A Study of the Impact of Capital Structure on Financial Performance

This report investigates the impact of capital structure on the financial performance of public listed financial institutions, specifically focusing on Jordanian firms. The study utilizes secondary data from sources like annual reports and the Jordan Stock Exchange website, incorporating a comprehensive literature review. Employing regression and descriptive analysis, the research examines the relationship between capital structure and various financial metrics, including operating profit, net profit, return on equity, return on assets, and return on capital employed. The findings reveal a significant impact of capital structure on operating and net profit, while the relationship with other return metrics appears less pronounced. The report delves into the determinants of capital structure, research methodology, data analysis, and concludes with recommendations. The research aims to identify the impact of capital structure on financial performance, exploring determinants, and assessing the relationship between capital structure and key financial indicators. The report also addresses research questions concerning capital structure determinants and its influence on profitability margins and return ratios. The study's significance lies in its potential to aid corporations in optimizing their capital structures, mitigating financial risks, and improving overall financial performance.

IMPACT OF CAPITAL STRUCTURE ON FINANCIAL
PERFORMANCE A STUDY OF PUBLIC LISTED
FINANCIAL INSTITUTION

ABSRTRACT
Research study is based on identification of the impact that capital structure have on the financial performance of the business firm. In
this regard secondary data is collected from varied sources especially annual report and Jordon stock exchange website. Literature
review is done in the report and it is identified operating and net profit heavily get affected by the capital structure. Apart from this
return on equity, asset and capitals employed also affected by the capital structure of the business firm. Regression analysis and
descriptive analysis tools are used to analyze the data that is related to the 10 finance companies of Jordon. On analysis of data it is
identified that operating and net profit is heavily affected by the capital structure. However, in case of return on asset, return on equity
and return on capital employed such kind of relationship is not observed. Thus, it is concluded on the basis of entire work that capital
structure have a very huge impact on the operating and net profit but it does not put any large impact on the return on asset, return on
equity and return on capital employed.

TABLE OF CONTENTS
CHAPTER 1: INTRODUCTION....................................................................................................5
1.1 Background of research.........................................................................................................5
1.2 Research aims and objectives................................................................................................6
1.3 Rationale of research.............................................................................................................6
1.4 Significance of research.........................................................................................................7
1.5 Structure of the report............................................................................................................7
CHAPTER 2: LITERATURE REVIEW.........................................................................................8
To identify the impact of capital structure on the net profit margin (NPM).............................10
To identify the impact of capital structure on the return of capital employed (ROCE)............12
To identify the impact of capital structure on the return on assets (ROA)................................13
To identify the impact of capital structure on the return on equity (ROE)................................14
CHAPTER 3: RESEARCH METHODOLOGY...........................................................................15
3.1 Research introduction and overview...................................................................................15
3.2 Research type.......................................................................................................................15
3.3 Research design...................................................................................................................15
3.4 Research approach...............................................................................................................16
3.5 Research philosophy............................................................................................................16
3.6 Data collection methods......................................................................................................17
3.7 Data analysis........................................................................................................................17
3.8 Validity and reliability.........................................................................................................17
3.9 Ethical considerations..........................................................................................................18

3.10 Limitation of study............................................................................................................18
CHAPTER 4: DATA ANALYSIS................................................................................................19
Net profit....................................................................................................................................19
Operating profit.........................................................................................................................20
ROCE.........................................................................................................................................22
ROA...........................................................................................................................................23
Return on equity........................................................................................................................25
Descriptive statistics..................................................................................................................26
CHAPTER 6: CONCLUSION......................................................................................................28
CHAPTER 7: RECOMMENDATION..........................................................................................30
REFERENCES..............................................................................................................................32

CHAPTER 1: INTRODUCTION
1.1 Background of research
Capital structure is the one of the most important concept related to finance that is used by the most of business firms in order to
evaluate their business performance. Capital structure is basically a set of liabilities that are currently in the business. All these
liabilities comes in two categories equity and liability. The proportion of both in the capital structure greatly affects the financial
performance of the business firm. Capital structure can be termed as a means that is usually used to finance business operations
(Pratheepkanth, 2011). It is the combination of debt and equity that are usually used to finance business operations. The way in which
business operations are finance have a significant importance for the managers. This is because the way of finance determine size of
overall finance cost of the business firm. In the current report detail study is carried out on the 10 financial institutions of Jordon and
impact that capital structure have on their financial performance. In this regard data related to the relevant firms will be gathered from
the books, magazines and journals. In the current research study an attempt is made to identify and understand the impact that capital
structure have on the financial performance of the business firm. Detailed literature review will also be done in respect to capital
structure and financial performance. It is common assumption among the people that in case if wrong debt equity mix is prepared by
the business firm then performance of the firm may severely be affected. Thus, it can be said that capital structure have due
importance for the business firms. It is very important to understand the reason due to which capital structure have a very high impact
on the financial performance. Finance cost of the business and liability burden depends on the capital structure (Kennon, 2015). If
there is a very high amount of debt in the capital structure then in that case burden of interest will be very high on the firm. Suppose
firm face loss in its business then in that case also it will have to pay interest to the creditors. So, loss in business and further payment
of huge amount of interest will make firm condition pathetic (Margaritis and Psillaki, 2010). Contrary to this, suppose there is high
proportion of equity in the debt in the capital structure then also to some extent financial performance will be negatively get affected.
This will happened because external entities as shareholder will influence firm decision making. Such kind of thing sometimes
severally affect the firm business performance. Thus, excessive proportion of debt or equity in the capital structure negatively affect

the business performance. Due to this reason it is very important to maintain balance in the capital structure. If there will be optimum
capital structure then burden of finance cost on the firm will be low and there will be high return on equity and asset in the business.
1.2 Research aims and objectives
The aim and objective of research are as follows.
Aim: To identify the impact of capital structure on the financial performance.
Objectives
To identify determinants of capital structure of the organization.
To identify the impact of capital structure on the gross profit margin (GPM)
To identify the impact of capital structure on the operating profit margin (OPM)
To identify the impact of capital structure on the net profit margin (NPM)
To identify the impact of capital structure on the return of capital employed (ROCE)
To identify the impact of capital structure on the return on assets (ROA)
To identify the impact of capital structure on the return on equity (ROE)
To assess the relationship between capital structure and financial Performance of banks in Jordan
To evaluate the impact of the capital structure on the financial performance of banks in Jordan
Research questions
What are the determinants of the capital structure of the business firm?
What is the impact capital structure have on the gross profit margin of the relevant firms?
What is the relationship between operating profit and capital structure of the business firm?
What is the relationship between net profit margin and capital structure?
What is the limit up to which capital structure affects ROCE?

