Debt Financing and Financial Performance of Manufacturing Firms Listed in The Nairobi Stock Exchange Market.

Behind every successful firm lies a deliberate financing strategy that transforms borrowed capital into sustainable wealth, a reality that places capital structure at the heart of corporate performance. This study examined the effect of debt financing on the financial performance of manufacturing firms listed on the Nairobi Securities Exchange over the period 2019–2023, focusing on how different debt instruments shape profitability in an increasingly volatile and competitive business environment. Grounded in capital structure theories including the Modigliani and Miller propositions, Net Income approach, Trade-Off Theory, and Modern Portfolio Theory, the study adopted a quantitative research design and employed linear regression analysis using SPSS to test the relationship between debt structure and financial performance measured by return on assets. Four regression models were estimated, with bank loans, trade credit, debentures, and lines of credit serving as independent variables. The findings revealed that bank loans and trade credit exerted a statistically significant positive influence on financial performance by supporting growth investments and enhancing liquidity management. Debentures demonstrated a positive but comparatively weaker effect, reflecting the long-term financing benefits tempered by higher costs and financial risk exposure. In contrast, line of credit financing exhibited a significant negative effect on performance, largely attributed to high interest rates and short repayment horizons that intensify cash flow pressures. The study concludes that the composition of debt, rather than its sheer magnitude, is a critical determinant of financial outcomes among manufacturing firms. An optimal financing strategy therefore entails a balanced debt portfolio, approximating 60% long-term and 40% short-term instruments, to sustain capital-intensive operations while preserving liquidity and resilience amid market uncertainty.