The effect of capital structure choice on the profitability of selected JSE-listed General Retailers

Abstract: This study investigated the impact of capital structure choice on the profitability of selected JSE-listed General Retailers in South Africa from 2010 to 2018. Using panel regression analysis, this study examined the impact of capital structure on profitability of selected JSE listed General Retailers. The importance of managing capital structure has been stressed by corporate collapse due to mismanagement of debt, as seen in the global financial crisis of 2007-8. The final sample consisted of 11 JSE listed General Retailers. Return on equity (ROE) was used as a dependent variable to measure profitability. Short-term debt to total assets ratio (SDA), long-term debt to total assets ratio (LDA) and interest coverage ratio (ICR) were used as independent variables to represent capital structure. Firm size (LOGSIZE) was used as a control variable. The study used panel data regression with pooled, fixed effects and random effects. However, the final model selected according to the Hausman test was the fixed effects model. The outcomes of this study show a statistically insignificant but positive relationship between short-term debt to total assets ratio and profitability. A negative and statistically significant relationship was found between the ratio of long-term debt to total assets (LDA) and profitability (ROE). Furthermore, a negative and statistically insignificant relationship was found between the ratio of interest coverage ratio (ICR) and profitability (ROE). Firm size (LOGSIZE) had a negative and insignificant relationship with profitability (ROE). The study has shown that long-term debt has an inverse relationship with profitability. These outcomes are therefore contrary to the trade-off theory of capital structure which encourages companies to use more debt to fund the purchase of assets. This study has contributed to the existing literature on the impact of capital structure on the profitability of listed General Retailers since there are fewer studies conducted in this area in South Africa. The findings have important implications for policymakers, finance providers, entrepreneurs, and company managers alike.M.Com. (Finance