Effect of Capital Structure on Profitability of Tea Companies in Kenya

Abstract

To finance operations and make investments, businesses need money. The majority of businesses struggle with the decision of whether to finance their operations with debt or with equity. But for organizations, identifying the best solution and appropriately managing risks are essential. The main aim of the study was to determine how the financial structure of Kenyan tea enterprises affected their profitability. A descriptive research design was thought to be advantageous for this study since it was helpful in acquiring data that highlight the relationship between variables. Despite the study's emphasis on 60 Tea companies that had been registered at the TBK for the previous five years, data from 26 companies was obtained that was regarded adequate to establish conclusions (2017-2021). The study made use of secondary data from the annual reports that each corporation published. The data analysis employed descriptive and inferential statistics. As a result of the study's findings, an R-square value of 0.046 was obtained, indicating that the four independent variables selected can explain about 17.8% of the variation in the profitability of Kenyan tea companies, with the remaining 82.2 percent of the variation being related to other variables unconsidered in this study. Additionally, the study found a marginal correlation (R=0.421) between the independent variables and tea company profitability. The ANOVA test indicated that the F statistic was significant at the 5% level with a p value of 0.000. The methodology thus proven useful for examining the profitability of Kenyan tea businesses. The research found that the financial structure of tea firms didn't affect their profitability over the study period. Businesses have used debt to lower operating and financial costs. The capital structure, size, leverage, or other characteristics of Tea Companies did not affect their profitability. The difference in tea firm profitability of 17% was explained by the independent variables. Regarding the regression model that was employed, a significant finding was made. It was demonstrated that there was little correlation between the Tea companies' profitability and capital structure. It is proposed that a fair debt and equity ratio be set in order to ensure that the Tea companies have appropriate capital. The companies will be able to settle their obligations and make investments with high return potential as a result. Due to time and financial restrictions, the researcher had to use 26 registered tea companies. More research has to be done in this area because there are few to no studies and scant information accessible on the Kenyan tea industry. This will provide us additional knowledge about the tea industry and possibly a better understanding of how the businesses function.