INTERNAL EQUITY AND FINANCIAL PERFORMANCE OF KENYA TEA DEVELOPMENT AGENCY PROCESSING FACTORIES IN NYERI COUNTY, KENYA
Gichuki Shelmith Wanjira - Department of Accounting & Finance, School of Business, Economics and Tourism Kenyatta University, Kenya
Dr. Farida Abdul (PhD) - Department of Accounting & Finance, School of Business, Economics and Tourism Kenyatta University, Kenya
ABSTRACT
The tea industry globally has faced a significant market decline, with the exception of China, where the sector showed resilience. The Kenyan tea industry, in particular, has experienced mixed financial results, often demonstrating a declining trend in performance. This decline is evident when examining the financial performance of tea factories in Kenya, as reflected in profitability metrics such as dividend payout ratios. For instance, the Kenya Tea Development Authority (KTDA)-managed tea factories posted declining dividend payout ratios: 14% in 2020, 12% in 2021, 10.5% in 2022, and 11% in 2023. These figures suggest challenges in maintaining profitability, which are compounded by factors such as fluctuating market prices, cost pressures, and financing choices made by the factories. Financing decisions are critical in determining the success of any business, particularly in capital-intensive industries like tea production. Prudent financing decisions have the potential to optimize the utilization of funds while minimizing associated risks, thereby contributing to improved financial performance. A key element of these financing decisions is the capital structure, which includes a combination of debt and equity financing. For tea factories, a well-balanced capital structure could mean the difference between maintaining liquidity, achieving profitability, and sustaining growth. The specific objective of this study is to examine the effect of internal equity—primarily retained earnings—on the financial performance of KTDA-managed tea factories in Nyeri County, Kenya. Internal equity, as a financing source, allows firms to reinvest profits back into the business without increasing debt obligations, potentially offering greater financial stability. This study focuses on internal equity’s relationship with financial performance, measured through the dividend payout ratio, which serves as an important indicator of profitability. By analyzing the capital structure’s role, the research aims to offer insights into how the use of retained earnings can influence the financial health of tea factories, especially in an environment marked by economic challenges and market volatility. The findings from this study could help inform better financial strategies and decisions within the Kenyan tea industry.