The Effect of Capital Structure on Profitability of Listed Manufacturing Companies in Tanzania

Maselle, Richard (2016) The Effect of Capital Structure on Profitability of Listed Manufacturing Companies in Tanzania. Masters thesis, The Open University of Tanzania.

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Abstract

Researcher used this study to measure the effect of capital structure on Performance of Public listed companies in DSE Tanzania using a panel data of six companies during the 5 year period, from 2009 to 2013 which created 30 observations. Panel data for the selected companies were generated and analyzed using fixed effect regression statistical technique to test the relationship between capital structure variables and return on asset and random effect used to test the relationship between capital structure variables and return on equity. Variable computations were conducted with the assistance of STATA computer software and the results of the study revealed the mixed results, a negative relationship revealed between debt to equity ratios and return on equity while Debt to asset ratios indicated a positive relationship with return on equity when random effect regression used. The overall results revealed that capital structure has a positive impact on company profitability while some of capital structure variables with combination of debt to equity indicated a negative relationship with company profit and other capital structure variables with combination of debt to assets indicated a positive relationship with company profit Correlation and regression models indicated a positive relationship between debt to assets ratios and company profit. In terms of ROE and ROA while only debt to equity ratios showed a negative relationship with ROE as indicated by both methods. The study recommends that managers of manufacturing companies should increase the reliance on short term debt to asset ratios as a source of finance because they have much influence on profit generation on both return on equity and return on assets. Debt to equity ratios were the only variables which indicated a negative relationship with company profit in terms of return on equity, for that case managements should reduce the use of these ratios although other remaining ratios has to be increased because they also indicated a positive relationship with all profitability ratios

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