Browsing by Author "Mutiso, Samuel Mwongela"

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    Capital Structure and Profitability of Companies Listed at the Nairobi Securities Exchange, Kenya
    (Kenyatta University, 2025-09) Mutiso, Samuel Mwongela
    The primary goal of companies is to maximize shareholders’ wealth, and effective management of capital structure is crucial in achieving this objective. However, declining profitability trends, as measured by Return on Assets (ROA), have raised concerns about how companies listed on the Nairobi Securities Exchange (NSE) utilize debt and equity financing. Grounded in the Modigliani and Miller Theorem and Pecking Order Theory, this study examined the effect of capital structure on the profitability of non-financial firms listed on the NSE. The independent variables included the components of capital structure: equity, term loans, mortgage bonds, and times interest earned ratio, while profitability, measured by ROA, served as the dependent variable. The study adopted a survey research design using secondary quantitative data from all 63 listed non-financial companies over the study period. Data were collected from publicly available financial statements and analyzed using descriptive statistics and inferential regression analysis with SPSS version 28. Findings indicated that the listed companies demonstrated positive profitability with an average ROA of 8.1%. Equity financing (56.8%) had a significant positive effect on ROA (β = 0.072, p < 0.000), while term loans (24.2%) negatively affected profitability (β = -0.093, p < 0.000). The times interest earned ratio (average 3.765) positively influenced performance (β = 0.007, p < 0.000), whereas mortgage bonds (10.6%) had a non-significant effect. Overall, capital structure explained 35.5% of profitability variation, highlighting the influence of other factors beyond financing decisions. The study concluded that prioritizing equity financing enhances profitability by reducing financial risk, while excessive reliance on term loans can impair performance. Maintaining strong interest coverage improves financial health, and mortgage bonds have a marginal impact. Recommendations include establishing optimal equity-to-debt ratios, prudently managing term loans below 24.2%, improving interest coverage ratios above 3.765, diversifying financing instruments, and conducting regular reviews of capital structure to adapt to market conditions.