Capital Structure and Profitability of Companies Listed at the Nairobi Securities Exchange, Kenya
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Date
2025-09
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Kenyatta University
Abstract
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.
Description
A Research Project Submitted to the School of Business, Economics and Tourism in Partial Fulfilment of the Requirements for the Award of the Degree of Master
of Business Adminstration (Finance Option) of Kenyatta University. September, 2025
supervisor
Francis Gitagia