The Relationship Between Profitability and Capital Structure of Small and Medium Enterprises in Nairobi County

Abstract

Small and Medium Enterprises play an important role towards economic growth and development not just in Nairobi county, but Kenya at large. The relationship between the capital structure of firms and their profitability has been explored in both developed and developing countries. However, despite the limitation of empirical findings in the Kenyan case, the existing literature seems inconclusive due to mixed findings. Thus, this study investigated how capital structure affects profitability of the firm, focusing on SMEs in the county government of Nairobi. This study was guided by trade-off and Pecking Order Theories. The study employed a correlation survey design to investigate the relationship between profitability and capital structure among SMEs in Kenya. Secondary data obtained from the World Bank Enterprise Survey of 2013 was used. A total of 179 SMEs was sampled for the study. The study used both descriptive and regression analysis with the help of Ordinary Least Square Methods. Findings of the study indicate that the capital structure of the firm, positively influenced firm profitability. In addition, the size of the firm, growth in terms of sales, and the assets influenced firm profitability positively. Furthermore, the age an SME does not affect its productivity. Following the findings, the study concluded that higher ration of loans in the capital structure, the size of the SME and the assets, leads to an increase in SMEs profits. The study, therefore, recommends that SMEs should be encouraged to take loans and increase their business operations since, the benefits are more than the costs. In addition, the study recommends that SMEs should find ways of expanding their business to reap the benefits of economies of scale.