Oketah, Felix Okechukwu, Prof. Ifeoma Mary Okwo, and Dr. Ikechukwu Ezugwu
Correspondence: felix.oketah@esut.edu.ng


ABSTRACT
The study examined the effect of debt indices on financial performance of oil and gas companies
in Nigeria. The specific objectives are to evaluate the effect of debt ratio (DR), debt to equity ratio
(DER) and interest coverage ratio (ICR) on return on assets (ROA). The study anchored on the
Trade-off theory and agency theory. Ex-post facto research design was adopted wherein secondary
data sourced from audited financial statements of three (3) selected oil and gas companies (Total
Nigeria Plc, 11 Nigeria Plc and Oando Nigeria Plc) listed on Nigerian Exchange Group. A period
of 12 years (2010–2021) was used for the analysis. The results of the panel data regression analysis
revealed that the predictor variables of DR had negative (-0.218419) and significant (0.0012) effect
on ROA; DER had a negative (-0.001717) and nonsignificant (0.6430) effect on ROA; while ICR
had a positive (1.85E-06) and nonsignificant (0.5160) effect on ROA of oil and gas companies in
Nigeria. The implication of the finding is that a higher interest coverage ratio is associated with
better financial performance in terms of ROA. The study concluded that among the explanatory
variables examined only the interest coverage ratio had a positive effect on the financial
performance of oil and gas companies in Nigeria. The adjusted R-squared (R2) of the study is
31%. The study recommended amongst other things that oil and gas companies should maintain a
balance debt structure and avoid taking excessive debt that could strain their ability to generate
profits. They should also aim at maintaining a healthy interest coverage ratio to ensure that they
can comfortably meet interest payment obligation and avoid financial strain.
Keywords: Debt Indices, Financial Performance, Oil and Gas Companies, Debt Ratio, Debt to
Equity Ratio, Interest Coverage Ratio, Return on Assets, Trade-off Theory, Agency Theory

  1. INTRODUCTION
    1.1 Background of the Study
    Debt financing involves utilizing borrowed funds for investment purposes to generate returns.
    According to Gatsi et al (2013), a company’s adeptness in augmenting profits through debt leverage
    signifies the efficacy of its corporate governance. Effective debt management can showcase robust
    corporate governance and lead to improved company performance. When the returns on
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    investments surpass the cost of financing, incorporating debt capital could heighten the
    profitability of equity capital (Abdul & Adelabu, 2015).
    Debt indices serve as gauges for evaluating the extent of borrowed capital employed to support a
    company’s ventures. It is imperative for both management and funding providers to comprehend
    how an organization is financed, as an ill-suited financial mix could detrimentally impact a
    company’s performance and sustainability (Enekwe et al, 2014). One of the primary advantages of
    debt financing lies in its tax-deductible interest charges, which ultimately lead to a lower capital
    cost (Krishnan & Moyer, 2006). Nonetheless, there are associated costs linked with debt financing,
    necessitating the careful design of a debt-equity combination to strike an equilibrium between
    equity and debt. Crafting a capital structure should aim to optimize shareholder wealth while
    approximating the most favorable capital structure possible.
    A company’s capital structure portrays how it secures its activities and expansion through an array
    of long-term financing sources, including common stock, preferred stock, retained earnings, and
    debentures, which generally have extended repayment periods. Among the various financing
    sources, gearing or leverage highlights the degree of external financing in a firm’s capital structure.
    Essentially, it elucidates the risk associated with profit before interest and tax (PBIT) and the
    distribution of dividend income to shareholders, encompassing predetermined interest payments
    to creditors from company earnings. Gearing, or financial metrics such as debt ratio, debt-to-equity
    ratio, and interest coverage, appraise a company’s capability to settle its obligations with its assets,
    the extent to which its operations are funded through debt and equity, and its ability to meet interest
    obligations on outstanding debt. Elevated debt levels indicate heightened gearing and bankruptcy
    vulnerability, potentially hindering future access to new lenders. Prudent management of debt
    indices can enhance shareholders’ returns on investment (Jelinek, 2007). However, inadequately
    formulated and managed debt indices can precipitate substantial repercussions for a company’s
    financial health and future prospects. Consequently, this study seeks to ascertain the extent to
    which debt indices like debt ratio, debt-to-equity, and interest coverage influence the financial
    performance of Nigerian oil and gas enterprises.
    1.2 Statement of the Problem
    Oil and gas enterprises operating in Nigeria confront a substantial challenge in reconciling
    shareholder expectations with the company’s financial requirements. In pursuit of this equilibrium,
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    management invests significant time in scrutinizing data to ascertain the optimal debt-to-equity
    ratio that aligns with the company’s objectives and satisfies shareholder anticipations.
    While numerous studies, including the Modigliani and Miller (M&M) proposition, propose that
    debt is a favorable avenue for financing due to the tax advantages associated with debt cost
    (interest), which maintains earnings per share and preserves equity stockholder count, the concept
    of gearing or leverage introduces financial risk. This risk pertains to the potential impact on
    earnings or dividend allocation to shareholders stemming from elevated gearing within the
    company’s capital structure. Such a risk influences operating cash flow and shareholder earnings,
    encompassing both business and operational risk facets. Highly leveraged companies may grapple
    with going concern challenges that could potentially lead to bankruptcy.
    Considering the aforementioned risk analysis, the introduction of debt heightens the demand of
    shareholders of Nigerian oil and gas firms for increase in return on equity (dividends) to offset the
    risks linked with external financing (secured creditors). These creditors require timely interest
    payments, irrespective of annual profit or loss. This heightened dividend demand translates to
    elevated costs for the oil and gas firms, subsequently affecting their retention strategies for future
    profit growth and prospects.
    Inadequate debt management, stemming from ineffective policies concerning debt utilization,
    servicing, and oversight within Nigerian oil and gas companies, can lead to inherent business risk.
    Failing to meet financial obligations may result to financial distress, indicative of going concern
    uncertainties that could escalate to bankruptcy. Consequently, this research aims to investigate the
    influence of debt indices on the financial performance of oil and gas enterprises in Nigeria, while
    also offering insights into effective debt management strategies to enhance the financial
    performance of these aforementioned firms within the Nigerian context.
    1.3 Objectives of the Study
    The general objective of this study is to examine debt indices and financial performance of oil and
    gas companies in Nigeria. The specific objectives of the study are to:
    i. Ascertain the effect of debt ratio on return on assets of oil and gas firms in Nigeria.
    ii. Evaluate the effect of debt-to-equity ratio on return on assets of oil and gas firms in Nigeria.
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    iii. Determine the effect of interest coverage ratio on return on assets of oil and gas firms in
    Nigeria.
  2. REVIEW OF RELATED LITERATURE
    2.1.1 Debt Indices
    Debt financing encompasses the process by which a company generates capital by issuing debt
    instruments, such as bonds or debentures, to investors. This financial strategy involves selling
    these debt instruments to individuals and institutional investors, thereby raising funds for
    operational needs or capital investments. In exchange for lending the money, these investors
    become creditors and receive the assurance of repayment of both the principal amount and interest
    on the debt (Investopedia, 2020).
    A debt refers to a borrowed sum of money obtained by one party from another. Debt is commonly
    employed by businesses and individuals to facilitate significant purchases that might otherwise be
    unattainable through normal means. A debt arrangement enables the borrowing party to access
    funds with the agreement to repay the borrowed amount at a later date, often accompanied by
    interest. Debt financing is typically categorized into three main types: Short-Term
    (Secured/Unsecured) Loans, which are usually settled within 6 to 12 months; Intermediate-Term
    (Secured/Unsecured) Loans, with repayment typically occurring within three years; and LongTerm (Secured/Unsecured) Loans, which are generally repaid within a span of 5 years. Conversely,
    debt indices encompass various factors and variables that signify the proportion of debt within a
    company’s financial structure, spanning both short and long-term contexts.
    2.1.2 Debt Ratio
    The debt ratio serves as a financial metric designed to assess the extent of leverage within a
    company. This ratio is calculated by dividing the total debt of a company by its total assets,
    expressed either as a decimal or percentage. It operates as a solvency ratio, gauging the proportion
    of a company’s total liabilities relative to its overall assets. Through the debt ratio, one can glean
    insights into a company’s capability to settle its obligations utilizing its asset base, thereby
    shedding light on its financial leverage. If the ratio surpasses one, it signifies that a substantial
    portion of the debt is financed through the company’s assets, implying a situation where liabilities
    exceed assets. Such a higher ratio also suggests that the company might be exposed to the risk of
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    defaulting on its debt if interest rates experience rapid escalation. Conversely, a ratio less than one
    indicates that a larger share of the company’s assets is backed by equity, underscoring a more
    secure financial position (Investopedia, 2019). In essence, the debt ratio is determined by dividing
    total liabilities or total debt by the company’s total assets.
    Debt Ratio = Total Debt
    Total Assets
    2.1.3 Debt to Equity Ratio
    The ratio of debt to equity characterizes the extent to which a company funds its operations through
    debt in comparison to internally owned capital. This pivotal metric in the realm of corporate
    finance plays a crucial role in assessing a company’s financial leverage. In more precise terms, it
    signifies the potential of shareholder equity to meet all prevailing obligations should the company
    encounter a downturn. Termed as the Debt-to-Equity ratio, this metric, also referred to as the “debtequity ratio,” “risk ratio,” or “gearing,” functions as a leverage ratio, juxtaposing the entirety of
    debt and financial commitments with the aggregate of shareholders’ equity. Its purpose is to
    delineate whether a company’s financial structure leans towards debt or equity financing
    (Corporate Finance Institute, 2020).
    The debt-to-equity ratio operates as a liquidity metric within the financial domain, serving to
    compare a company’s total debt against its overall equity. A higher debt-to-equity ratio indicates a
    heavier reliance on creditor financing, such as bank loans, as opposed to investor financing, which
    involves shareholders. To compute the debt-to-equity ratio, the total liabilities or total debt of the
    company is divided by its total shareholders’ equity.
