The Effect of Capital Structure on Financial Performance: Ethiopia’s Metal and Engineering Industry

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Addis Ababa University


In Ethiopia, recently there are few capital structure studies that focused on determining firm specific and macro economic factors responsible to affect capital structure decision; in these studies researchers include either profitability or performance of companies to understand whether it had an effect on capital structure selection but they ignored the reverse effect of capital structure on financial performance of companies. To understand this reverse effect this thesis analyzes the effects of capital structure and debt maturity choice on financial performance using audited financial statements collected from each 10 sampled companies of Ethiopia’s Metal and Engineering Industry for the time span of six years (2007 to 2012). The multivariate OLS regression result of the study indicates capital structure has a significant and positive effect on financial performance (measured by return on equity) of the Metal and Engineering Industry companies as it is measured by debt ratio; furthermore, short term debt ratio has significant whereas long term debt ratio has insignificant but both positive effect as the study examined if different level maturity of debt has a different effect on financial performance. Thus, the study concluded that data from Ethiopia’s metal and engineering industry companies support Trade- off theories and despite to their significances no different effect in direction on financial performance was found caused by levels of debt maturity. On the other hand, asset tangibility as a controllable variable was found to have a significant and negative whereas company size and asset turnover were not. Finally, the study recommended that companies in Metal and Engineering industry should employ more debt in to their capital structure; however, the industry companies should give a through consideration to determine the optimal point to which they exhaustively take the benefits of debt; otherwise they will be exposed to bankruptcy risk due to excessive utilization of debt



Metal and engineering industry