Impact of Debt Structure on Financial Performance of Saudi Arabian Firms
The study uses a sample of 125 firms that are listed on the Saudi-Arabia Stock Exchange. The sample was drawn from 13 different sectors (see Table 1). Firms from the Energy & Utility and the Real Estate sector formed the highest proportion (13.6%) while Agriculture/Food formed the lowest proportion (1.6%).
Descriptive Statistics of Sampled Firms
The highest ratio of short-term debt to total assets was 100 percent. In other words, the firm financed all of its assets with short-term debt. The lowest ratio of short-term debt to total assets was 0 percent. The average ratio of short-term debt to total assets was 21.56 percent with a standard deviation of 29. 99 percent. The highest ratio of long-term debt to total assets was 76.21 percent. The lowest ratio of long-term debt to total assets was 0 percent. In other words, the firm did not finance any of its assets with long-term debt. The average ratio of long term debt to total assets was 20.09 percent with a standard deviation of 18.3 percent. The highest ratio of total to total assets was 100 percent. In other words, the firm financed all of its assets with debt. The lowest ratio of debt to total assets was 0 percent. The average ratio of short-term debt to total assets was 41.56 percent with a standard deviation of 32.03 percent. The highest ROA was 33.9 percent while the lowest was -13.7 percent. The mean ROA was 5.45 percent with a standard deviation of 8.02. The highest ROA was 51.3 percent while the lowest was -33.3 percent. The mean ROA was 8.12 percent with a standard deviation of 13.90.
Results and Findings
The study had three key hypotheses. The study applies Pearson Correlation analysis to test the hypotheses for the study at 5 percent significance level.
H1: Firms operating in Saudi Arabia with lower levels of short-term debt will have higher levels of financial performance.
The correlation between the ratio of short-term debt to total assets and Return on Assets (ROA) is -0.123 (see Table 3). This signposts a negative relationship between short-term debt and financial performance. Therefore, low levels of short-term debt are associated with better financial performance. However, the Pearson correlation co-efficient is statistically insignificant at 5%. Similarly, the Pearson correlation between short-term debt to total assets and Return on Assets (ROA) is -0.080 (see Table 4). However, it is also statistically insignificant. Therefore, conclude that there is no relationship between the level of short term debt and financial performance in Saudi Arabia.
H2: Firms operating in Saudi Arabia with lower levels of long-term debt will have higher levels of financial performance.
The correlation between the ratio of long-term debt to total assets and Return on Assets (ROA) is -0.112 (see Table 5). This signposts a negative relationship between long term debt and financial performance. Therefore, low levels of long-term debt are associated with better financial performance. However, the Pearson correlation co-efficient is statistically insignificant at 5%. Similarly, the Pearson correlation between long-term debt to total assets and Return on Assets (ROA) is -0.083 (see Table 6). However, it is also statistically insignificant. Therefore, conclude that there is no relationship between the level of long term debt and financial performance in Saudi Arabia.
H3: Firms operating in Saudi Arabia with lower levels of total debt will have higher levels of financial performance.
The correlation between the ratio of total debt to total assets and Return on Assets (ROA) is -0.304 (see Table 7). This signposts a negative relationship between total debt and financial relationship. Therefore, low levels of total debt are associated with better financial performance. The Pearson correlation co-efficient is statistically significant at 5%. Similarly, the Pearson correlation between total debt to total assets and Return on Assets (ROA) is -0.216 (see Table 8). It is also statistically significant at 5%. Therefore, we conclude that there is a negative correlation between the level of total debt and financial performance in Saudi Arabia.
Discussion
The study finds no evidence to support a correlation short-term debt and financial performance in Saudi Arabia. The same findings apply to long-term debt. Interesting the total debt reveals a statistically significant relationship with financial performance. The total debt is a simple sum of short-term debt and long-term debt. Therefore, although both short-term debt and long-term debt have an adverse effect on financial performance. However, when the two are combined, they heighten the impact on financial performance. Therefore, firms should be more concern about the aggregate debt and not the individual components of the debt structure. Short-term debt creates liquidity risk, and long-term debt creates bankruptcy risks. All these risks increase operating costs and finance costs of a firm that adversely affect their financial performance
Conclusion
The current study investigates the association between the short-term debt, long-term debt and total debt with financial performance among firms listed in the Saudi Arabia Stock Exchange. The study reveals that there is a statistically significant negative correlation between total debt and financial performance. However, there is no correlation between the individual debt components and financial performance. The study proposes an expansion of the current study to assess Saudi Arabian firms that are not listed on the stock exchange market.
