GEARING RATIO AND PROFITABILITY OF LISTED CONSTRUCTION FIRMS IN NIGERIA
Keywords:
Debt to Asset Ratio, Debt to Equity Ratio, Debt to Market Capitalization Ratio, Gearing Ratio, ProfitabilityAbstract
The study examined the effect of gearing ratio on the profitability of listed construction firms in Nigeria. Specifically, the study determine the extent to which debt to equity ratio, debt to asset ratio, interest coverage ratio and debt to market capitalization ratio affect the return on assets of listed construction firms in Nigeria. The study is anchored on Pecking Order theory Ex-post facto research design was adopted in the study. The population of the study included all the eight construction companies that are listed on the floor of the Nigerian Exchange Group, from which a sample size of six was purposively selected. Secondary data were sourced from the annual reports of the firms over a span of ten years which covered 2014 to 2023 accounting periods. Descriptive analysis, Pearson correlation and multicollinearity diagnostics were conducted prior to hypotheses testing. The result of the Panel Estimated Generalised Least Square used in testing the hypotheses revealed that: debt to equity ratio has a positive but non-significant effect on the return on assets of listed construction firms in Nigeria (β = 0.000316; p-value = 0.2297); debt to asset ratio has a negative and significant effect on the return on assets of listed construction firms in Nigeria (β = -0.178356; p-value = 0.0000); interest coverage ratio has a positive and significant effect on the return on assets of listed construction firms in Nigeria (β = 0.049435; p-value = 0.0000); debt to market capitalization ratio has a positive and significant effect on the return on assets of listed construction firms in Nigeria (β = 0.000431; p-value = 0.0023). In conclusion, while high levels of debt relative to assets can be detrimental to profitability, other measures, such as interest coverage and the debt to market capitalization ratio, can have positive effects on firm profitability. The study recommends that finance directors and strategic planners of listed construction firms should reduce the level of debt relative to total assets by paying down high-interest debt or seeking alternative financing options in order to mitigate the negative effects of excessive debt while potentially improving the firms' ability to generate returns from their assets.
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