    Debt to Equity Ratio = Total Debt
    Total Shareholders′Equity
    2.1.4 Interest Coverage Ratio
    The interest coverage ratio, also recognized as the times interest earned ratio, is a debt metric
    utilized to assess a company’s capacity to meet its interest obligations on existing debt. This ratio
    is computed by dividing a company’s earnings before interest and taxes (EBIT) by its interest
    expenses over a specific timeframe, in relation to the corresponding interest payments due for
    that identical period.
    Interest Coverage Ratio = Earnings before Interest and Taxes
    Interest Expense
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    2.1.3 Financial Performance
    The term ‘Performance’ originates from the Greek word ‘Parfourmen,’ which conveys the notions
    of accomplishment, execution, fulfillment, and execution. It denotes the act of carrying out tasks,
    achieving objectives, and meeting satisfactory standards. In a broader context, performance
    encompasses the achievement of a specific task evaluated against contemporary benchmarks of
    accuracy, completeness, cost-effectiveness, and speed. In simpler terms, it quantifies the extent to
    which a task has been completed or is being carried out (Enekwe et al, 2015). Financial
    performance involves a subjective assessment of how effectively a company leverages its core
    business operations to generate increased revenues. All businesses incorporate financial
    performance metrics as part of their performance evaluation, although there’s ongoing debate about
    the relative importance of financial versus non-financial indicators. Evaluating a company’s
    financial performance aids decision-makers in objectively gauging the outcomes of business
    strategies and initiatives in monetary terms. Growth is often perceived as a success indicator,
    provided it translates into enhancements in financial performance (Brealy et al, 2007).
    Financial performance pertains to the process of appraising a company’s outcomes, policies, and
    activities in monetary units. It serves as an indicator of a firm’s achievements, conditions, and
    adherence to standards. The concept is employed to gauge a firm’s overall financial well-being
    within a specific timeframe, reflecting its position and the efficiency with which assets are
    employed to generate additional revenue and expand operations (Copisarow, 2000). Various
    methods are employed to gauge financial performance. These encompass revenue from operational
    activities, total units sold, market share, return on assets, return on equity, net profit margin,
    earnings per share, net operating profit after tax, asset turnover, and operating income. Within the
    scope of this study, return on assets is chosen as a proxy for financial performance. This ratio is
    utilized because it is a pivotal measure of profitability, assessing the amount of profit generated by
    a firm for each unit of its assets.
    2.1.4 Return on Assets
    This financial metric is a ratio that indicates the proportion of earnings a company generates in
    relation to its entire pool of resources, represented by its total assets. Functioning as a measure of
    profitability, this ratio assesses the net income generated by the total assets over a specific
    timeframe, achieved by comparing the net income against the average total assets. In essence, the
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    return on assets ratio, commonly referred to as ROA, serves as a gauge of the company’s efficacy
    in utilizing its assets to generate profits within a given period.
    Return on Assets =
    Net Income
    Total Assets
    Where; Net income = Profit for the year
    This metric indicates the comparative profitability of the business. A heightened return on assets
    ratio is more advantageous for investors, as it signifies that the company is adeptly harnessing its
    assets to generate larger net income amounts. The Return on Assets (ROA) ratio evaluates the
    efficiency with which a company is able to yield returns from its investment in assets. In simpler
    terms, ROA reflects the company’s skill in converting the funds used to acquire assets into net
    income or profits. Thus, a higher ROA corresponds to greater overall profitability for the firm.
    Additionally, ROA serves as an indicator of managerial competence, revealing how effectively the
    company’s management has translated the assets within its control into earnings (Falope & Ajilore,
    2009).
    2.2 Theoretical Framework
    The theories which are considered to underpin this study include the Trade-off Theory and
    Agency Theory.
    2.2.1 Trade-off Theory
    Trade-off theory is a financial theory based on the work of economists Modigliani and Miller in
    the 1950s. The trade-off theory claims that companies should aim to find the optimal level of
    financial leverage. Optimal level of financial leverage means that the gains and costs of financial
    leverage is balanced (Myers, 1984). The original version of the trade-off theory grew out of the
    debate over the Modigliani miller theories when corporate income tax was added to the original
    irrelevance, this created a tax shield benefit for debt. According to the trade-off theory, most firms
    try to balance between the tax advantage on the use of leverage against the costs associated with
    utilization of leverage as a financing means of investments in a firm (Aliu, 2010). However, tradeoff theory explains that companies usually borrow from financial institutions in a gradually manner
    so as to reach its optimal level of debt-equity ratio. At this level, firms are able to maximize market
    value in summing up present valve of expected debt financing cost against expected benefits of
    debt financing.
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    2.2.2 Agency Theory
    Jensen and Meckling (1976) defined agency relationship as a contract under which one or more
    persons (the principal) engage another person (the agent) to perform some services on their behalf
    which involves delegating some decision-making authority to the agent (Oliver, 2016). The issue
    of agency arises immediately when the desires and the goals of the principal and the agent issues
    with the aim of ensuring a better relationship between them. More so, the Jensen and Meckling
    (1976) agency theory explains that decisions on capital structure must aim at reducing the cost
    related to agency by reducing equity in capital structure. This is done by increasing the debt
    financing hence increasing the market value of the firm as well as reducing the conflicts that may
    exist between manager of a firm and shareholders.