What impact capital structure have on the ROA?
What influence capital structure have on return on equity?
What is the relationship between capital structure and financial Performance of banks in Jordan?
What impact capital structure have on the financial performance of banks in Jordan?
1.3 Rationale of research
Capital structure is the concept on which with passage of time period many research scholars write a lot because it have impact
on the firm performance. Capital structure is the factor that play an important role in determining the cost of capital for the business
firm and its burden on same (Onaolapo and Kajola, 2010). It is not clear to most of people that what capital structure have impact on
the firm business performance. Thus, it was necessary to conduct to research on the impact that capital structure have on the firm
financial performance. In order to obtain reliable results firm performance will be measured by using varied ratios like gross profit
margin, net profit margin, return on capital employed, return on assets and return on equity. Overall result on these ratios will help one
in deriving reliable results.
1.4 Significance of research
There is lots of significance of the current research study. Most of the corporations make a mistake in developing their capital
structure. Due to this reason burden of finance cost increased on the business firm. In case of downturn in economy severe impact of
imbalanced capital structure is observed on the firms. Current, research study will help readers in identifying and understanding the
impact of capital structures on the financial performance. Means that through review of the research report one will come to know
about the impact that different capital structures have on the financial performance of the business firms.
1.5 Research gap
In past time period most of researches are carried out on the impact that financial performance have on the capital structure of
the business firms. There were few studies that were on the impact that capital structure have on the financial performance of these
business firms. Their research studies does not produce accurate results because data of few firms was analyzed for small duration like

three years. Thus, it can be said that this was the huge research gap and it comes in existence because less and improper research was
carried out by researchers in earlier research. Due to this reason it is decided to conduct research on topic impact of capital structure
on the financial performance of the business firm.
1.6 Structure of the report Introduction- This is the preliminary part of the current research study under which main focus is on understanding the concept of
the capital structure and its impact on the financial performance. Rationale and significance of the research is also explained in the
report. Literature review- This is the second and one of the most important part of the current research study. In this section of the report
analysis of secondary data is done and on this basis impact that capital structure have on the firm’s financial performance is
identified. In this part of research study reliable and relevant research papers will be evaluated and in proper manner interpretation
of results of statistical tools will be done to identify the outcome of the previous research studies that were conducted on the
capital structure and its impact on the firm financial performance. Research methodology: Research methodology is another important part of report because under this detail explanation is given
about the way in which current research study is carried out. This section will be fragmented in different parts and detail
explanation about research approach and philosophy will be given in this part of report. Thus, it can be said that research
methodology section is very important component of this report. Data analysis: In this section analysis of data will be done. Obtained results will be presented with interpretation. In the data
analysis section according to research requirement tools and methods are applied on data for analysis purpose. Thus, it can be said
that overall result of research will be derived from this part of the report.
 Conclusion and Recommendations- It is the final part of the report and on the basis of obtained results conclusion is prepared and
recommendations are made at end of the research study.

CHAPTER 2: LITERATURE REVIEW
Determinants of the capital structure of an organization
According to Brigham and Ehrhardt, (2013) there are number of factors that play an important role in determining the firm
capital structure. Company current profitability is the one of the most important factor that heavily influence the capital structure of
the business firm. Usually, with increase in business profit debt proportion in capital structure also increased. This lead to increase in
proportion of debt relative to equity in the capital structure. Current liquidity and expected cash flow amount is another most
important determinant of the capital structure for the business firm. If there is expectation that cash inflow of high amount will takes
place in the business then debt amount increase at very slow rate in the capital structure or proportion of same get reduced. Thus, it
can be said that firm profitability and current liquidity and expected cash inflows are the determinants of the capital structure.
As per views of Ahmad Abdullah and Roslan, (2012) profit is not a single factor that play a lead role in determining capital
structure for the business firm. Managers have their own business expansion plans. If any firm is planning to expand its business on
large scale then it needs heavy amount of cash in its business. In such a situation business firms raise capital through issuing equity in
the primary market. Thus, expansion policy of the business firm is the one of the main determinant of the capital structure in the
business firm.
To evaluate the relationship and impact of capital structure on financial performance of the business firms.
According to Molly, Laveren and Deloof, (2010) there is a very close relationship between the capital structure and business
performance. This is because business performance is measured in terms of revenue and profit. It is well known fact that profit in the
business depends on the expenditure that are made by the firm in its business. Thus, if expenses are in control profit will goes up in the
business. Finance cost cover certain percentage of sales every year. If there is a balanced capital structure then burden of finance cost
on the business can be reduced and profit can be increased which ultimately lead to improvement in business performance. To
understand that impact of capital structure on the firm performance it is necessary to evaluate two conditions namely balanced and
imbalanced capital structure. If there is a balanced capital structure then it means that proportion of debt and equity is almost equal.

Hence, there is be less burden of dividend and interest on the business firm. There will be moderate amount of finance cost in the
business. Contrary to this, suppose capital structure is imbalanced then two sort of conditions may come in existence either there may
be high proportion of debt in the capital structure or percentage of equity may be high on same. In both cases capital structure affects
firm performance. This is because in case debt percentage is high firm will be liable to pay huge amount of interest to the creditors
even it face loss in its business. In such kind of situation loss faced by the firm will further increased and cash reserved will reduced in
the business. Hence, it can be said that such kind of imbalanced capital structure negatively affect the firm performance. On other
hand, if there is high proportion of equity in the capital structure then in that case also company may observe poor business
performance. This is because high proportion of equity in the capital structure lead to heavy amount of dividend payment to the
shareholders. Due to payment of high amount of dividend profit also get reduced. In this way, high portion of equity in the capital
structure negatively affects the firm performance. This, proved that imbalanced capital structure have negative impact on the business
firm.
Contrary to this Salim and Yadav, (2012) state that there is no relationship between capital structure and firm performance.
This is because to what extent firm will perform good or bad depends on the market conditions and firm business strategy. If market
conditions are suitable and strategy is appropriate then in that case in every condition firm earn profit in its business. In such kind of
situation capital structure does not matter. Thus, instead of giving due importance to the capital structure prime significance must be
given to business strategy and surrounding environment. Only by doing so any firm can improve its business performance overnight.
In views of Maditinos and et.al., (2011) any business firm must not give due importance to single factor. Managers must keep
eye on business environment, effectiveness of the firm strategy and capital structure. All these factors more or less affects the business
performance. Hence, significance of any of them cannot be undermined by the firm. In order to improve business performance
managers must focus on multiple factors and must act on all of them altogether. By doing so it can be ensured that company
performance in every condition will get improved. There must be proper plan which must be followed keep keen eye on new
developments that are happening in the business environment. Like monthly meeting can be conducted between the managers and

