The Relationship Between Capital Structure and Profitability of Construction and Allied Firms Listed at the Nairobi Securities Exchange

Abstract

Capital structure is a very debatable topic in finance mainly in regard to the optimal capital structure that will result to maximum value of a firm. Several theories have been postulated to try to contribute to this broad topic. The objective of the study was to determine whether relationship exist between capital structure and profitability of listed Constructions and Allied firms at NSE. The study used a descriptive research design covering a period of 10 years from 2006 to 2015. Secondary data for the five listed construction and allied firms was collected. It was analyzed using multiple Regression model and descriptive statistics. The independent variables were long term debt ratio and size of the firm and the dependent variable was Return on Assets. Descriptive statistics revealed that, listed construction and allied firms financed most of their assets through equity. The mean of long term debt ratio was 24%, the profitability as indicated by return on Assets (ROA) had a mean of 8% while the average size of the firms measured by Sales was at 16%.The study found capital structure and profitability of listed construction and allied firms at NSE to have a weak negative relationship. However firm size was positively related with profitability. Thus the study recommends that construction sector companies should finance most of the assets using other sources of finance such as equity, preferred stock and maintain long-term debts at minimum levels and their management should come up with strategies to drive their sales to increase their profitability. Commercial banks should be cautious as they lend long term loans to the construction sector