    However, the agency theory suggests that debt is used as a tool to control the manager since with
    debt financing; managers will be forced to focus on using the free cash flows to service the debt
    other than trying to invest the funds in some profitable projects (Calabrese, 2011). Thus, the theory
    of agency supports the use of debt to improve the firm’s financial performance (Mwangi et al,
    2016).
    In summary, the study adopts the two theories as its framework because Trade-off theory
    emphasizes the aim of a firm to find the optimal level of debt indices that would be positively
    relevant to the financial performance. On the other hand, Agency theory supports the use of debt
    to improve the firm’s financial performance. It suggests the need to use only debt for continuous
    funding of a business rather than issuing further equity and causing harm to the earnings available
    to the equity stock holders.
    2.3 Empirical Review
    Vintilǎ and Duca (2012) investigated The Impact of Financial Leverage to Profitability Study of
    Companies Listed in Bucharest Stock Exchange. Their study examined the relationship between
    return on equity (ROE), leverage, size of firms and total assets turnover. Data from companies
    registered under Bucharest Stock Exchange were used for analysis. Results of the regression
    analysis indicated that high debt level causes significant positive impact on ROE. Their study
    concluded that many companies use debt to leverage their capital and profit but important to note
    that debt is not the only factor that used to leverage capital and profit.
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    Enekwe et al (2014) explored the effects of financial leverage on financial performance of Nigeria
    Pharmaceutical Companies. The data for the study were extracted from the annual reports and
    accounts of three pharmaceutical companies from 2001 to 2012. The results of the correlation and
    regression analysis revealed that debt to equity ratio, debt ratio and interest coverage ratio had
    insignificant impact on profitability of the pharmaceutical industry in Nigeria.
    Enekwe (2015) investigated the relationship between financial ratio analysis and corporate
    profitability of some selected quoted oil and gas companies in Nigeria. The results of the pearson
    correlation and regressions of the analysis showed that interest coverage has positive relationship
    and statistically significant with corporate profitability in the Nigerian oil and gas industry.
    Mule and Mukras (2015) investigated the Relationship between Financial Leverage and Financial
    Performance of Listed Kenyan Firms. The study used annual data for a 5 years period starting from
    the year 2007 to 2011. The results of the panel data analysis found strong evidence that financial
    leverage significantly and negatively affects the performance measured using ROA. Ismail (2016)
    studied the effect of financial leverage on financial performance of non- financial firms listed on
    the Nairobi Securities Exchange. Data were extracted from the annual audited financial statements
    of non-financial companies listed at NGX for a period of 5 years between 2011 and 2015. The
    results of multiple linear regression analysis found that financial leverage had a significant
    negative relationship with financial performance while firm size had positive and insignificant
    relationship with financial performance.
    Nawaz et al (2015) evaluated the impact of financial leverage on firms’ profitability: An
    Investigation from Cement Sector of Pakistan. This research is an attempt to establish a stochastic
    relationship between Financial leverage and Profitability of cement sector operating in Pakistan.
    Data for the study were sourced from annual reports of selected 18 cement manufacturers for six
    years period (2005 to 2010). Results of the Ordinary Least Square model revealed that financial
    leverage has a statistically significant inverse impact on profitability at 99% confidence interval.
    Ilyukhin (2015) investigated the impact of financial leverage on firm performance: Evidence from
    Russia. Firm debt to total assets was used as proxy of financial leverage measure while return on
    assets, return on equity and operating margin were employed as firm performance measures. The
    results for a large sample of Russian joint-stock companies over the period 2004-2013 years
    showed that the impact of financial leverage on Russian firms’ performance has been negative.
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    Denugba et al, (2016) investigated Financial Leverage and Firms’ Value: A Study of Selected
    Firms in Nigeria. Data were collected from the annual reports and accounts of five selected firms
    listed on Nigerian Exchange Group for a period of 6 years (2007-2012). The results of the Ordinary
    Least Square (OLS) analysis revealed that there was significant relationship between financial
    leverage and firms’ value. Also, that financial leverage had significant effect on firms’ value. Their
    study concluded that financial leverage is a better source of finance than equity to firms when there
    is need to finance long-term projects.
    Karimi and Kheiri (2017) evaluated a study on the impact of financial structure, financial leverage
    and profitability on companies’ shares value (A Study Case: Tehran Stock Exchange Listed
    Companies, Iran). Data for the study were collected from official documents on Tehran’s stock
    exchange from 2010 and 2014. Results of the analysis revealed that the variable of financial
    structure has no statistically significant effects on company’s value. Also, results showed that there
    is a positive relationship between financial leverage and profitability on company’s value.
    Nhung (2017) investigated the impact of financial leverage on firm performance: A Case Study of
    Listed Oil and Gas Companies in England. Data for the study was drawn from financial statements
    of 18 British Gas and Oil companies from 2009 to 2014. The result revealed that there were strong
    negative impacts of financial leverage measured by LTD and TD on performances of ROA and
    ROE, while STD had insignificant effects on ROA and ROE of these firms.
    Nwanna and Ivie (2017) evaluated effect of financial leverage on firm’s performance: A Study of
    Nigerian Banks (2006 – 2015). Financial leverage was decomposed into debt ratio, debt-equity
    ratio and interest coverage ratio while profitability, size, liquidity, efficiency and market
    capitalization value were used to measure performance. Data for the study were drawn from annual
    reports of selected companies. The results of the multiple regression analysis revealed that
    financial leverage has positive effect on profitability and efficiency while no significant effects
    were found on liquidity, size and market capitalisation value.
    Iqbal and Usman (2018) evaluated the impact of financial leverage on firm performance. Data
    from top 16 companies in Pakistan Textile industry from 2011-2015 were used for the study. The
    results of the descriptive statistics, correlation analysis and regression model showed that financial
    leverage has negative and significant effect on firm ROE and financial leverage has positive and
    significant effect on firm ROA. Their study also indicated that the high interest rate and more
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    amount of debt decreases the value of equity and has negative impact on firm performance. On the
    other hand, the amount of debt has positive impact on firm ROA. Their study concluded that
    financial leverage has positive impact on firm performance if the amount of debts do not exceed
    from the amount of equity.
    Ahmadu (2020) studied financial leverage and financial performance of oil and gas companies in
    Nigeria. Regression Analysis was used for the study. The results revealed that short term debt ratio
    and long term debt ratio have no significant effect on the financial performance and total debt ratio
    has a negative significant effect on the financial performance denoted by return on equity.
    Osamor (2020) studied financial stability and firm’s performance of selected oil and gas firms in
    Nigeria. The result of the regression analysis unveiled that financial stability ratios have no effects
    on firm’s performance while financial risk ratios have effects on firm’s performance in oil and gas
    firms.
    Obumneme (2022) examined the impact of Capital Structure on Financial performance of oil and
    gas firms in Nigeria. The finding of the regression analysis revealed that long term debt to total
    assets has a negative significant influence on return on asset whereas short term debt to total debt
    and total debt and total debt to total equity had positive insignificant impacts.
    2.5 Gap in Empirical literature
    From the related literatures reviewed it can be observed that majority of existing studies were
    conducted on manufacturing sector, neglecting other sectors of the economy such as
    Pharmaceutical sector, Oil and Gas sector in Nigeria. This is a gap in this research.
    More so, some of the studies on debt ratio, debt and equity ratio above were conducted outside
    Nigeria. For instance, Muhammad (2018) and Iqbal & Usman (2018) carried out their works in
    Pakistan whereas Nanteza (2017) conducted his work in Kenya. This has also created a
    geographical gap in the research.
    Among the works carried out on debt indices and financial performance of oil and gas companies,
    emphasis is not so much payed on interest coverage ratio and financial performance. A variable
    gap is thus created in the research. Finally, majority of the research were done before year 2022.
    Thus, making this work carried out in 2023 most recent and up to date.
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    This research therefore on debt indices and financial performance of oil and gas sector in Nigeria
    intends to fill the gaps.
  3. METHODOLOGY
    3.1 Research Design
    The research methodology employed in this study is ex-post facto, a systematic approach that
    addresses research questions using existing data. The primary focus of the study is on Nigeria,
    utilizing data from the nation’s oil and gas companies, specifically emphasizing 11 companies
    listed on the Nigeria Exchange Group as of January 2022.
    Predominantly sourced from publicly available audited financial statements of the selected oil and
    gas companies listed on the Nigerian Exchange Group, secondary data was utilized for this study.
    The data spanned a 12-year period (2010-2022), ensuring an adequate number of observations per
    variable to ensure the credibility of the regression analysis results. The study’s timeframe
    commenced in 2010 and concluded in 2021, with the exclusion of the year 2022 due to the
    customary practice of finalizing accounting by oil and gas companies in December.
    The study’s target population consisted of the 11 oil and gas firms listed on the Nigeria Exchange
    Group in 2022. However, the sample size comprised three specific companies: Total Nigeria Plc,
    11 Nigeria Plc, and Oando Nigeria Plc. These companies were deliberately chosen based on
    considerations of data availability and performance.
    3.2 Method of Data Analysis
    The multiple regression technique was used to analyze the variables. Regression analysis was
    conducted to ascertain the effect of these explanatory variables (Debt ratio, Debt -to- Equity Ratio
    and Interest Coverage Ratio) on return on assets. Decisions were reached on a 5% level of
    significance. Preliminary test such as descriptive statistics were also performed. It was used to test
    the normality of the distribution of the data series.
    3.3 Model Specification
    The model is specified as follows: ROAt = βo + β1DRt +β2DERt + β3ICRt +ɛt –(Equation (1)
    Where: ROA = Return on Assets
    DR = Debt Ratio
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    DER = Debt to Equity Ratio
    ICR = Interest Coverage Ratio
    ɛ = Stochastic Disturbance (Error) Term
    βo = Coefficient (constant) to be estimated
    β1 –β3 = Parameters of the independent variables to be estimated
    t = Current period
    3.4 Description of Variables
    For the purpose of the analysis, the variables of the study were organized and structured into
    independent and dependent variables. Financial performance which is the dependent variable was
    measured by return on assets while the independent variable (debt indices) was measured by debt
    ratio, debt-to-equity ratio and interest coverage ratio.
