Capital structure and profitability of selected non-financial firms on the Ghana stock exchange

Abstract

The study investigated the relationship between capital structure and profitability of listed non-financial firms in Ghana, covering a seven-year period (2002-2008). Capital structure theories provided theoretical basis for the work. The study adopted the panel data methodology to examine the effects of capital structure on the profitability of twenty selected non-financial firms. The general least square technique was used as an estimation technique for the study. Financial statements of the selected firms were also used to extract data for the study. Ratios such as return on assets, return on equity and net profit margin were used as indicators for determining the profitability of the firm. Short-term debt, long-term debt and total debt ratios were also used as indicators for leverage of the firms. The study revealed that 54.99 % of the total capital of the firms is made up of debts. Of this 47.65 % constitute short-term debts while 7.33% is made up of long-term debts. This indicates that the non-financial firms are highly leveraged firms and also shows the importance of short-term debts over long term debts in financing non-financial firms. The correlation and regression results showed a significantly negative association between leverage and profitability. This implies that, during the period under study, leverage did not bring about profitability. There should therefore be reforms in the financial markets to reduce cost of short-term debts or encourage internal financing. The firms should also focus on growth so as to benefit from leverage. Reforms in the banking sector to provide more long-term debt to non financial firms is as well necessary to affect profitability.