The Effect Of Capital Structure On The Profitability Of The Real Estate Firms In Kenya

Abstract

Capital structure is one of the major decisions that the management of any firm is tasked with. There are two types of financing, debt and equity, for management to choose between or decide on a mixture in any financing decision. The choice between the two is not free but rather governed by a number of factors. In today‟s world firms have to remain competitive for them to survive the very stiff competition in the market. One of the major ways of remaining competitive is by remaining profitable so as to have the resources to pursue any of the competitive strategies. Debt financing has been associated with tax benefit to the firm. The real estate industry in Kenya has been experiencing tremendous growth in the recent past to be ranked as the 4th highest contributor to the economy. The objective of this study was to determine the effect of capital structure on the profitability of real estate firms in Kenya. The study targeted the 78 real estate firms in Kenya covering a period of 7 years, 2008 – 2014. The study adopted a descriptive research design and used regression model to determine the nature and extend of relationship Secondary data was collected using data collection templates. Profitability was measured using ROA, ratio of net profit before tax to total assets while capital structure was measured using, debt to equity ratio, short term debt to total term debt, long term debt to total debt. Using an SPSS software, data was analyzed and results for the regression model obtained. The results of the study revealed that although capital structure does affect the profitability of real estate firms, this relationship is weak and statistically insignificant. The ratio of short term debt to total debt revealed the most effect on profitability while the overall debt revealed the weakest. Thus there are other major factors affecting profitability of the real estate firms other than capital structure. The research thus recommend that the real estate focus more on short-term debt as opposed to the overall debt to equity ratio since it has the most pronounced effect among all the variables. Thus it is necessary to explore the factors affecting short-term debt as the ultimately affect the level of profit.