    Table 3.7.1: Model Variables Description
    Variables Description/Measurement
    ROA = Return on Assets This shows the percentage of how profitable a
    company’s assets are being utilized in
    generating revenue.
    ROA = Profit for the year
    Total Assets
    DR = Debt Ratio The debt ratio measures the relative amount of a
    company’s assets that are provided from debt.
    DR =
    𝐓𝐨𝐭𝐚𝐥 𝐃𝐞𝐛𝐭
    𝐓𝐨𝐭𝐚𝐥 𝐀𝐬𝐬𝐞𝐭𝐬
    DER = Debt-to-Equity Ratio The debt-to-equity ratio calculates the weight of
    total debt and financial liabilities against
    shareholders’ equity.
    DER = Total Debt
    Shareholders′ Equity
    ICR = Interest Coverage Ratio The interest coverage ratio shows how easily a
    company can pay its interest expenses.
    ICR = Operating Income/EBIT
    Interest Expenses
    Source: Author’s Arrangement, 2023.
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  4. DATA ANALYSIS
    Table 4.1: Descriptive Statistics of the Industry Level
    ROA DR DER ICR
    Mean 0.019236 0.836626 2.607067 1141.694
    Median 0.058642 0.792204 2.955631 6.475802
    Maximum 0.151623 2.015828 15.91316 402.7211
    Minimum -0.368402 0.522044 -21.35047 -2.464140
    Std. Dev. 0.116349 0.316736 5.288390 6708.326
    Skewness -1.017900 0.951299 -1.258580 0.946361
    Kurtosis 3.214057 2.42997 2.80358 3.012343
    Jarque-Bera 24.52409 126.9136 205.6833 1641.804
    Probability 0.105365 0.083100 0.123000 0.001000
    Sum 0.692478 30.11855 93.85443 41100.98
    Sum Sq. Dev. 0.473794 3.511263 978.8475 1.58E+09
    Observations 36 36 36 36
    Source: Author’s Computation, 2023 (Eviews 10.0 Statistical Software)
    Table 4.1 presents the variable description of the 36 observations for the panel data of the sampled
    oil and gas companies. The normality of the data distribution is assessed through the skewness,
    kurtosis, and Jarque-Bera Probability coefficients. The results indicate that the variables, except
    for ICR, exhibit statistically insignificant p-values (greater than 0.05) for the Jarque-Bera
    Statistics. This suggests that the variables follow a normal distribution.
    The skewness coefficients further supported this finding, as they have values less than or
    approximately equal to 1. Skewness measures the asymmetry of the data distribution, and the fact
    that the coefficients are within an acceptable range indicates a relatively symmetrical distribution
    for the variables. Additionally, the kurtosis coefficient provided further confirmation of the normal
    distribution, as all variables have coefficients below or around 3. Kurtosis measures the degree of
    peakedness or flatness of a distribution, and values close to 3 indicate a normal distribution.
    Overall, the results from the coefficients of skewness, kurtosis, and Jarque-Bera Probability
    suggest that the variables in the panel data for the oil and gas companies are normally distributed,
    providing confidence in the data’s suitability for subsequent analyses.
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    Table 4.2: Regression Analysis of the Industry Level
    Dependent Variable: ROA
    Method: Panel EGLS (Period random effects)
    Date: 05/21/23 Time: 22:54
    Sample: 2010 2021
    Periods included: 12
    Cross-sections included: 3
    Total panel (balanced) observations: 36
    Swamy and Arora estimator of component variances
    Variable Coefficient Std. Error t-Statistic Prob.
    C 0.204337 0.058208 3.510442 0.0014
    DR -0.218419 0.061556 -3.548297 0.0012
    DER -0.001717 0.003669 -0.467976 0.6430
    ICR 1.85E-06 2.81E-06 0.656869 0.5160
    Effects Specification
    S.D. Rho
    Period random 0.000000 0.0000
    Idiosyncratic random 0.110916 1.0000
    Weighted Statistics
    R-squared 0.360950 Mean dependent var 0.019236
    Adjusted R-squared 0.311039 S.D. dependent var 0.116349
    S.E. of regression 0.097272 Sum squared resid 0.302778
    F-statistic 6.024771 Durbin-Watson stat 0.653731
    Prob(F-statistic) 0.002254
    Source: Author’s Computation, 2023 (Eviews 10.0 Statistical Software)
    Table 4.2 presents the outcomes concerning the impacts of Debt Ratio, Debt to Equity ratio, and
    Interest Coverage on Return on Assets (ROA). The findings reveal that Debt Ratio has a
    noteworthy and adverse influence on ROA, implying that an elevation in the Debt Ratio
    corresponds to a decline in ROA. Nevertheless, the Debt to Equity ratio exerts an unfavorable
    influence on ROA that lacks statistical significance. Similarly, although Interest Coverage has a
    favorable influence on ROA, it also lacks statistical significance. Furthermore, as indicated in
    Table 4.1.2b, a unit rise in Debt Ratio and Debt-to-Equity Ratio results in a 0.21% decrease and a
    -0.002% decrease, respectively, in return on assets for oil and gas firms in Nigeria. Conversely, a
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    unit rise in Interest Coverage Ratio corresponds to a minute increase of 0.000001% in return on
    assets within the industry.
    The adjusted R-squared value, approximately 31%, suggests that the explanatory variables (DR,
    DER, and IC) account for around 31% of the variations observed in ROA. The remaining 69% of
    the variations could be attributed to other factors influencing ROA in the industry, as well as
    factors captured by the error terms. The probability associated with the F-statistics being
    significant (0.002254) denotes the statistical appropriateness of the multiple regression model and
    the overall outcomes. The Durbin-Watson statistic gauges the presence of autocorrelation in the
    data. A value below 2 signifies positive autocorrelation, above 2 signifies negative autocorrelation,
    and a value of 2 indicates the absence of serial autocorrelation. In this instance, the Durbin-Watson
    statistic of 0.653731 indicates the presence of positive serial autocorrelation in the panel data
    derived from the annual reports and accounts of the sampled consumer goods firms.
    4.3 Test of Hypotheses
    Decision Rule: Reject null hypothesis (Ho) if the P-value tabulated is less than the A-value of 0.05
    and t-statistic presented is above A –value of 2. Otherwise, accept the null hypothesis.
    4.3.1 Hypothesis One
    Ho: Debt ratio has a nonsignificant effect on return on assets of oil and gas companies in Nigeria
    Hi: Debt ratio has a significant effect on return on assets of oil and gas companies in Nigeria
    Decision: From the panel data regression analysis in table 4.2. The P-value of 0.0012 is less than
    A-value of 0.05 and t-statistics value of 3.55 is above 2. Therefore, the alternate hypothesis is
    accepted and the null hypothesis rejected. This implies that debt ratio has a significant effect on
    return on asset of oil and gas companies in Nigeria.
    4.3.2 Hypothesis Two
    Ho: Debt to equity ratio has no significant effect on return on asset of oil and gas companies in
    Nigeria
    Hi: Debt to equity ratio has a significant effect on return on asset of oil and gas companies in
    Nigeria
    Decision: From the panel data regression analysis in table 4.2. The P-value of 0.6430 is greater
    than 0.05 A-value whereas the t-statistic value of 0.5 is below 2. Therefore, the null hypothesis is
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    accepted and the alternate hypothesis rejected. This implies that debt to equity ratio has no
    significant effect on return on asset of oil and gas companies in Nigeria.
    4.3.3 Hypothesis three
    Ho: Interest coverage ratio has no significant effect on return on asset of oil and gas companies in
    Nigeria.
    Hi: Interest coverage ratio has a significant effect on return on asset of oil and gas companies in
    Nigeria.
    Decision: From the panel data regression analysis in table 4.2. The P-value of 0.5160 is greater
    than 0.05 A-value and t-statistic value of 0.7 is below 2. Therefore, the null hypothesis is accepted
    and the alternate hypothesis rejected. This implies that interest coverage ratio has no significant
    effect on return on asset of oil and gas companies in Nigeria.
    4.4 Discussion of Findings
    4.4.1 Debt Ratio and Return on Asset
    The outcome of the panel multiple regression analysis offers valuable insights into the correlation
    between the debt ratio and the return on assets (ROA) within Nigeria’s oil and gas firms. The
    results reveal a substantial and adverse impact of the debt ratio on these companies’ ROA. This
    outcome implies that as the debt ratio climbs, the ROA of oil and gas enterprises tends to diminish.
    This suggests that heightened levels of debt in relation to the total assets of the company negatively
    influence both the returns achieved from asset utilization and the returns allocated to shareholders.
    With an elevated debt ratio, companies need to apportion a considerable portion of their earnings
    towards interest payments, which in turn diminishes the overall returns generated from their assets.
    This discovery corroborates earlier research conducted by Maghanga (2015) and Ismail (2016),
    which uphold the idea that an elevated debt ratio typically has an adverse impact on a company’s
    ROA. Nonetheless, this finding contradicts the conclusions drawn by Vintila and Duca (2012),
    who may have arrived at a different outcome due to variations in analytical methodologies,
    approaches, or sample selections employed.
    4.4.2 Debt to Equity Ratio and Return on Asset
    The results indicated that the debt to equity ratio exhibits a negative and statistically insignificant
    influence on the return on assets. This implies that an increased proportion of debt in relation to
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    equity has an adverse impact on both profitability and operational efficiency. Elevated debt levels
    give rise to higher interest obligations, subsequently diminishing profitability and overall returns
    derived from asset utilization. This holds notable implications for oil and gas firms possessing
    higher debt to equity ratios, as they would incur heightened expenses due to interest payments,
    consequently leading to reduced profitability. This underscores the importance of maintaining a
    well-balanced capital structure to ensure sustainable growth and profitability. Overreliance on
    debt-based financing could yield unfavorable repercussions on both profitability and asset
    utilization. These findings align with prior research conducted by Rehman (2013), Nanteza (2017),
    Muhammad (2018), and Nhung (2017), which similarly identified a negative and insignificant
    correlation between the debt to equity ratio and return on assets (ROA). Conversely, the outcomes
    from Gweyi and Karaja (2014) as well as Denugba, Ige, and Kesino (2016) diverge from the
    present study, as they demonstrated a positive and significant connection between the debt to
    equity ratio and ROA.
