The Effect of Capital Structure on the Financial Performance of Listed Pharmaceutical, Food and Beverage Companies on the Ghana Stock Exchange

Abstract

The study examined the effect of capital structure on the financial performance of pharmaceutical, food and beverage companies listed on the Ghana Stock Exchange from 2007 to 2016. The performance indicators included Return on Equity (ROE), Return on Asset (ROA), Return on Capital (ROC) and Earnings per Share (EPS) while capital structure proxies were Long term Debt to Capital Ratio and Short-Term Debt to Capital Ratio controlling for total asset. The study used panel data analysis as the method of analysis and found that Long-Term Debt to Capital Ratio negatively impacted all performance indicators while Short-Term Debt to Capital Ratio was insignificant on all performance indicators except ROA which was negative as well. In summary, the relationship between capital structure and performance proved negative. Further, the larger the size of the company, the higher its profitability. The study recommended that for policy purpose, Ghana Revenue Authority should accelerate the collection of corporate taxes as over 40% of the debt portfolio of sampled companies was tax in arrears. Also, the companies are advised to reduced debt and use more equity as well as increasing their total assets.