Abstract
For any company to be profitable, it is essential for it to retain a competitive advantage which enables continuing prosperity. In many studies, capital structure has been widely used by academics as a determinant of profitability. Empirical evidence on work done to determine the relationship between capital structure and profitability has been inconclusive. Results obtained in these studies point to both positive and negative relationships between capital structure and profitability. The conflicting outcomes of these studies could be because of the context in which these studies have been conducted. To contribute likewise on capital structure, this study focuses on the construction industry in South Africa, where a research gap has been identified with regards to the effects or influence of capital structure on profitability. This study seeks to determine the impact of capital structure on profitability by examining the construction and building materials listed companies on the JSE Ltd for a nine-year period from 2007 to 2015. The main question investigated in this study is: Does capital structure affect the profitability of the construction and building materials listed companies in South Africa? This study utilises return on equity (ROE) and return on assets (ROA) to measure profitability (i.e., the dependent variables). The independent variables used are debt to equity ratio (D/E), short term debt ratio (STDR), long term debt ratio (LTDR), company size, and total debt ratio (TDR). This study utilises a quantitative methodology in exploring the relationship between capital structure and profitability of seventeen (17) construction and building materials listed companies. This study’s hypothesis is justified based on hypothetical references, which comprises the theories such as, pecking-order theory, trade-off theory and Modigliani and Miller. Several statistical models were used in this study, which includes random and fixed-effects models to establish the nexus between capital structure and profitability. The statistical analysis results show that using ROA and ROE as a measure for profitability produced the same results. (STDR) and (LTDR) have a significant negative relationship with profitability. These results suggest that an increase in debt will result in subsequent decrease in profitability in construction and building materials listed companies. Company size, on the other side, has a positive impact on profitability measured by ROA and ROE. These results support the pecking-order theory and, in part, the trade-off theory, implying that companies that use equity or internal financing achieve higher profitability as compared to companies that use debt. The results also show that (TDR), (DE) are positively related to construction company financial performance in South Africa. However, the association is not significant.
M.Com. (Financial Management)