    4.4.3 Interest Coverage Ratio and Return on Asset
    The outcomes indicate that the Interest Coverage Ratio (ICR) exhibits a positive but statistically
    insignificant impact on the return on assets (ROA) within Nigerian oil and gas firms. This suggests
    a tendency for the interest coverage ratio to rise concomitantly with an increase in the return on
    assets, and vice versa. Put differently, as oil and gas companies achieve elevated returns on their
    assets, their capacity to cover interest expenses also tends to enhance. A heightened interest
    coverage ratio reflects the company’s ability to generate ample profits for covering interest
    payments. Within the oil and gas sector, marked by substantial capital investments, a higher return
    on assets signifies more efficient utilization of the company’s resources and a heightened capacity
    to generate profits. Consequently, this culminates in an elevated interest coverage ratio as the
    company possesses greater funds to meet its interest obligations. Conversely, diminished returns
    stemming from the company’s assets pose challenges in covering interest expenses. This situation
    could arise from factors like declining oil and gas prices, operational inefficiencies, or economic
    downturns. Under such circumstances, the interest coverage ratio tends to decline due to the
    company’s compromised profitability and its reduced ability to generate ample profits for covering
    interest payments. The findings of Enekwe Agu and Eziedo (2014), Kariri and Kheri, Nwanna and
    Irie (2017), Enekwe (2015) corroborate the results concerning the positive influence of interest
    coverage on return on assets. These studies underscore that a higher interest coverage ratio
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    generally aligns with improved financial performance and profitability within the oil and gas
    industry.
    5.2 Conclusion
    The primary objective of the study was to explore the correlation between debt indices and the
    financial performance of oil and gas firms in Nigeria. The systematic collection and scientific
    analysis of data yielded significant insights. Firstly, the analysis revealed a noteworthy and adverse
    impact of the debt ratio on return on assets (ROA). Secondly, although the debt to equity ratio
    displayed a negative effect on ROA, this influence did not achieve statistical significance. Lastly,
    the interest coverage ratio exhibited a positive effect on ROA, yet this effect was not statistically
    significant.
    The adjusted R-squared value demonstrated that around 31% of the variations observed in ROA
    could be attributed to the debt ratio, debt to equity ratio, and interest coverage ratio. This suggests
    that these variables moderately contribute to the financial performance of oil and gas enterprises
    in Nigeria. Based on these conclusions, the study inferred that among the variables under scrutiny,
    solely the interest coverage ratio exhibited a positive impact on the financial performance of
    Nigerian oil and gas companies. This implies that a heightened interest coverage ratio corresponds
    to enhanced financial performance in terms of ROA.
    5.3 Recommendations
    The subsequent recommendations were formulated based on the research findings:
    i. As the study demonstrated a noteworthy adverse influence of the debt ratio on return on
    assets (ROA), it is prudent for oil and gas enterprises to exercise careful control over their
    debt levels. Excessive debt has the potential to contribute to decreased ROA, thus
    detrimentally affecting financial performance. It is advisable for companies to uphold a
    well-balanced debt structure and refrain from taking on excessive debt that could
    potentially strain their capacity to generate profits.
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    ii. Despite the absence of a statistically significant correlation between the debt to equity ratio
    and ROA as revealed by the study, oil and gas firms should not overlook this ratio when
    making financing choices. The debt to equity ratio delineates the extent of debt in relation
    to equity within the company’s capital framework. While the direct impact on ROA may
    not be pronounced, maintaining a sensible equilibrium between debt and equity remains
    imperative to ensure financial stability and risk mitigation.
    iii. The management of oil and gas companies should exercise diligent oversight of their
    interest coverage ratio. A heightened interest coverage ratio signifies the company’s ability
    to cover interest obligations with its earnings. Companies should aim to sustain a robust
    interest coverage ratio, ensuring they can easily fulfill interest commitments and evade
    financial strain.
    5.4 Contribution to Knowledge
    The research addresses a gap within the current body of literature by investigating the impact of
    debt indices on the financial performance of Nigeria’s oil and gas sector. Earlier studies often
    neglected this specific sector or concentrated on foreign contexts, leading to an informational void
    pertaining to Nigeria. By focusing on the Nigerian oil and gas industry, the study sheds light on
    the distinct dynamics and factors influencing financial performance within this domain.
    The outcomes underscore the significance of the interest coverage ratio as a pivotal determinant
    of financial performance among Nigerian oil and gas enterprises. The research discloses that,
    among the examined variables, solely the interest coverage ratio exhibits a favorable influence on
    return on assets (ROA). This underscores the crucial nature of maintaining a sound interest
    coverage ratio for Nigerian oil and gas companies, as it aids in covering interest obligations and
    enhancing ROA.
    The study’s contribution to existing knowledge enriches the comprehension of how debt indices
    impact the financial performance of Nigeria’s oil and gas sector. The findings hold practical
    implications for decision-makers within oil and gas enterprises, financial institutions, and
    regulatory entities in Nigeria. They offer guidance for devising strategies aimed at enhancing
    financial performance and ensuring the sector’s long-term viability.
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