The effect of capital structure on profitability of manufacturing companies in Tanzania

Fred, Sichizya Steven (2015) The effect of capital structure on profitability of manufacturing companies in Tanzania. Masters thesis, The Open University Of Tanzania.

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Abstract

This study analyzed the effect of capital structure on profitability of listed manufacturing companies in Tanzania using panel data of six companies listed in the Dar es Salaam Stock Exchange during a 5 year period. The period was from 2009 to 2013 in which 30 observations were obtained. Panel data for the selected companies were analyzed using fixed effect regression statistical technique to test the relationship between capital structure variables and return on asset (ROA) and random effect used to test the relationship between capital structure variables and return on equity (ROE). Other statistical methods of partial correlation and summary of descriptive statistics were also used to analyze the study results. Variable computations were done with the assistance of STATA computer software. The results of this study revealed the mixed results, a negative relationship revealed between debt to equity ratios and return on equity. Debt to asset ratios indicated a positive relationship with return on equity when random effect regression used. Other results indicated a positive relationship between ROA and all capital structure variables using fixed effect regression method. Both, 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 (regression and correlation models). This study recommend to managers of manufacturing companies to increase the reliance of short term debt to asset ratios and long term debt to asset ratios as a source of finance because they have much influence in profit generation on both return on equity (ROE) and return on asset (ROA) as indicated by regression results.

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