The relationship between capital structure and profitability of companies listed on the Nairobi securities exchange

Abstract

This study examines the relationship between capital structure and profitability for non-financial firms listed on the NSE in Kenya. The objective of the study was to establish the relationship between capital structure and profitability of non- financial companies listed in the NSE from the year 2008 to 2012. The study used financial ratios such as, Return on Assets (ROA) as measures of firm performance. The study also used debt/equity ratios to analyse the relationship between capital structure and firms performance. Secondary data from Nairobi Securities Exchange hand book was collected for the period of 5years (2008-2012). It comprised of Audited financial statements. Data obtained was analysed using a statistical package for Social science (SPSS) and MS-excel.

The results of the study indicate that there exists a negative relationship between capital structure and financial performance of listed firms on the NSE in Kenya. The results obtained from the study indicate that the higher the debt ratio, the less the return on equity which therefore supports the need to increase more capital injection rather than borrowing, as the benefits of debt financing are less than its cost of funding.