CAPITAL STRUCTURE DECISION AND PROFITABILITY: A STUDY OF NEPALESE MANUFACTURING COMPANIES

Abstract

This research focuses on the relationship between capital structure and the profitability of manufacturing businesses listed on the Nepal Stock Exchange (NEPSE). This research focuses on five regularly traded companies, examining how various capital structure and control factors like debt ratio, debt-to-equity ratio, firm size, fixed assets and liquidity ratio influence profitability indicators like return on equity (ROE), return on assets (ROA), net profit margin (NPM), and operating profit ratio (OPR). To evaluate these connections, the research employs descriptive, correlational, and regression analyses using secondary data derived from audited financial accounts over a 10-year period. The research demonstrates that while a higher debt ratio positively correlates with ROE, indicating that increased leverage can enhance equity returns, it does not have a uniform impact on ROA, NPM, and OPR. Conversely, a high debt-to-equity ratio negatively affects ROA, NPM, and OPR, suggesting that excessive leverage can reduce overall profitability. The study also finds that firm size and fixed assets negatively influence ROE, indicating potential inefficiencies or increased capital costs associated with larger scale and substantial asset investments. In contrast, liquidity positively correlates with ROA, NPM, and OPR, underscoring its importance in maintaining financial stability and operational efficiency. The research underscores the importance of establishing a balanced capital structure to optimize profitability, providing practical insights for financial managers, legislators, and academics. By addressing a research gap in the Nepalese context and providing a complete study of capital structure dynamics in manufacturing enterprises, the findings provide a contribution to the current body of literature. Keywords: