Abstract
Well-performing industrial firms displaying good financial performance and financial sustainability are important contributors to economic growth, especially in the African context. With this in mind, it remains vital to explore ways in which the financial performance and financial sustainability of firms may be enhanced. Literature has suggested that capital structure may be an important consideration in this case. If this is the case, then firms could ensure that capital structure decisions made do not undermine financial performance and financial sustainability.
The objective of this study was to determine whether a relationship exists between capital structure and financial performance, and capital structure and financial sustainability. These relationships were studied for South African and Nigerian listed industrial firms for nine years, from 2014-2022. Capital structure was measured by the debt-equity ratio, whilst financial performance was measured using accounting measures, return on equity and return on assets as well as market-based measures, share price growth and Tobin’s Q. Financial sustainability was measured by the Altman Z-Score. Panel data analysis was utilised to perform the data analysis to achieve the research objectives. Capital structure was found to have a significantly negative relationship with financial performance as measured by return on equity, and a statistically insignificant relationship with the remaining measures of financial performance and financial sustainability. These findings indicate that capital structure decisions may be related to financial performance, depending on how financial performance is measured. These results could, therefore, provide information to decision-makers for selecting a suitable source of financing, namely between internal and external sources of financing.
Keywords: Capital structure, Financial performance, Financial sustainability, South Africa, Nigeria, Johannesburg Stock Exchange (JSE), Nigerian Exchange Limited (NGX), Panel data analysis.