Financial Structure Analysis of Private Limited Manufacturing Companies Evidence from Selected Companies in Mekelle, Ethiopia

Abstract

Lack of proper financial structure is the cause of failure for many firms in developing countries. In countries like Ethiopia, where financial market is less developed, the range of financial instruments available is narrow. Thus, companies in such countries face many challenges that affect their financial structure decisions. To this end, the aim of this study was to assess how companies finance their assets, what challenges they face and to identify the determinants of financial structure. Both primary and secondary data were used. Secondary data were collected from Ethiopian revenue and custom authority. Financial statements reported for the years 2004-2012 were collected from 10 purposively selected companies out of 25 companies found in the area. Primary data were collected using questionnaires which were distributed to finance managers of the companies.

The collected data were analyzed using descriptive statistics and Ordinary least square multiple regression model. The descriptive statistics results depict that majority of the firms finance their assets using short-term debt such as trade credits and bank over-drafts. Collateral is the major constraint for many of the companies, however, larger firms use more long-term loans. Furthermore, the multiple regression findings show that, profitability, size, and tangibility of assets are found to be significant determinants of long term debt, while liquidity has a strong significant effect on short-term debt. Thus, the results are found to be consistent with pecking order theory.

Keywords: Financial structure, manufacturing PLC, financing Assets, determinant