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. © 2005, © Emerald Group Publishing Limited.