Impact of Capital Structure on Financial Performance of Manufacturing Firms (A Case Study of Selected Manufacturing Firms in Asela Town)

Abstract

The main objective of this study was to assess the impact of capital structure on financial performance of manufacturing firms in Asela Town by using the financial statements of eight selected manufacturing firms over the past five years period from 2010 to 2014, the data source was secondary data which was collected from Asela Revenue and Customs Authority. Explanatory research design was used to examine the relationship between the variables. The dependent variable for the study was profitability which is measured by Return on Assets (ROA), and the independent variables were Debt to Equity Ratio (DER), Total Debt Ratio (TDR), Long Term Debt Ratio (LTDR), and Short Term Debt Ratio (STDR). Firm Size (FS) and Firm Growth (FG) also used as control variables. For the sake of achieving the objectives of the study, the researcher was used purposive sampling method. For data analysis purpose, descriptive statistics technique was employed to describe the relationship between the variables, Correlation analysis was used to determine the degree of association between variables, testing of assumption for Classical Linear Regression Model (CLRM) were made to estimate the accuracy of the data. Lastly, the balanced fixed effect panel regression model was used. The result of regression analysis revealed that debt to equity ratio have negative significance effect on profitability, total debt ratio have positive and significant effect on profitability, short-term debt ratio have positive significance effect on profitability, long term debt ratio have positive insignificant effect on profitability, firms size have negative insignificance effect on profitability and firms growth also have negative insignificance impact on profitability of selected manufacturing firms.The Main Objective Of This Study Was To Assess The Impact Of Capital Structure On Financial Performance Of Manufacturing Firms In Asela Town By Using The Financial Statements Of Eight Selected Manufacturing Firms Over The Past Five Years Period From 2010 To 2014, The Data Source Was Secondary Data Which Was Collected From Asela Revenue And Customs Authority. Explanatory Research Design Was Used To Examine The Relationship Between The Variables. The Dependent Variable For The Study Was Profitability Which Is Measured By Return On Assets (Roa), And The Independent Variables Were Debt To Equity Ratio (Der), Total Debt Ratio (Tdr), Long Term Debt Ratio (Ltdr), And Short Term Debt Ratio (Stdr). Firm Size (Fs) And Firm Growth (Fg) Also Used As Control Variables. For The Sake Of Achieving The Objectives Of The Study, The Researcher Was Used Purposive Sampling Method. For Data Analysis Purpose, Descriptive Statistics Technique Was Employed To Describe The Relationship Between The Variables, Correlation Analysis Was Used To Determine The Degree Of Association Between Variables, Testing Of Assumption For Classical Linear Regression Model (Clrm) Were Made To Estimate The Accuracy Of The Data. Lastly, The Balanced Fixed Effect Panel Regression Model Was Used. The Result Of Regression Analysis Revealed That Debt To Equity Ratio Have Negative Significance Effect On Profitability, Total Debt Ratio Have Positive And Significant Effect On Profitability, Short-Term Debt Ratio Have Positive Significance Effect On Profitability, Long Term Debt Ratio Have Positive Insignificant Effect On Profitability, Firms Size Have Negative Insignificance Effect On Profitability And Firms Growth Also Have Negative Insignificance Impact On Profitability Of Selected Manufacturing Firms.