The impact of capital structure on firms’ profitability: a case of two cement manufacturing companies listed on DSE

Capital structure has attracted deep discussion and scholarly attention across industries in the corporate finance literature over the past decades. In due regard, the subject has been given little attention by researchers in Tanzania. Capital structure decision is among decisions that management needs to be careful since different studies show that the same affects profitability level of the organization. Hence, proper care and attention must be observed when determining the optimal capital structure. This study investigated the impact of capital structure on firm’s profitability listed on the Dar es Salaam Stock Exchange. Two cement manufacturing firms listed on DSE were selected through purposive sampling. Secondary data were gathered from published financial statements for a period of six years from 2009 to 2014. Data were analyzed using multiple linear regressions with the help of Statistical Package for Social Science (SPSS) software program version 20. Results indicated that there is a significant positive relationship between long-term debt and firm’s profitability. Long-term debts affect significantly return on capital employed (ROCE), return on equity (ROE) and return on assets (ROA) with unstandardized coefficients of 5.643, 4.860 and 5.262 respectively. The results support that organization that use long-term debts as sources of financing will benefit more due to tax shield. Therefore, management of manufacturing firms will need to trade-off between tax advantage of debts and various related risks when determining the optimal capital structure. Also results indicated that profitability level of manufacturing firms is neither affected by equity capital nor by total liabilities.