they can share each other opinion on changes that are happening in the business conditions. By doing so suitable solution of the
problem can be identified. Apart from this, while preparing business strategy rivals tactics can be evaluated and best one can be
developed for the business firm. This will ensure that firm will be able to deliver magnificent performance in its business. Moreover,
at same time to time capital structure can be evaluated by the business firm and it can easily decide whether debt or equity must be
used to finance business. Thus, by taking steps in respect to these three variables better decisions can be made by the business firm.
As per views of Kundakchya and Zulfakarova, (2014) there is no appropriate form of capital structure that can be followed by
the business firms. Means that it is not possible for the firms to maintain 50:50 ratio of debt and equity. This, is because every
business firm have specific sort of capital structure and it may be balanced or imbalanced in nature. While raising fund through any
source of finance firm consider number of factors but then also there is a probability of making wrong decisions. It is possible in
specific situation that raising a fund through both debt and equity is not appropriate for the business firm. There may be a situation
where there is a heavy amount of debt in the business due to which there is a heavy burden of finance cost on business. At same time,
there may be a situation where there is high amount of issued equity in the business and above certain level it is not possible to further
issue shares in primary market. In such kind of scenario any company have to choose least loss making option. Thus, always it is not
possible to maintain optimum capital structure in the business.
According to Berger and Bouwman, (2013) since inception of business main focus must be on maintaining balance in the
capital structure. If this will be done then it is to some extent possible to maintain balance among debt and equity in the business. If
same will be done then business firm can maintain its performance up to specific level. Thus, it is very important to follow best
strategy related to capital structure in the business at preliminary stage.
To identify the impact of capital structure on the gross profit margin (GPM)
According to Berger and Bouwman, (2013) capital structure have an impact on the gross profit margin of the business firm. Usually,
when any firm approach banks for obtaining finance, mentioned financial institution review current capital structure. If they identified
that there is already heavy amount of debt burden in the balance sheet and firm is not able to pay its debt amount on time then in that

case it receive less amount of debt in its business. This results in improper funding of the business operations and less amount of units
are produced and sold in the market. Due to this reason firm earn less amount of gross profit in its business. Thus, it can be said that
capital structure have a direct impact on the firm performance in terms of gross profit margin.
In the views of Margaritis and Psillaki (2010) one cannot surely say that capital structure have positive or negative impact on
the gross profit margin. This is because sales is affected by number of factors like demand and economic environment conditions.
Thus, it cannot be surely said by an individual that entirely due to capital structure gross profit margin positively or negatively get
affected. Thus, it is very important for the business managers to make sure that they do detailed evaluation and on that basis real
reason that is responsible for decline in sales is identified.
To identify the impact of capital structure on the operating profit margin (OPM)
According to Muzir, (2011) capital structure and operating profit margin are interlinked to each other. Thus, with change in the capital
structure operating profit margin also get changed. Capital structure lead to development of finance cost in the business. By this
finance cost amount of profit earned on business declined. Finance cost is included in the non-operating expenses and due to this
reason it does not have any impact on the operating expenses of the business firm. It can be said that finance cost have any impact on
the operating profit margin of the business firm.
As per views of Almajali, Alamro and Al-Soub, (2012) finance cost is the non-operating expenses because it is not related to
the production process or manufacturing activity of the business activity. Due to this reason finance cost is included in category of the
non-operating expenses. It can be said that there is impact of operating expenses on the business firm operating profit margin earning
capacity. Due to availability of less amount of finance firm produce less units and earn less profit in business. At same time operating
expenses increased in business. Due to this reason operating profit margin reduce in business due to imbalanced capital structure.
Thus, business firm must focus on its capital structure because it is affecting operating profit margin. Capital structure affects the
overall profitability of the business firm. This is because it generate finance cost in the business due to which profit get declined in the

business. It can be said that capital structure have impact on operating profit, it negatively affect the overall profitability of the
business firm.
Inoue and Lee, (2011) claims that business firms must try to developed balanced capital structure. This is because by doing so
finance cost can be minimized by the firm in the business. Fifty proportion can be given to debt in the capital structure and fifty
percentage share can be given to equity in the capital structure. By doing so balance can be maintained in the capital structure and
finance cost is kept in control. Thus, it can be said that capital structure have due importance for the business firms.
To identify the impact of capital structure on the net profit margin (NPM)
Andrews, (2010) claims that capital structure have a very high impact on the net profit of the business firm. This is because
finance cost is included in the income statement as non-operating expenses. Net profit is computed by subtracting non-operating
expenses from the gross profit margin. Thus, due to inclusion of finance cost net profit amount in the business get reduced. There are
the two most important elements of the finance cost namely interest and dividend. In case higher amount of loan is taken in the
business burden of interest increased in the business. On other hand, if any firm further issue shares in the market then in that case
dividend of higher amount is recorded in the income statement. In both cases net profit get declined.
According to Taani, (2014) most of business firms find themselves unable to maintain balance in the capital structure. This is
because in order to maintain 50:50 ratio of debt and equity any firm cannot issue shares every year through FPO or further public
offer. Moreover, issue of shares lead to reduction in power of existing Directors. Due to this reason any firm frequently cannot issue
shares in the market. Instead of this, company in single time can raise huge amount of fund through equity and rest of time it can raise
amount through debt source of finance. By doing so imbalanced capital structure can be made balanced.
As per views of Ahangar, (2011) company can also choose the option of share repurchase in order to reduce finance cost in the
business. Under share repurchase program company repurchase or buy back shares from the shareholders. In return capital amount is
paid back to the relevant entity. By doing so business firm is in position from where it can reduce portion of dividend in the finance
cost. It can be said that due to buy back of Share Company liability to pay dividend to the shareholders comes to end. Due to this

