Capital Structure Decision And Profitability: A Study Of Nepalese Manufacturing Companies

Abstract

Organizations’ profitability is the key factor for gaining sustainability. In achieving the profitability, capital structure is an important factor and, to increase the profitability, appropriateness of capital structure is must. Gone are the days when business organizations were operated in traditional way and earning profit. Businesses these days are more competitive and more complex. So, since couple of decades the world is talking about sustainability of the business. Sustainability is the outcome of profitability. And profitability is influenced by proper mix of debt and equity. Earning profit is much important to every business organization because profitability determines the sustainability of an organization in the market. Thus, financial manager should be able to identify the influencing factors for increasing profitability of an organization. In this study, researcher raised four questions and aimed to identify the positions of capital structure and profitability, which were in line with the first two research questions. Similarly, researcher also aimed to examine the relationship between capital structure and profitability, which was in line with the third research question. Finally, it was aimed to examine the impact of capital structure on profitability which was in line with fourth research question. To identify the positions, descriptive research design has been adopted and, to examine the relationship and impact, correlational research design has been adopted. Secondary data are used for the study and have been sourced through annual financial reports of sampled companies. Based on the five yearly data collected from five Nepalese Manufacturing Companies listed in NEPSE, the researcher has examined the relationship of capital structure with profitability. Under the descriptive statistic, minimum, maximum, mean and standard deviation have been used to describe the positions of capital structure and profitability. Under the correlation analysis, Karl Pearson’s correlation and regression analysis have been adopted to examine the relationship between capital structure and profitability and test first hypothesis. Similarly, it is used to examine the impact of capital structure on profitability. Under the inferential statistic, analysis of variance test (One-Way ANOVA) has been adopted to test the second hypothesis. Researcher identifies the positions of debt and debt-equity ratios lower to the average in investigated manufacturing companies. The position of ROE is found to be higher than average level. On the other hand, the positions of ROA, NPR and OPR are found to be lower than average level. Debt ratio is found to have negative relationship with ROE, ROA, NPR and OPR. Similarly, debt-equity ratio has negative relationship with ROE and ROA, while it has significant negative relationship with NPR and OPR. The test of second hypothesis confirms that there is no significant difference in ROE in different groups of sizes of firm, while ROA, NPR and OPR are found to be different among the firms with different sizes. It is concluded by this study that increase or decrease in debt ratio and debt-equity ratio has no significant impact on ROE, whereas increase in debt results in increase in ROA. This is because increase in debt results in tax shielding, which, in turn, results in increased return to equity shareholders, and decrease in equity results in decrease in ROA.