Examination of The Effect of Debt Ratio On the Financial Performance of Listed Industrial Goods Firms in Nigeria

This study examined the effect of debt ratio on the financial performance of listed industrial goods firms in Nigeria. The study adopted a panel research design using secondary data from the annual reports and audited financial statements of fourteen (14) listed industrial goods firms on the Nigerian Exchange Group covering 2016–2025. Financial performance was measured using Return on Assets (ROA), while debt ratio (DR), debt-to-equity ratio (DTER), equity multiplier (EM) and firm size (FSIZE) were used as explanatory and control variables. The study employed the Generalized Method of Moments (GMM) for data analysis. The unit root results showed that ROA, ROE, ROCE, DR, DTER and EM were stationary at level, while firm size was reported as I(1). The GMM results revealed that debt ratio had a negative and statistically significant effect on ROA, with a coefficient of −0.797994 (p = 0.0000) at the 5% level of significance. Debt-to-equity ratio had a positive and significant effect on ROA, with a coefficient of 0.112080 (p = 0.0000), while equity multiplier had a negative and significant effect, with a coefficient of −0.265923 (p = 0.0000). Firm size had a positive and significant effect, with a coefficient of 1.803112 (p = 0.0000). The lagged ROA was also negative and significant (−0.267189; p = 0.0000). The J-statistic of 9.255646 (p = 0.414018) indicated valid instruments, while the Arellano-Bond tests showed no significant serial correlation at AR(1) (p = 0.4719) and AR(2) (p = 0.2221). The study concludes that excessive reliance on debt adversely affects financial performance, while appropriately managed debt may support performance. It recommends prudent debt management and a balanced capital structure.