Financial Leverage and Corporate Financial Performance: A Comprehensive Review

Ahmad Omar  Abubakar; Stacey Ayiecha  Anyonje

doi:10.59413/eafj/v4.i2.3

Authors

Ahmad Omar Abubakar School of Business, Technical University of Mombasa, Kenya Author
Stacey Ayiecha Anyonje School of Business, Technical University of Mombasa, Kenya Author

DOI:

https://doi.org/10.59413/eafj/v4.i2.3

Keywords:

Financial leverage, firm performance, debt financing, trade-off theory, pecking order theory, financial risk

Abstract

This paper examines the relationship between financial leverage and firm performance across various industries and economic contexts. The research analyzes how debt financing influences corporate profitability, stability, and overall financial health. Through a systematic review of recent literature, the study investigates different leverage metrics and their effects on financial performance indicators such as Return on Assets (ROA), Return on Equity (ROE), and Earnings Per Share (EPS). The findings reveal that while moderate levels of financial leverage can enhance firm value and shareholder returns, excessive debt may lead to financial distress and undermine long-term sustainability. The optimal capital structure varies significantly by industry, firm size, and market conditions, suggesting that companies should tailor their leverage strategies to their specific operational characteristics and risk profiles.

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