THE RELATIONSHIP BETWEEN CAPITAL STRUCTURE AND PROFITABILITY OF FIRMS LISTED AT THE NAIROBI SECURITITES EXCHANGE

Abstract

Purpose: The purpose of this study was to examine the relationship between capital structure and profitability of firms listed at the Nairobi Securities Exchange.

Methodology: The researchers used longitudinal research design, by making use of secondary quantitative data derived from the firms’ annual audited reports and information from Nairobi Securities Exchange handbooks.

Findings: It was found that the firm’s profitability (measured by return on capital employed) was significant and positively correlated with internal equity (r=0.601, p<.01).

Implications: The researchers concluded that non-financial firms listed in NSE are more reliant on equity financing than debt financing.

Value: Kenyan firms should use more internal equity to ascertain profitability as it does not involve costs of acquisition compared with external equity and debt finance.