Abstract
This paper examines effects of capital structure on business profitability in seven processing enterprises listed on the Dar es Salaam Stock Exchange (DSE), Tanzania. Capital structure in this study was measured by long-term debt to equity ratio (LTDR) and business profitability was measured by Return on Assets (ROA), Return on Equity (ROE) and Earnings per Share (EPS). The study applied secondary data obtained from the published reports in the DSE website for a duration of ten years from 2009 to 2018. Ordinary Least Squares (OLS) regression analysis and Karl Pearson Coefficient of Correlation were employed to determine the relationship between capital structure and business profitability. Results revealed that the capital structure indicator had a weak and statistically insignificant effect on business profitability measures. The relationship between LTDR and all measures of profitability used in this study were found to be weak and insignificant. Therefore, the study concluded that capital structure is not a major determinant of firm’s profitability. These findings generally concur with the predictions of the Pecking Order Theory of capital structure decisions of firms. It is therefore recommended that financial managers should follow a moderate and cautious approach to debt issues despite the benefit of tax shield in order to minimize the risk of operating under financial distress.
Highlights
The term capital structure refers to the relationship between the various long-term sources of financing such as equity capital, preference share capital and debt capital [1]
Scholars in Tanzania have investigated the relationship between capital structure and Gaston Vedasto Mujwahuzi and Crispin John Mbogo: Effects of Capital Structure on Business Profitability of Processing Enterprises Listed on the Dar es Salaam Stock Exchange, Tanzania commercial banks performance [5,6] while others have concentrated on Small to Medium Enterprises (SMEs) [7], Bundala [8] focused on nonfinancial listed firms and Richard [9] investigated the relationship between capital structure and firm performance in manufacturing firms
The firms’ profitability was measured in terms of return on assets (ROA), return on equity (ROE) as well as earnings per share (EPS).The targeted population in this study involved all the enterprises listed in the Dar es Salaam Stock Exchange (DSE) in Tanzania and by the end of 2019 a total of 28 companies were listed in that stock market
Summary
The term capital structure refers to the relationship between the various long-term sources of financing such as equity capital, preference share capital and debt capital [1]. The relationship between capital structure and business profitability can mainly be explained by Capital Structure Irrelevance Proposition, Traditional Trade-off theory and Pecking Order theory. Kaaya et al [5] found a negative relationship as opposed to the traditional trade-off theory when studying the capital structure effects on banking sector profitability. These mixed empirical findings create a contradiction on the relationship between capital structure and organizational performance and the discussion should be extended
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