This paper seeks to investigate the relationship between capital structure and profitability of listed firms on the Ghana Stock Exchange (GSE) during a five‐year period.
Regression analysis is used in the estimation of functions relating the return on equity (ROE) with measures of capital structure.
The results reveal a significantly positive relation between the ratio of short‐term debt to total assets and ROE. However, a negative relationship between the ratio of long‐term debt to total assets and ROE was found. With regard to the relationship between total debt and return rates, the results show a significantly positive association between the ratio of total debt to total assets and return on equity.
The research suggests that profitable firms depend more on debt as their main financing option. In the Ghanaian case, a high proportion (85 percent) of the debt is represented in short‐term debt.
