Influence of Capital Structure on Financial Performance of Manufacturing Companies In Ethiopia
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Date
2026-01-01
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Addis Ababa University
Abstract
This study focuses on how capital structure affect the financial performance of manufacturing firms in Ethiopia. The study applied explanatory research design with quantitative approach. It examines how various capital structure variable such as, total debt-to-total assets ratio (TDTA),
long-term debt-to-equity ratio (LTDTE), and short-term debt-to-equity ratio (STDTE) impact key performance indicators such as Return on Assets (ROA), Return on Equity (ROE), and Net Profit Margin (NPM). The study also considers firm size (SZ) as a control variable. It uses secondary
panel data from the annual audited financial statements of 10 (Ten) manufacturing companies in Ethiopia over the period of five years from 2020 to 2024 G.C. and non-probability purposive sampling method were used to select the samples. Most of the data were collected from Ministry
of Revenue Large Taxpayers Office. The study used multiple regression models to test the effect of capital structure on financial performance by applying Ordinary least square (OLS) regression and using SPSS software Version 23 for data analysis. The findings disclose that, total debt to total assets (TDTA) and long-term debt to equity (LTDTE), shows a statistically
significant negative effect on return on assets (ROA) and net profit margin (NPM). Conversely,short-term debt to equity (STDTE) shows a positive but statistically insignificant impact on ROA and NPM. Firm size (SZ) demonstrates a statistically significant negative effect on ROA but an
insignificant negative effect on NPM. Regarding return on equity (ROE), variables such as LTDTE, STDTE, and SZ have an insignificant negative impact, while TDTA shows a statistically significant positive effect. Therefore, the findings show that optimizing capital structure requires more understanding of how different types of debt influence various aspects of financial
performance, emphasizing the importance of strategic decision-making in financing choices.Based on these insights, the study recommended that financial managers within the manufacturing sector carefully manage their debt levels, aiming to reduce excessive leverage to enhance profitability.
Key word: - Capital structure, Financial Performance, Manufacturing companies, ROA, ROE,NPM, TDTA, TDTE, STDTE, Firm Size