Effect of Capital Structure on Firm’s Profitability (Evidence from Endowment Fund for Rehabilitation of Tigray /EFFORT/Manufacturing Companies)

Abstract

Capital structure the mix of securities and the proportionate sums that make up capitalization. It is the combination of unlike sources of long-term sources such as equity shares, preference shares, debentures, long-term loans and retained earnings. The term capital structure refers to the link between the various long-term sources financing such as equity capital, preference share capital and debt capital. This research was done to assess the effect of capital structure on profitability of EFFORT manufacturing companies. The researcher used secondary sources of data, which is audited financial statements such as balance sheet and income statement of eight (8) manufacturing companies from period of 2008 to 2017. The companies selected are those operated for at least 10 years. Because of this all selected samples are aged in the operation more than ten (10) years. For this study panel data of eight (8) manufacturing firms for ten (10) years from (2008 to 2017) is used. Independent variables used for this study were total debt to total asset, total debt to equity, and Long-term debt to total assets  and dependent variable were return on assets, and also control variables were firm size, sales growth rate and tangibility. Under this study descriptive statistics and correlation analysis were employed. For panel data regression, random effects regression was used for the data analysis. The result of the study shows that total debt to assets (TDA) and Long term debt to total assets (LTDA) are negatively significant with profitability of the firm and total debt to equity (TDE) is positively significant with profitability of the firm. As the result shows most of EFFORT manufacturing firms’ use debt financing. The researcher recommends that for all managers of EFFORT manufacturing companies’ equity source of finance is more profitable than debt financing.

Keywords: capital structure, profitability, returns on assets, total debt to assets, Long term debt to total assets, and total debt to equity.

DOI: 10.7176/RJFA/11-7-05

Publication date: April 30^th 2020