reason finance cost get reduced in the business and net profit margin get increased. Thus, it can be said that capital structure heavily
affect the net profit margin that is earned by the firm in the business.
According to Memon, Bhutto and Abbas, (2012) share repurchase cannot be done every time by the firm in its business. There are
some conditions on satisfaction of which most of times firms make use of relevant option. Shares are buy back from the investors
when company find out that its shares are undervalued. There are many firm who buy back shares because they think that it is right
time and there is a requirement to reduce outstanding shares in the business. There are multiple benefits of share repurchase schemes.
If in specific case there are huge number of outstanding shares in the business then in that case low earning per share (EPS) and return
on equity is observed. Moreover, investors receive less amount of dividend per share. If shares will be repurchased then in that case
there will be less number of shares that will be hold by the investors. Thus, there will be high amount of dividend per share, earning
per share and return on equity in the business. So, investors wealth increased with shares repurchase. In terms of finance cost there
may be two scenario of share repurchase, either finance cost in terms of dividend may increase or decrease. If dividend on each unit
hold will be same as given to the shareholders before share repurchase then in that case finance cost burden will reduce on firm which
lead to increase in net profit margin of the business. There may be a situation in which firm may declare higher amount of dividend on
each unit hold by the shareholders. If same happened then burden on dividend will increased which lead to decline in net profit margin
in the business. There is a third situation which can also come in existence. Under this firm will not declare any amount of dividend
for the shareholders. In such kind of scenario there will be no burden of dividend as finance cost on the business firm. Thus, it can be
said that capital structure and change in same affects the net profit margin of the business firm.
To identify the impact of capital structure on the return of capital employed (ROCE)
According to Welch, (2011) return on capital employed is the one of the most important tool that is used to evaluate the business
performance. Return on capital employed refers to the percentage return that is obtained on the capital amount that is invested in the
business. If there is higher value of return on capital employed then it is assumed that firm is earning good amount of return on the
invested capital. Contrary to this, if low return on capital employed is observed in case of business firm then it means that firm is

earning low amount of percentage return on specific amount. Thus, return on capital employed will be low in the business. There is a
very close connection between capital structure and return on capital employed. This is because for computing return on capital
employed amount of net profit is taken in to consideration. While computing net profit all sort of non-operating expenses are taken in
to account. Finance cost is one of them. If there is a high amount of debt in the capital structure relative to equity then in that case
there will be high amount of interest amount in the income statement. Higher will be value of interest profit of the firm will decline.
Lower will be net profit return then percentage of capital employed will be less. Hence, it can be said that capital structure heavily put
an impact on the return on capital employed.
As per views of Mazzi, (2011) any firm cannot make an adjustment in its interest payment liability unless its overall value is
not paid to the creditors. But there is an option in case of dividend. As it is not necessary to pay dividend to the shareholders in each
and every financial year. Thus, by not paying dividend to the shareholders any company can reduce burden of finance cost in its
business and can increase return on capital employed in the business. However, with passage of time period it is necessary to reduce
amount of debt in the business. By doing so cost of finance can be reduced for the upcoming time period and better return can be
earned on the invested capital.
As per views of Carter and et.al., (2010) nonpayment of dividend is the best option that firm is having in its business. It is not
necessary for the firm to pay dividend amount in each and every financial year. Moreover, no one can question for nonpayment of
dividend to the shareholders. However, in annual general meeting Directors have to put forth the proposal for nonpayment of dividend
before shareholders. Moreover, they have to explain the reason due to which dividend is not paid to shareholders. Reason may by low
profit in the business or requirement of making huge investment in the business. Thus, by not paying dividend amount one can reduce
burden of finance cost on the business and in this way return on capital employed can be increased in the business.
To identify the impact of capital structure on the return on assets (ROA)
According to Chowdhury and Chowdhury, (2010) return on asset is the one of the most important ratio that is used by the
managers to evaluate business performance in terms of extent to which best use of asset is made in the business. Higher value of return

on asset reflects that to large extent asset is efficiently used by the firm in its business. On other hand, low value of return on asset is
indicating that asset is not used to efficiently by the company. Capital structure affects the return on assets because in the relevant ratio
net profit is compared with assets. As it is well known fact that capital structure have a huge impact on the firm profitability. It must
be noted that cost of equity is higher than cost of debt. Thus, if in the capital structure proportion of equity will increased the cost of
equity will also enhanced. There are many sort of expenditures that are made by the business firms in respect of issue of equity in the
primary market. Preliminary expenses are made on launch of IPO or FPO. Moreover, amount is paid to the investment banker for
equity valuation and other services. At end of the year dividend is paid to the shareholders. Thus, all these things together constitute a
very huge amount of cost of equity. Due to this reason profit of the firm substantially reduced in the business. This lead to less return
on asset in the business. Thus, it can be said that capital structure affects the return on assets.
As per views of Xin, W.Z., (2014) merely on the ground of less net profit it must not be assumed that inefficient use of asset is
made in the business. This is because net profit of the firm reduced due to heavy amount of finance cost that is incurred in the
business. Finance cost have nothing to do with usage of asset. Thus, if due to finance cost net profit heavily get declined then it must
not be assumed that efficient use of asset is not made in the business.
To identify the impact of capital structure on the return on equity (ROE)
Cheng and et.al., (2010) claims that return on equity is the one of the most important measure that is used to evaluate the firm
performance. Return on equity basically revealed the return that is generated on overall equity. Higher is the return on equity it is
assumed that firm give good performance in its business. Capital structure heavily affect the return on equity. This is because capital
structure is the combination of debt and equity. Higher will be proportion of equity in the firm capital structure less will be return on
equity. Moreover, if there will be less amount of equity in the capital structure then in that case there will be high percentage return on
equity. Thus, it can be said that capital structure affects the return on equity.

CONCEPTUAL FRAMEWORK
Impact of capital structure
on financial performance
Due to imbalanced
capital structure less
finance is available and
due to this reason less
sales is made in the
business. Hence, gross
profit decline. Operating
expenses and non-
operating expenses
increase in firm. Due to
this reason capital
structure affect OPM
and NPM.
Determinants of
capital structure
Debt and equity
Impact of capital
structure on gross
profit
Less availability of
finance due to high
debt in capital
structure. This lead to
decline in sales and
gross profit margin
Capital structure and
operating profit as well
as net profit
Profit, liquidity and
cash flows
Business expansion
plan
Capital structure and
ROA, ROE and
ROCE
Capital structure
generate finance
cost in business.
Finance cost is
subtracted from
operating profit and
due to this reason
net profit get
reduced in business.
Net profit is used to
compute all above
given ratios. Thus,
decline in net profit
affect ROA, ROCE
and ROE.
Increase
in
proportio
n of debt
in capital
structure
reduce
values of
measures
of
financial
performa
nce.

