THE EFFECT OF CAPITAL STRUCTURE ON PROFITABILITY (Reference to manufacturing company in Nepal)

Abstract

The main objective of the study was to analyze the effect of capital structure on profitability with reference to manufacturing company in Nepal. This study is based on secondary data was gathered from financial annual report of manufacturing companies of Nepal for ten year periods (2013/14-2022/23). Descriptive statistics correlation and multiple regression analysis are used for data analysis. This study reveals that manufacturing companies have great contribution to investors fund and strong capital adequacy position due to high debt to equity ratio. Moreover, in this study, manufacturing companies shows a large share of financing by the insurers relatively to the owners and there is risky for the investors due to the high leverage ratio or debt equity ratio. Profitability is the measurement of efficiency. Manufacturing companies have high value of ROA and ROE means there is efficient utilization of its total assets. Investors are getting more return from their investment and also company performance is good. The correlation analysis shows that debt to equity ratio (DER) and debt to total assets have significant negative relation with profitability (ROA and ROE) of manufacturing companies in Nepal. Moreover, firm size has significant negative relationship with profitability (ROA and ROE) of the manufacturing companies. The regression result reveals that debt to equity ratio has insignificant negative effect on ROA but it has significant negative effect on ROE of the manufacturing companies while debt to assets ratio has insignificant positive effect on profitability (ROA and ROE) of manufacturing companies. Further, firm size has significant negative effect on profitability (ROA and ROE) of the manufacturing companies in Nepal. Hence, this study concluded that capital structure has insignificant effect on profitability of manufacturing companies in Nepal.