The Impact of Capital Structure on Profitability of Nascent Small and Medium Enterprises in Ghana

The importance of small and medium enterprises cannot be overstated; however, most of them fail in their early stages. When small businesses are profitable, their staying power is enhanced. This paper investigates the relationship between capital structure and profitability of nascent small and medium enterprises in Ghana. The study samples 1106 SMEs that have been in operation for five years or less and are registered with the Ghana Enterprises Agency. Regression analysis is used to estimate functions that relate return on assets (ROA) and return on equity (ROE) to capital structure measures such as debt ratio, equity ratio, and debt to equity ratio. The findings show that the equity and debt to equity ratios have significant positive relationships with both profitability metrics. On the other hand, the debt ratio was found to have a negative relationship with profitability. The study suggests that nascent SMEs should use internal equity to be profitable and only use debt if it is used in conjunction with equity.