CHAPTER 3: RESEARCH METHODOLOGY
3.1 Research introduction and overview
Capital structure is the area of finance on which many intellectual people write lots of things with passage of time period.
Capital structure put a huge impact on the finance cost of the business firm. Thus, it is very important to maintain strong control on the
finance cost. In the current research study impact of capital structure on the firm performance is analyzed. In this regard number of
factors are taken in to consideration like firms capital structure and measures of firm performance like gross profit, net profit, return
on assets and return on equity. The interrelationship of capital structure with the performance measures is identified by using
regression analysis tools. On the basis of results findings and conclusion section are prepared in the report.
3.2 Research type
There are two type of research that is conducted by an individual primary and secondary research. There is a difference between
primary and secondary research. This is because primary research indicate the data that is collected by one by making own labors
(Riedl, Davis and Hevner, 2014). Contrary to this, secondary data is one which was already collected by other person and printed in
the report or any other source of information. In the current research study only secondary data is gathered. This is because normal
people cannot accurately estimate the impact of capital structure on the firm performance. Hence, primary data is not collected in the
current research study and only secondary data is gathered as well as analyzed in the research report. Secondary data cover the
information related to the 11 business firms of Jordan. Data is collected for five years and same is analyzed by using regression
analysis method. Results are presented and interpretation of same is made in the report to derive specific result.
3.3 Research design
Research design refers to the different methods that are used to collect data in respect to research topic. There are different
research design methods like exploratory, descriptive and experimental (Boone and Boone, 2012). All these research design methods

encompass different techniques of data collection. It depends on the researcher that which research design it feels appropriate for the
relevant research. In the current research study exploratory research design will be used. This is because same is used when one does
not know anything about research topic and wants to know about same from starting point in detail. Thus, first of all secondary data
related to the company will be collected and analyzed by using regression analysis method (Choy, 2014). Apart from this, other
research design method that is commonly used by the researcher is descriptive research design. Mentioned one is used when one to
some extent know about research topic but further intends to increase knowledge about same. There is a need to developed broad
understanding about research topic and due to this reason exploratory research design is used in the present research.
3.4 Research sampling
In the current research sample of 11 banks is taken that are listed in the Jordon stock exchange. Five year financial statements of
these banks are download from Jordon stock exchange and same are analyzed by using regression analysis method. It can be said that
appropriate sample size is taken in the current research study and reliable results will be obtained from same.
3.5 Research approach
Research approach refers to the specific way that is followed to conduct current research study. There are two research approach
namely inductive and deductive approach. Both of them are totally different from each other. In the inductive approach first step is to
do observation of the variables on which one wants to carry out research study. In the second stage hypothesis is prepared which will
be tested to formulate a theory. Thereafter, data is collected by the researcher. One need to ensure that right sort of data is gathered
and it suit to the research requirements. In the third stage pattern in which values are moving is identified. Pattern revealed the positive
or negative change that takes place in the variable (Stevenson, 2010). After identification of pattern data is analyzed using statistical
tools and relationship among variables is identified. Apart from this other research approach that is commonly used in the research are
deductive approach.
In the deductive approach theory that is linked to the current study is find out and then by formulating hypothesis same is tested.
Relevant facts and figures that are related to the research study are gathered from reliable sources. Further, data that is collected is

analyzed by using statistics or nonscientific methods (Roberts, 2013). At end on the basis of analysis of data hypothesis is accepted or
rejected. In the current research study inductive approach will be used because quantitative data is analyzed in the research study,
3.6 Research philosophy
In the research study there are two sort of philosophy namely interpretivism and positivism. Interpretivism philosophy refers to
the data collection that is done from the books, journals and magazines. Whereas, positivism philosophy indicate the scientific data
that is collected by an individual by using specific methods and tools. Thus, it can be said that interpretivism and positivism
philosophy totally different from each other. In the current research study interpretivism philosophy is used because scientific data is
not collected in the present research study (Arain. and et.al., 2010). From the annual reports and websites company information will be
gathered. Moreover, data for literature review is taken from the books, journals and magazines.
3.7 Data collection methods
There are number of the data collection methods that are available to the researchers. It depends on the individual that which
source it feel is best for data collection. One can collect primary data by giving questionnaire to the sample units. Apart from this,
observation of sample units or variables can also be done to collect data for the report. Secondary data can be gathered from varied
sources like books and journals etc (Thabane and et.al., 2010). While collecting data from any source of information it must be
ensured that source is reliable and only relevant and truth information is taken from different information source. Thus, it can be said
that there are different methods of data collection and each one cannot be used in every condition in the research study.
3.8 Data analysis
There are two sort of data analysis approaches like thematic and statistical. Thematic approach is one that is used when on
collect data from respondents and wants to identify the sort of response that is given by the different type of respondents. On other
hand, there is another data that is related to the firm and already printed on newspaper. Such kind of data is analyzed by using
statistical tools. In order to analyze the data regression analysis method will be used in the present research study ( Panas. and
Pantouvakis, 2010). This is because this model reflect the variation that comes in the dependent variable due to change in independent

variables. In percentage term this relationship can be identified. Moreover, significant difference among mean values of the variables
is identified by using regression analysis method
3.9 Validity and reliability
Validity and reliability of the one of the main characteristics of good research. For the researcher it is necessary to ensure that
collected data is good and valid for the current research study. There must be a high level of reliability of the collected data in the
research. Thus, only those data that are highly reliable must be collected by an individual for the research (Bender, 2011). Before
taking any specific data from any source evaluation of same must be done by the researcher in order to ensure that only required and
reliable is taken in to consideration for conducting current research.
3.10 Ethical considerations
While conducting research study there are some ethics that one must followed. Like it is ethical responsibility of an individual to
ensure that only reliable information is taken in consideration. It is one of the most important ethic that researcher must follows in the
present research. This is because if data will be irrelevant or wrong the best results cannot be obtained. It is also ethical responsibility
of researcher to ensure that all information that is related to the respondents is secret and inaccessible to any person ( du Plessis and
Van Niekerk, 2014). Along with this, one needs to ensure that entire research work is carried down in appropriate manner and right
results are obtained. This is because when one conduct a researcher it consider previous studies and their results. If current research
will produce wrong results and same will be followed by any person to carry out research work then same may conduct study in
wrong direction.
3.11 Limitation of study
There are few limitations of the current research work. As few literatures are taken in to consideration to prepare literature review
section of the report (Cozby and Bates, 2015). However, it is ensured that literature that is taken in to consideration highly reliable.
Thus, it can be said that literature review section is prepared in appropriate manner in the report.

