Abstract
The study aims to investigate and analyse the effect that debt has on the performance of the eight largest Johannesburg Securities Exchange (JSE) listed retail companies in South Africa. The aim is to ascertain how debt affects overall company health and performance. The study will approach this question holistically by not only analysing a single metric of performance, such as profitability or increased share price over a period of time, but a mixture of salient metrics contributing to overall performance and company health. These metrics will provide value to all stakeholders involved. The key motivation for this approach is to provide useful information and insights to management and stakeholders on the overall effect of debt in the capital structure, where most of the available research on the topic has not been able to do so, due to a narrow empirical quantitative focus. The study will adopt a micro view by examining the companies and their individual financials, and not at macro/systematic factors that include for example, the public perception of a company leading to rising/collapsing share values, that has very little to do with the actual financial metrics and operational efficiencies of a company.
The available reading on the research question has not been able to provide evidence that can be used by management in listed companies, in order to maximise company value, not only for shareholders, but all stakeholders, over the long term. Due to the largely empirical quantitative focus, conclusions have been ineffective, vague, contradicting and unhelpful at best. Arguably the most popular research method for the problem is a panel regression approach of debt and company performance. The method focusses on profitability and management efficiency related metrics including ROA, ROI and ROE compared to short - and long-term debt. This is not adequate to answer this question fully, as the number of variables used are too limiting. The inconclusive nature of the research available on the subject thus underpins the research method applied in this study. In order to ascertain the overall effect that debt has on a listed company, the study will make use of a financial ratio analysis incorporating different categories of ratios including profitability and management efficiency, liquidity, leverage and relevant market value ratios in order to represent the different stakeholders in eight listed retail companies over a period spanning ten years, from 2010 to 2019. With the detail and insight provided by financial statements and annual integrated reports, a clear picture will be presented on the overall effect of debt on the various companies. This will allow the user of the study to understand the effect of debt not only on performance, but also the overall company health as indicated by selected financial ratios, and their movement over time in relation to the debt balance.
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The findings indicate that the increase in financial debt in a company does not lead to an overall increase in performance but has a positive impact on certain ratios. The overall financial health of the sample companies was negatively impacted by the introduction, or an increase in total debt thus leading to long-term wealth destruction for all stakeholders. Management of listed companies needs to be cognisant of the findings of the study, and not chase short-term performance by using leverage to boost incentivised metrics to the detriment of long-term financial health. Shareholders and other stakeholders including creditors and other suppliers can also take note and be wary of their dealings with companies with inflating debt balances.