The Influence of Non-Performing Loan Ratio on the Relationship between Short-Term and Total Leverage and Profitability
Financial distress in the financial services sector is known to predict wider economic consequences and some of the principal metrics that could be used to measure these are leverage and loan ratios. Therefore, this study focuses on evaluating the impact of short-term leverage and total leverage on return on assets of eight (8) deposit money banks quoted on the Nigerian Exchange Group, from 2013 to 2021. Additionally, this study examines the moderating role of non-performing loans on the relationships between short-term ratio and total leverage ratio, and return on assets. The Hausman test shows that random effects regression is appropriate. Robust standard errors random-effects regression analysis shows that short-term leverage significantly and negatively affects return on assets and total leverage insignificantly and negatively affects return on assets. In addition, the regression analysis shows that non-performing loans ratio significantly and positively moderates the relationship between short-term leverage and return on assets, while non-performing loans ratio significantly and negatively moderates the relationship between total leverage and return on assets of the sampled companies. The study recommends that management of the studied exchange sub-sector should remain mindful of the consequences of high non-performing loans when they make long and short-term financing decisions.
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