Ruri, Joseph KinyuaOmagwa, Job2018-05-212018-05-2120182278-487X2319–7668http://ir-library.ku.ac.ke/handle/123456789/18409Research ArticleSmall and Medium Enterprises constitutes the backbone of many economies in the world since they create jobs and contribute positively to their respective economies which Kenya is not an exception. In Africa there are a few studies on the link between capital structure and SMEs financial performance. The few studies in record focuses on capital structure and profitability of quoted companies, capital structure and financial performance of errand services SMEs and international joint ventures. In addition, the effect of capital structure on financial performance of large firms have been examined by a number of studies with smaller firms attracting less attention. Very few if any studies have examined the effect of capital structure on financial performance of SMEs. Hence, inadequate finance knowledge and inconclusive literature thus the need for more empirical work. This warranted a further investigation hence the current study. The specific objectives of the study were: to establish the effects of equity capital, debt capital and Retained earnings on financial performance of SMEs. The study adopted descriptive design. The target population was 95 SMEs and by use of stratified random sampling technique a sample of 29 respondents was established. Descriptive analysis and multiple regression analysis were used in data analysis. Data was presented in tables graph and pie charts. Preliminary diagnostic tests were done before running the regression analysis. The study established that: Equity capital and Debt capital has a significant effect on financial performance of the SMEs studied due to a p-value of 0.021 and 0.020 respectively with the significance level being 0.05. However, retained earnings was found not to have a significant effect on financial performance of the SMEs studied since the p-value was 0.797. Among the three variables Equity capital had greatest proportion in terms of contribution towards capital structure due to its advantage to the firm. Debt capital was found to be more risky than others while retained earnings proved difficult to raise and maintain. The study therefore concludes that generally, capital structure has a collective significant effect on financial performance of SMEs in Embu County, Kenya.enLeverageCapital structureFinancial performanceDebt capitalEequity capitalArticle