The Impact of the Capital Structure on the Performance of Companies – Evidence from Albania

Abstract

In this study, we investigate the relationship between the capital structure and the profitability of the firms. We focus our study unto 53 construction companies of Albania for years 2016 – 2019, and by calculating variables to measure both capital structure and profitability, we run multiple regression analysis. We use Return on Assets and Return on Entity to measure profitability and up to five different variables to measure the capital structure. We notice that the construction companies use mainly the short-term leverage to fund their activities. The regression results show that there is no significant impact of the capital structure on the profitability of the firm, whereas we notice a significant relationship between the capital structure and the Return on Entity of these firms. More specifically, our results show that the current liabilities to total assets ratio and the current liabilities to total liabilities ratio have a negative correlation with the Return on Assets of the entities. The non-current liabilities to total assets, current liabilities to total assets and total liabilities to total equity ratios have a positive relationship with the Return on Equity of these firms, with the last ratio having the biggest impact. These findings contribute to the existing literature on the relationship between capital structure and performance and give hints to more profitable ways of financing for these companies such as relying on long-term financing or finding alternative ways in regional capital stock markets.