CHAPTER 4: DATA ANALYSIS
In order to analyze the data set in a systematic manner regression analysis method is used. By using this tool the significant different
that exists between two variables is identified. Results are explained below.
Gross profit ratio
H0: There is no significant mean difference between capital structure and gross profit of the firms.
H1: There is significant mean difference between capital structure and gross profit of the firms.
Regression Statistics
Multiple R 0.380423
R Square 0.144722
Adjusted R
Square -0.14037
Standard Error 0.234231
Observations 5
ANOVA
df SS MS F
Significance
F
Regression 1 0.027851 0.027851 0.507631 0.527581
Residual 3 0.164592 0.054864
Total 4 0.192442
Coefficients
Standard
Error t Stat P-value Lower 95%
Upper
95%
Lower
95.0%
Upper
95.0%
Intercept 7.125102 1.207293 5.901718 0.009713 3.282957 10.96725 3.282957 10.96725
X Variable 1 0.015281 0.021447 0.712482 0.527581 -0.05297 0.083535 -0.05297 0.083535
Interpretation

It can be seen from the table that multiple R square value is 0.38 which means that there is moderate relationship among the
debt equity ratio and gross profit earned in the business. R square stood at 0.144 which means that 14% change comes in the
dependent variable due to change in the independent variable. Adjusted R square is -0.14 which means that due to addition of any new
variable -14% change can be observed in the result. Value of level of significance is 0.52>0.05 which means that there is no
significant mean difference among the dependent and independent variable. Intercept value stood at 7.12 and coefficient value is -
0.015. It can be said that there is low or moderate relationship between gross profit and capital structure. It is concluded that with
change in capital structure big variation does not come in the gross profit of the business firm.
Net profit
H0: There is no significant mean difference between capital structure and net profit of the firms.
H1: There is significant mean difference between capital structure and net profit of the firms.
Regression Statistics
Multiple R 0.327138
R Square 0.107019
Adjusted R
Square -0.19064
Standard
Error 0.376896
Observations 5
ANOVA
df SS MS F
Significance
F
Regression 1 0.051072 0.051072 0.359535 0.591028
Residual 3 0.426153 0.142051
Total 4 0.477225
Coefficients Standard t Stat P-value Lower 95% Upper Lower Upper

Error 95% 95.0% 95.0%
Intercept 3.324241 1.942635 1.711202 0.185568 -2.85809 9.506571
-
2.85809 9.506571
X Variable 1 -0.02069 0.03451 -0.59961 0.591028 -0.13052 0.089134
-
0.13052 0.089134
Interpretation
In the table given above two variables are taken in to consideration namely capital structure and measurement of financial
performance. Capital structure is computed by using debt and equity ratio. Values of debt and equity is taken from the annual report. It
can be seen from the table that value of multiple R is 0.32. Multiple R is the important part of the regression model as it reflects the
relationship that exists among the two variables. It can be seen from the table that capital structure and Net profit are highly correlated
to each other. Correlation value always remain in range of -1 to +1. If correlation value is negative then it means that there is negative
relationship among the variables. Means that if one variable value is increasing then same of other one is reducing. On other hand, if
there is a positive value of correlation then it means that both variables are positively associated with each other. This means that if
value of one variable will increase then same of other one will also enhance. In the current case correlation value is 0.54 which is
almost not nearby to 1 and it means that capital structure and financial performance in terms of net profit are moderately correlated to
each other. Means that with change in the capital structure to medium extent variation comes in the net profit of the business firm.
Value of R square is 0.10 which means that with change in independent variable which is capital structure 10% changes comes in the
net profit of the business firm. Thus, it can be said that R indicate the variation that may come in the dependent variable due to change
in the independent variable. Value of adjusted R square is -0.19 which means that if any new variable will be added to the model then
in that -0.19% change may come in the values generated by the model. Adjusted R square only reflect the alteration that may take
place in the model if any variable is added in same. Value of level of significance is 0.59>0.05 which means that there is no significant
mean difference among the values of the dependent and independent variable. It can be said that if capital structure of the firm will get
changed then in that case big difference will be observed in the values of the dependent variable which is net profit. It can be said that

there is no significant mean difference in values of the independent and dependent variable. Value of intercept is 3.32 which means
that in case value of all independent variables will be zero on average basis of sum of debt equity ratios of 11 financial institution of
Jordon will be 3.32. Value of coefficient is -0.02 which means that with small positive change in the capital structure financial
performance will be decrease by -0.02 points. Thus, it can be said that change in capital structure and firm profitability in terms of
profit to minor extent is positively correlated to each other.
Operating profit
H0: There is no significant mean difference between capital structure and operating profit of the firms.
H1: There is significant mean difference between capital structure and operating profit of the firms.
Regression Statistics
Multiple R 0.823201
R Square 0.67766
Adjusted R
Square 0.570213
Standard
Error 0.197403
Observations 5
ANOVA
df SS MS F
Significance
F
Regression 1 0.245769 0.245769 6.306929 0.086834
Residual 3 0.116904 0.038968
Total 4 0.362673
Coefficients
Standard
Error t Stat P-value Lower 95%
Upper
95%
Lower
95.0%
Upper
95.0%
Intercept 0.530427 1.017474 0.521318 0.638184 -2.70763 3.768484
-
2.70763 3.768484

X Variable 1 0.045393 0.018075 2.51136 0.086834 -0.01213 0.102915
-
0.01213 0.102915
Interpretation
In this model of regression also two variables are taken in to account out of which one is independent and other one is
dependent. Operating profit variable is dependent and capital structure is independent. An attempt is made to identify the relationship
that exists between both variables. Table that is given above revealed that value of multiple R is 0.82 which reflects that there is a
strong and positive relationship among the dependent and independent variables. There is a high degree of proximity of correlation
value with the upper level of correlation value. Thus, it can be said that financial performance and capital structure are highly
associated with each other. R square value is 0.67 which means that with alteration in value of the capital structure 67% variation
comes in the dependent variable which is operating profit. It can be said that operating profit is highly affected by the capital structure
of the business firm. Thus, it can be assumed that if negative change happened in the capital structure then in that case profitability of
the business firm may heavily get affected. Adjusted R square value is 0.57 which means that with addition of one variable in the
model 51% change may come in the profitability of the business firm. Level of significant difference value is 0.08 which is higher
than alpha value 0.05 which means that there is no significant difference between the mean value of the dependent and independent
variable. This means that with small change in the independent variable big variation does not comes in the dependent variable.
However, it must be noted that in case of net profit there was level of significant equivalent to the 0.59 and in the present case value of
level of significance is 0.08. Intercept value is 0.53 which indicate that in case value of the independent variable is zero value of
dependent variable will atleast stood at 0.53. Coefficient value is slightly negative which is 0.04 and on this basis it can be said that
operating profit is only get changed by 0.04 points with small variation in the independent variable. Coefficient value of the operating
and net profit can be compared with each other. Coefficient value in case of net profit is -0.02 and in case of operating profit value of
same is 0.04. This means that there is no big difference in the impact that capital structure may have on the measures of financial

