The Relationship Between Capital Structure and Profitability of Construction and Allied Companies Listed at the Nairobi Securities Exchange

Abstract

The objective of this research was to determine the effects of Capital structure on the profitability of the listed construction and allied companies in Kenya. Theoretically it is assumed that the value of a company depends upon the future operating income generated by its assets and it does not matter what capital structure a company uses to finance its operations. Multiple linear regression which included Return on equity as independent variable, total debt, short term debt and long term debt as dependent variables and size and growth as control variables. These variables were used to establish whether capital structure decisions affect the profitability of the listed construction and allied companies in Kenya. Secondary data was collected from 2003 to 2012 and analyzed with the aid of statistical tools. Descriptive study research design was used to determine the frequency of occurrence or the extent to which variables were related. The population used in this study was five construction and allied companies which are all listed in the NSE .The study used mainly secondary data from the NSE hand book, data relating to the research question was obtained from the audited financial statements of the respective companies. The correlation coefficient and coefficient of determination were used to test whether the expected values of a quantitative variable within several pre-defined groups differed from each other. The results obtained from the regression equations found out that there was significantly positive relationship between Total debt, Long term debt, Short term debt and profitability which implies that an increase in debt position is associated with an increase in profitability hence firm's performance, The study further found out that profitability increased with the control variables which were both size and sales growth From the findings outlined above, The study recommends that companies, should consider borrowing for funds and putting such funds to economical value so that they can consequently reap from such projects and increase their profits. Secondly the firm management should take in to account their size and growths as this also turned to be critical factors in determining profitability.