Impact of capital structure on the financial performance of selected list firms on the Ghana stock exchange

Abstract

The main objective of the study was to assess the impact of capital structure on the financial performance of listed firms in Ghana Stock Exchange. The researcher conducted a causal survey to collect data from companies listed on the Ghana Stock Exchange market in order to determine the current status of the subject under study with respect to one or more variables. The researcher chose to employ a select of listed Ghana Stock Exchange companies through a purposive sampling strategy. The researcher conducted a ratio analysis on the 2015 financial statements of the selected firms and afterwards carried out a correlation test to assess the relationship between the variables. For the purpose of this study, only profitability and gearing ratios were considered. The researcher found that, financial structure indeed affects the financial performance of firms listed at the GSE. There existed a strong relationship between financial structure (capital gearing and debt to equity) and profitability (ROCE, gross profit, net profit and asset turnover). The researcher hence recommended that, management and owners of corporations needed not focus on maintaining a specific leverage ratio but rather they should let the actual capital structure be dictated by business needs. However, they were urged not to load the business with more debt than it has the capacity to service as this would potentially lead to financial challenges that ultimately could lead to bankruptcy. Also, there was need for the firms listed on the Ghana Stock Exchange to have a strong capital structure which provides them strength to withstand financial crises and offers shareholders a better safety net in times of depressions.