as a proxy for financial performance to assess the effects of debt financing on the financial performance of listed consumer goods firms in Nigeria, will be conducted against this backdrop.The study's time frame, which was set between 2013 and 2022, highlights the era when businesses had to find funding as a result of the current recession and the global economic collapse into which the nation was sucked. Given the aforementioned, the goal of this study is to determine how much debt financing affects the profitability of Nigerian oil and gas businesses that are publicly traded.
In an effort to build an ideal business finance approach, contemporary commercial financial managers locally, regionally, and worldwide frequently face the difficulty of inadequate financial performance inside their organizations. However, these managers frequently struggle to meet the demand arising with regard to making money for their investors while also maintaining a business's operations to support the expansion of an economy (Mallick & Yang, 2019).
As was already mentioned, this study is primarily motivated by the fact that a company's decision to use debt to finance its operations is typically made by its board of directors or analysts, who hold the view that debt is frequently regarded favorably by stockholders to the extent that the proceeds are used to fund an establishment's operations and if the market rate is favorable. Given this, it is clear that some establishments continue to place importance on the impact of debit financing on an establishment's profitability(Agnihotic, 2015). However, the focused corporate structure and not on the debt structure of an establishment. It is based on this background that the present study seeks to examine debt financing affect the profitability of quoted oil and gas companies in Nigeria.
The main objective of this study is to examine debt financing affect the profitability of quoted oil and gas companies in Nigeria. Specific objectives of the study include;
Research Questions
The follow questions were derived from the research objectives to give the present study a direction;
Research Objectives
The following were hypothesized in this study;
Hypothesis 1
H0: Total debt to total asset ratio has no significant effect on the financial performance of some selected firms in the oil and gas industry of Nigeria
H1: Total debt to total asset ratio has a significant affect the profitability of quoted oil and gas companies in Nigeria
Hypothesis 2
H0: Total debt to total equity ratio has no significant effect of on the profitability of some selected firms in the oil and gas sector of Nigeria
H1: Total debt to total equity ratio has a significant effecton the profitability of some selected firms in the oil and gas sector of Nigeria.
Hypothesis 3
H0: Long-term debt to total assets ratio has no significant effect on the profitability of some selected firms in the oil and gas sector in Nigeria
H1 Long-term debt to total assets ratio hasa significant effecton the profitability of some selected firms in the oil and gas sector in Nigeria.
Hypothesis 4
H0: Short-term debt to total assets ratio has no significant effect on the profitability of some selected firms in the oil and gas sector in Nigeria
H1Short-term debt to total assets ratio hasa significant effecton the profitability of some selected firms in the oil and gas sector in Nigeria.
This study is very significant since it advances our understanding of capital finance, which is important for both scholars and business analysts. It also compensates for the dearth of academic articles in Nigeria on the financial performance and debit financing of businesses.
The results of this study will help Nigerian businesses, particularly those in the oil and gas industry, make effective and efficient financing decisions. They would be put in a good position to comprehend how different finance mixes can affect their operations. This study will be helpful to financial analysts and consultants that provide financial and consulting services to struggling and financially challenged businesses.
This study anticipates that the result will also be useful to owners in making informed decisions with regard to their equity interest in relation to the debt financing options available to their firms, creditors in ascertaining credit worthiness of a firm that is being able to identify the firms that are financially strong enough to settle their claim as at when due. Government too is no exception as it will be helpful to them in making favourable financial policies. Therefore, making the right decisions on these issues will help to increase the contribution of the oil and gas sector to the GDP as well as the employment rate once the sector becomes more viable because investors are curious about how such decisions will affect an organization's performance.
1.7 Scope of the Study
The scope of this study covers a sample of 8 firms out of ten (10) listed quoted oil and gas companies in the Nigeria Stock Exchange as 2022. This study covers the financial year period of ten (10) years from 2013 to 2022. The study chooses the oil and gas sector of Nigeria as its domain because it is a major determinant of Nigerian’s revenue which determines the economic growth.
1.8. Profile of the organization
This research work is divided into five chapters. Chapter one is an introductory chapter providing background to the study, statement of the problems, research questions, objectives of the study, Assumptions to be tested, significance of the study,scope of the study, organization of the study, as well as operational definition of key concepts.Chapter two contains review of related literature and theoretical framework focusing on the concept of human development in particular and development in general. Organizations of NGOs in Nigeria, existing literature of indicators of socio-economic development in Nigeria, empirical work on the area of socio-economic development. Chapter three dwells on research methodology focusing on research design, sources and instrument of data collection, population/sample size, sampling technique and method of data analysis.The four chapter contains presentation and analysis of the data collected including interpretations, testing of hypotheses and summary of major findings. Chapter five is the concluding chapter which is based on the research findings. It includes summary, conclusions and recommendations.
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