The Effect of Capital Structure on The Financial Performance of Addis Ababa Large Food and Beverage Manufacturing Industry
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Date
2025-02-17
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AAU
Abstract
The effect of capital structure on firm value has been a contentious issue in corporate finance,
with inconsistent and inconclusive findings across various industries and countries. This study
aims to examine the effect of capital structure decisions on the financial performance of large
food and beverage manufacturing companies in Addis Ababa, Ethiopia. The primary objective is
to analyze the effect of debt ratio and long-term debt to equity ratio on profitability, as measured
by Return on Assets (ROA), while considering other variables such as firm size, liquidity, asset
tangibility, sales growth, age, and inflation rate. Using secondary panel data from the audited
financial statements of 12 large food and beverage companies for the period 2017-2022, the
study employs econometric analysis to investigate these relationships. The findings reveal that
capital structure, particularly higher leverage or debit ratio has a significant negative impact on
financial performance, with long-term debt to equity ratio also having a statistically significant
negative relationship with ROA .this is because of the excessive costs associated with debt
.additionally asset tangibility and age of firms having significant negative relationships with
ROA. In contrast, some variables, such as firm size and sales growth shows positive effects on
performance. Based on these results, the study recommends that financial managers in the food
and beverage sector carefully balance their debt and equity financing by reducing their debt to
optimize profitability. Additionally, it suggests that firms should consider the specific economic
and industry context when making capital structure decisions, as the effects can vary
significantly across different environments