The Effect of Capital Structure on Corporate Profitability; An Empirical Analysis of Listed Companies in Nigeria

Efobi Uchenna*, Charity E. Duru-Uremadu **
* Department of Accounting, College of Business and Social Sciences, Covenant University, Nigeria.
** Department of Banking and Finance, College of Business and Social Sciences, Covenant University, Nigeria.
Periodicity:March - May'2009
DOI : https://doi.org/10.26634/jmgt.3.4.203

Abstract

Determining the capital structure of a company is a very critical factor to consider while projecting corporate performance in any business environment. This decision becomes even more difficult in a country like Nigeria, where the business and economic environment is highly unstable. This leaves the firms in a dilemma about what capital structure to adopt in financing their operations: Furthermore, the choice made by the company on what capital structure to adopt in financing their operations has serious impact on the performance of the firm. This study used regression analysis to determine the effect of capital structure on corporate profitability for 10 selected manufacturing firms for the period studied 2002-2005. We found out that the ratio of long-term debt to total asset (debt financing) and the ratio of equity to total liability of the firm (equity financing) had negative impact on the return on capital employed (ROE), while the ratio of short term debt to total liability had  insignificant effect on return on capital employed(ROE). Based on these findings, we made some recommendations, which includes that the firm management should ensure that they manage the composition of their capital structure well, most especially as it relates to long-term debts and equities as well as to the corporate reserves of the firm.

Keywords

Capital Structure, Profitability, Debt.

How to Cite this Article?

Efobi Uchenna and S.O. Uremadu (2009). The Effect Of Capital Structure On Corporate Profitability; An Empirical Analysis Of Listed Companies In Nigeria. i-manager’s Journal on Management, 3(4), 55-61. https://doi.org/10.26634/jmgt.3.4.203

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