performance. On the basis of overall discussion it can be said that operating profit is affected by the capital structure but there is no
significant mean difference between rate of change in both dependent and independent variables.
ROCE
H0: There is no significant mean difference between capital structure and return on capital employed of the firms.
H1: There is significant mean difference between capital structure and return on capital employed of the firms.
Regression Statistics
Multiple R 0.877543
R Square 0.770081
Adjusted R
Square 0.693441
Standard
Error 0.086219
Observations 5
ANOVA
df SS MS F
Significance
F
Regression 1 0.074694 0.074694 10.04807 0.050486
Residual 3 0.022301 0.007434
Total 4 0.096995
Coefficients
Standard
Error t Stat P-value Lower 95%
Upper
95%
Lower
95.0%
Upper
95.0%
Intercept -0.51103 0.444396 -1.14994 0.333523 -1.92529 0.903238
-
1.92529 0.903238
X Variable 1 0.025025 0.007895 3.169869 0.050486 -9.9E-05 0.050148
-9.9E-
05 0.050148

Interpretation
In the current report the variables on which study undertaken are return on capital employed (ROCE) and capital structure
which is reflected by the debt and equity ratio. Return on capital employed is the one of the most important ratio because it reflect the
return that can be earned on the invested amount. Correlation value is very high which means that there is a very strong relationship
among the dependent and independent variable. Correlation value is only 0.87 which is close to one and it can be said that both capital
structure and measures of performance which are return on capital employed are positively related to each other. Return on capital
employed basically reflect the return that one can earn on the capital that is employed or invested in the business. Value of correlation
is indicating that there is strong and positive relationship between return that is earned on the invested capital and the capital structure.
R square value is 0.77 which means that with change in the independent variable which is capital structure 77% variation comes in the
dependent variable which is return on capital employed. This means that return that is earned by the firms on the employed capital is
affected by the capital structure. It can be said that if capital structure will be restructured than in that case return that is earned on the
employed capital will also get changed but by medium percentage. Adjusted R square value is 0.69 which reflects that with addition of
the variable in the model percentage impact on return on capital employed will be 69%. Level of significance is 0.05 which is equal to
value of alpha and this fact reflect that there is significant difference in the mean value of the both dependent and independent
variable. It can be said that rate of change of dependent variable is higher than rate of change that happened in the independent
variable. Intercept reflects the mean value of the dependent variable when value of the independent variable is zero. It can be said that
value of the dependent variable is -0.511 when value of independent one will be zero. Coefficient value is only 0.02 which indicate
that there is a negligible relationship among the dependent and independent variable. It can be said that return on capital employed is
affected by the capital structure of the business. It is observed that results are revealing that return on capital employed is affected by
the independent variable in terms of rate of change in mean value.
ROA
H0: There is no significant mean difference between capital structure and return on assets of the firms.

H1: There is significant mean difference between capital structure and return on assets of the firms.
Regression Statistics
Multiple R 0.844464
R Square 0.713119
Adjusted R
Square 0.617493
Standard
Error 0.007036
Observations 5
ANOVA
df SS MS F
Significance
F
Regression 1 0.000369 0.000369 7.457312 0.071892
Residual 3 0.000149 4.95E-05
Total 4 0.000518
Coefficients
Standard
Error t Stat P-value Lower 95%
Upper
95%
Lower
95.0%
Upper
95.0%
Intercept 0.010822 0.036265 0.298407 0.784868 -0.10459 0.126234
-
0.10459 0.126234
X Variable 1 0.001759 0.000644 2.730808 0.071892 -0.00029 0.00381
-
0.00029 0.00381
Interpretation
In the table that is given above two variables are taken in to consideration namely debt equity ratio that is already taken as
independent variables in above models. Other variable that is taken in to consideration is return on asset. Regression model is applied
on the data in order to explore relationship among these two variables. It is identified that there is appositive relationship among the
dependent and independent variable. From the above model it can be seen that correlation value is 0.84. It can be said that there is

high relationship among the variables. Means that with change in the capital structure high variation comes in the firm return on asset.
R square value is 0.71 which means that with change in the independent variable 71% comes in the dependent variable. This again
reflects that there is high relationship between the capital structure and the return on assets. Adjusted R square value is 0.61 which
reflects that with addition of new variable in the model impact of capital structure on the return on asset will be low. Level of
significance is 0.07<0.05 which means that there is no significant mean difference between mean values of the variables. It can be said
that if capital structure get changes then return on asset will not change by big percentage. Value of intercept is 0.010 which means
that when value of the independent variable will be zero then in that case dependent variable value will be 0.010. Coefficient value is
which 0.001 is slightly positive. It can be said that with change in the independent variable dependent variable value may only change
by 0.001 points which is negligible impact on same. Return on asset basically refers to the return that a company earned on the asset
that it have in its own business. Higher return on asset reflects that firm is making best use of assets in its business. Moreover, if return
on asset is low then in that case it is assumed that less amount of return is earned on the owned asset and same is not used in the best
way in order to generate return in the business. Research results are clearly reflecting that capital structure does not put a very high
impact on the return on asset.
Return on equity
H0: There is no significant mean difference between capital structure and return on equity of the firms.
H1: There is significant mean difference between capital structure and return on equity of the firms.
Regression Statistics
Multiple R 0.474365
R Square 0.225022
Adjusted R
Square -0.0333
Standard
Error 0.088988

