The Impact of Capital Structure onProfitability of Manufacturing Firms on the Ghana Stock Exchange: A Conceptual Analysis

Abstract

The concept of capital structure has raised considerable attention across many manufacturing sectors since the sector is influenced by many economic factors. There have been many efforts to comprehend the concept of capital structure using different theoretical perspectives.

The study is grounded on a literature review that aims to assess the influence of the choice of capitalon profitability by reviewing literature extensively on capital structure theories such as trade-off theory, pecking order theory, agency theory, Modigliani & Miller, and market timing theory.

To ensure a firm's profitability, firstly, the firm must be aware of its life cycle stage to determine the appropriate capital mix or structure required. Also, the company must develop a corporate financial strategy to determine the optimal mix of capital to maximize the market value of firms outstanding shares, which will lead to profitability

The researcher recommends that managers of manufacturing companies should not overuse the amount of leverage in their capital structure, but rather, they must first attempt to finance their projects through retained earnings and only resort to leverage as a last resort. Managers must strive to reach and maintain the appropriate capital structure level to maximize the firm's performance. The result from the study of literature shows that increases in short term debt and long-term debt affect the manufacturing companies' performance. The implication is that managers should make sure that they identify and maintain the optimal capital structure level to maximize the company's profit base.