Sewale AbateAemiro Mengistu2026-03-052026-03-052026-02-02https://etd.aau.edu.et/handle/123456789/7837This study aims to examine the effect of capital structure decisions on the financial performance on small and medium enterprise in diary sector in Addis Ababa user. The primary objective is to analyze the effect of long-term debt to equity ratio on profitability, as measured by Return on Assets (ROA), while considering other variables such as firm size, asset size, sales growth, firm age, and inflation rate. Using secondary panel data from the audited financial statements of 14 small and medium enterprise in diary sector in Addis Ababa for the period 2015-2024, the study employs regression analysis using Fixed Effect model to investigate these relationships. The findings reveal that capital structure, particularly higher long-term debt to equity ratio also having a statistically significant and negative relationship with return on asset .this is because of the excessive costs associated with debt .additionally asset size and age of firms having statically significant and negative relationships with return on asset. 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 small and medium enterprise in diary 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. Keywords: Capital Structure, Financial Performance, Dairy Sector, Profitability, Debt ratioenThesis