The effect of capital structure on profitability: an empirical analysis of listed firms in Ghana

Abstract

Purpose: This paper seeks to investigate the relationship between capital structure and profitability of listed firms on the Ghana Stock Exchange (GSE) during a five‐year period.Design/methodology/approach: Regression analysis is used in the estimation of functions relating the return on equity (ROE) with measures of capital structure.Findings: The results reveal a significantly positive relation between the ratio of short‐term debt to total assets and ROE. However, a negative relationship between the ratio of long‐term debt to total assets and ROE was found. With regard to the relationship between total debt and return rates, the results show a significantly positive association between the ratio of total debt to total assets and return on equity.Originality/value: The research suggests that profitable firms depend more on debt as their main financing option. In the Ghanaian case, a high proportion (85 percent) of the debt is represented in short‐term debt.