The Relationship Between Capital Structure and Profitability of Manufacturing Companies Listed at the Nairobi Securities Exchange

Abstract

For the companies to grow the decisions of the capital structure are very are critical in any business enterprise because they influence the companie’s value. Capital structure or financing decision forms critical decision in finance management that will affect the wealth of shareholders wealth and risk. The major challenge facing manufacturing companies listed at Nairobi Securities of Exchanges is structuring finance and its impacts on financial performance. The main objective of the study will seek to determines the relationship between the capital structure and profitability of manufacturing companies listed at NSE. The research study will utilized the research design descriptive. The target population was manufacturing companies listed in the Nairobi security exchange .Since the population was small the study used census to collect data. The study used secondary data from Nairobi security exchange for a period of 2013 -2017. The study regressed return on equity and debt ratio, liquidity and size of the firm. The findings revealed long term debt and liquidity influence profitability of manufacturing companies listed at the NSE. . This clearly shows that capital structure of of manufacturing companies profitability, is positively related to profitability of manufacturing companies listed at NSE, this is attributed to the fact that the long term debt is utilized to run the operations of these companies and by doing so reduce the losses that the firm would have undergone if there was shortage of the long term funds. The study concluded that long term debt of manufacturing firms listed in the NSE is positively related to profitability of manufacturing companies listed at NSE. The more the long term debt the higher the profitability in term of return on equity as well as increase shareholders wealth which indicates a need to increase more debt. The total debt in these companies could lead to higher interest tax benefit hence increasing the profitability of the manufacturing companies. The research study recommends and encourage the companies to increase their size by considering growing their assets by ploughing back there earnins. The size of the firm has also concluded of having e negatively affects the profitability of the Manufacturing companies.The study recommends the companies should come up with the finance corporate strategy that would increase there wealth and size in the long run .