Effect of capital structure on profitability of listed frims in ghana
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Date
2023
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KNUST
Abstract
The study aimed to investigate the impact of different types of capital structures on firm profitability, employing a positivist paradigm and explanatory research methodology. Utilizing secondary data from financial reports, a purposive sampling technique was used to select a sample of 15 firms from Ghana. The study used panel data techniques and conducted fixed-effect panel regressions to examine the association between capital structure and profitability. The results of different capital structure ratios' impact on profitability reveals varying relationships. For Total Debt to-Assets Ratio (TDAR), both Model 1 and Model 2 indicate a positive relationship with profitability (ROA and ROE). Higher TDAR is associated with improved profitability, attributed to tax shield benefits, leveraging assets for growth, and positive creditor confidence. The Total Debt-to-Equity Ratio (TDER) in Model 1 shows a positive association with ROA, while in Model 2, it has a negative link with ROE. Increased TDER can enhance ROA through magnified returns, but also elevate financial risk. Short-Term Debt-to-Assets Ratio (STDAR) in both models demonstrates a positive connection with both ROA and ROE, signifying short-term debt's role in enhancing liquidity, seizing opportunities, and optimizing capital structure. Long-Term Debt-to-Assets Ratio (LTDAR) exhibits a positive link with ROA in Model 1, while Model 2 displays a negative association with ROE. Long term debt's impact on asset expansion and stability aligns with profitability, but higher leverage can reduce ROE due to interest costs and risk. These findings underscore the intricate interplay between debt ratios and profitability, shaped by financial theories and considerations of risk and growth. These findings underscore the importance of balancing debt levels to optimize profitability while managing financial risks. It is crucial for companies to carefully consider their capital structure and leverage ratios to effectively leverage debt for enhanced profitability without exposing themselves to excessive financial risk. Maintaining an optimal mix of debt and equity enables companies to maximize returns on assets and generate higher profitability.
Description
A thesis submitted to the department of accounting and finance, school of business, Kwame Nkrumah university of science and technology in partial fulfilment of the requirements for the award of the degree of masters of science in accounting and finance