CAPITAL STRUCTURE AND PROFITABILITY OF MANUFACTURING COMPANIES IN NEPAL

Abstract

This study examined the impact of capital structure and profitability on listed manufacturing companies in Nepal by analyzing data from four companies over a 10-year period, from 2071 to 2080 (Nepali calendar years). The data were sourced from annual reports, company brochures, the Nepal Stock Exchange (NEPSE), the Securities Board of Nepal, and company websites. Regression models were utilized to evaluate the significance and impact of capital structure on firm profitability. The analysis revealed mixed results. A negative correlation was found between the debt-to-assets (D/A) ratio and profitability measures such as return on equity (ROE) and return on assets (ROA). However, the regression models showed varied outcomes: while a negative relationship was observed between the debt-to-equity ratio and net profit margin (NPM), the debt-to-assets and long-term debt ratios exhibited a positive relationship with NPM when using random effects regression. Additionally, the regression analysis indicated a negative relationship between ROA and all capital structure variables, yet a positive relationship between the debt-to-assets ratio and company profitability measures (ROE, ROA, and NPM). In summary, both correlation and regression analyses pointed to a negative relationship between the debt-to-equity ratio and company profitability metrics (ROA, ROE, and NPM). Conversely, regression results suggested that long-term and short-term debt-to-assets ratios positively influence profitability. Based on these findings, it is recommended that managers of manufacturing companies consider increasing their reliance on long-term and short-term debt as sources of finance, as these factors appear to significantly influence profitability measures such as ROE, NPM, and ROA.