The Effect of Capital Structure on Profitability of Firms Listed at the Nairobi Securities Exchange

Abstract

Firms require capital to finance their business operations and invest. Most firms are faced with a dilemma on whether to utilize debt or equity to finance their firms. But, it important for firms to find the best option and effectively manage their risks. The objective for this study was to determine the outcome of capital structure on profitability of firms listed at the NSE. A descriptive research design was considered effective for this study because it was useful in collecting data that depict the relationship between variables. The study targeted 67 firms that had been actively trading for the last 5 years (2011-2015) nonetheless; data was collected from 36 firms that were considered satisfactory to make generalization. The study used secondary data which was obtained from annual reports published by Capital Markets Authority. Analysis of data was done using descriptive and inferential statistics. The study found that listed firms were profitable in the study period. Firms utilized debt which minimized their cost of financing and operational costs. There lacked a relationship between capital structure, firm size, leverage and profitability of listed firms. The independent variables explained eighteen percent variance in profitability of listed firms. The regression model implemented was found to be significant. It was concluded that there existed an insignificant link relating capital structure and profitability of listed firms. It is recommended that a fair mix of debt and equity should be established to ensure that the firm maintains capital adequacy. Firms can thus be able to meet their financial compulsions and investments that can promise attractive returns. Time and resources was a hindrance that forced me to use 36 listed firms. A replica of this research study should be conducted in another sector such as the manufacturing sector to find out if similar results will hold. Financial leverage varies significantly by industry. Researchers can compare results and make a logical conclusion.