Relationship Between Capital Structure and Profitability, Evidence From Listed Energy and Petroleum Companies Listed in Nairobi Securities Exchange

Peter Njagi Kirmi

doi:10.11648/j.jim.20170605.11

Abstract

Capital structure is the mix of debt and equity that the firm uses in its operation. Managers utilize most of their substantial time in attempting to find the perfect capital structure in terms of risk/reward payoff for shareholders. This is true for both large and small companies trying to strategize on how much of equity and debt to be used without putting the business at risk. The main objective of this study was to determine the relationship between capital Structure and profitability of listed energy and petroleum companies in Kenya by establishing the relationship between long-term and short-term debts with profitability and its effects. Descriptive and causal research designs were used. The study target population was four energy and petroleum companies listed in NSE that operates in Kenya. A census all the 4 energy and petroleum companies listed in the Nairobi securities exchange was used. Secondary data used for data analysis was obtained from the companies financial statements for a period of five years from 2012 to 2016. Data analysis was done using inferential statistics using SPSS. The study established a strong positive relationship between short term debt and ROA and an average negative relationship between Long term debts and ROA and a weak positive relationship between total debt and ROA. Both the short term and long term debts were found to have no significant effect on ROA at 5% level of significance.

Highlights

The relationship between long-term debt to total assets and ROA is negative correlation with a Pearson coefficient of -0.672. This implies that when long-term debt is increased, ROA decreases. These finding are in agreement with findings of Abor (2005) [1] who examined the effect of capital structure on the corporate profitability of listed firms in Ghana and found a positive relationship between short-term debt ratio and profitability and a negative relationship between long term- debt ratio and profitability
The study sought to determine the relationship between capital structure and profitability of energy and petroleum companies listed in Nairobi securities exchange that operates in Kenya
The results indicate that when ratio of long term debt to total assets is increased, there will be a decrease in profitability, the results shows that the decrease is insignificant

Summary

Introduction

Capital structure is the percentage of capital at work in a business by type. It can either take the form of Equity Capital or Debt capital (Joshua, 2017) [9]. Equity Capital refers to money put up and owned by the shareholders This consist of contributed capital, which is the money originally invested in the business in exchange for shares of stock or ownership and retained earnings, which represents profits from past years that have been kept by the company and used to strengthen the balance sheet or fund growth, acquisitions, or expansion. The debt capital in a company's capital structure is the borrowed money that is at work in the business such as bonds, loans, debentures and commercial

Methods

Results

Conclusion