Observations 5
ANOVA
df SS MS F
Significance
F
Regression 1 0.006898 0.006898 0.871077 0.419505
Residual 3 0.023757 0.007919
Total 4 0.030655
Coefficients
Standard
Error t Stat P-value Lower 95%
Upper
95%
Lower
95.0%
Upper
95.0%
Intercept 1.407658 0.458672 3.068986 0.054606 -0.05204 2.867357
-
0.05204 2.867357
X Variable 1 -0.0076 0.008148 -0.93331 0.419505 -0.03354 0.018326
-
0.03354 0.018326
Interpretation
It can be seen from the table that value of multiple R is 0.47 which means that there is positive relationship between the
dependent and independent variable. It can be said that the rate by which capital structure get changed at low rate return on equity will
be altered. It can be observed that value of R square is 0.22 which reflects that with change in the firm capital structure return on
equity to the shareholders will get change only by 22% which is less percentage change. It can be said that return on equity to
shareholders is less affected by the capital structure. Level of significance is 0.41>0.05 which means that there is no significant
difference between the mean values of the variables. It can be said that rate of change in equity is not much high or lower in
comparison to rate at which capital structure of the business firms is changing during five year time period. Intercept value is only
1.40 which as mentioned in above models is reflecting that in case there will be zero value of the independent variables dependent
variable value will be -0.007. Value of coefficient is only -0.007 which reflects that with change in independent variable which capital
structure slightly negative variation is may be observed in dependent variable which is return on equity. Thus, it can be said that there

is no significant mean difference between mean value of the dependent and independent variable and both are almost changing at
same rate.
Descriptive statistics
Debt equity
ratio
Operating profit
ratio Net profit ratio
Mean 56.07954106 Mean 3.076035 Mean 2.163806
Standard Error 2.442087975 Standard Error 0.134661 Standard Error 0.154471
Median 58.02736111 Median 2.89441 Median 2.055539
Mode #N/A Mode #N/A Mode #N/A
Standard
Deviation 5.460674718
Standard
Deviation 0.301112
Standard
Deviation 0.345407
Sample
Variance 29.81896838
Sample
Variance 0.090668 Sample Variance 0.119306
Kurtosis
-
1.774497091 Kurtosis -1.9549 Kurtosis 3.294862
Skewness
-
0.407665115 Skewness 0.807298 Skewness 1.714812
Range 13.30165409 Range 0.670549 Range 0.888796
Minimum 48.94750531 Minimum 2.822913 Minimum 1.86286
Maximum 62.2491594 Maximum 3.493461 Maximum 2.751656
Sum 280.3977053 Sum 15.38017 Sum 10.81903
Count 5 Count 5 Count 5
Return on asset ROE Gross profit ratio
Mean 0.109482 Mean 0.981187 Mean 7.982032
Standard Error 0.005088 Standard Error 0.03915 Standard Error 0.098092

Median 0.112344 Median 0.953077 Median 7.997455
Mode #N/A Mode #N/A Mode #N/A
Standard
Deviation 0.011376 Standard Deviation 0.087543 Standard Deviation 0.219341
Sample
Variance 0.000129 Sample Variance 0.007664 Sample Variance 0.048111
Kurtosis -0.36623 Kurtosis 0.034962 Kurtosis -1.05496
Skewness -0.00228 Skewness 0.994355 Skewness 0.330958
Range 0.02987 Range 0.215459 Range 0.545317
Minimum 0.094741 Minimum 0.898833 Minimum 7.737819
Maximum 0.124611 Maximum 1.114292 Maximum 8.283136
Sum 0.547408 Sum 4.905935 Sum 39.91016
Count 5 Count 5 Count 5
ROCE
Mean 0.892336
Standard Error 0.06964
Median 0.865409
Mode #N/A
Standard
Deviation 0.15572
Sample Variance 0.024249
Kurtosis -0.37386
Skewness -0.40635
Range 0.399531
Minimum 0.671283
Maximum 1.070814
Sum 4.46168
Count 5

Interpretation
Above table is reflecting the descriptive statistics of the data that is analyzed. It can be observed from the data that mean value
of the debt equity ratio is 56.07 and value of standard deviation is 5.46 and this reflects that there is low deviation in value of the
variable. It can be said that at big rate value of debt equity ratio does not get changed. On other hand, it can be seen in case of
operating profit ratio that mean value is 3.07 and its standard deviation is 0.30 which is very low and this reflects that during the time
of 5 years any big change does not come in the value of the variable which is operating profit. Mean value of net profit ratio is 2.16
which is lower than operating profit ratio. This happened because form net profit many expenses are deducted and due to this reason it
cover very small percentage of sales. Standard deviation value of net profit ratio is 0.34 which is minor and this reflects that over the
period of 5 years by big percentage net profit ratio of relevant firms does not get changed. Mean value of return on asset is 0.10 and its
standard deviation is only 0.01 which is nothing. This means that return on asset almost remain same during the period of five years.
On other hand, standard deviation of debt equity ratio is higher. This means that there is difference in the rate at which debt equity
ratio and return on asset get changed. Mean value of return on equity is 0.98 and its standard deviation is 0.08 which means that return
on equity also get changed at slow pace during the time period of 5 years. Similar trend is observed in case of return on capital
employed whose average is 0.89 and standard deviation is 0.15. Gross profit ratio mean value is 7.98 and standard deviation of same is
0.21. There is a very low value of standard deviation. Hence, it can be said that all variables on which analysis is undertaken are not
changing at fast rate during time period of 5 years.
Relationship and impact of capital structure on the financial performance of banks of Jordon
On the basis of analysis of data it is identified that capital structure have an impact on the financial performance of the business
firm. Gross profit and net profit are moderately affected by the capital structure. In comparison to the gross and net profit operating
profit in the business is heavily affected by the capital structure of the business firm. It can be said that there is relationship impact of
capital structure on the financial performance of the business firm. Return on capital employed and return on asset are highly affected

by the capital structure of the company. Return on equity is less affected by the capital structure of business enterprise. Thus, it can be
said that overall capital structure affects measures of financial performance of the organization.

CHAPTER 6: CONCLUSION
On the basis of above discussion it is concluded that there is no significant difference between mean value of the debt equity ratio
and operating profit. This means that with slight change in the capital structure big variation does not comes in the operating profit of
the business firm. It must be noted that finance cost is deducted in the income statement after computation of operating profit. Hence,
direct relationship does not reflected by the income statement between both variables. But it can be said that capital structure and
operating profit and gross profit are linked to each other. This happened because when capital structure become imbalanced it directly
affects the amount of loan that is available to the business firms from the banks and other entities. If there is an imbalanced capital
structure then in that case banks will not like to give huge amount of debt to the any company. Due to this reason there will be scarcity
of finance in the business and this will affect firm business operations in negative manner. This will result in earning of less amount of
sales revenue and operating profit in the business. In this way capital structure and operating profit of the business firm are interlinked
to each other. Same reason also is related to the gross profit and due to less amount of availability of finance in the business less units
are produced and sold in the market which results in earning of less amount of net profit in the business. Strong percentage change in
the operating profit is also observed in relation to debt equity ratio. On this basis it is concluded that there is a high degree of
relationship between capital structures and operating profit that firm earns in its business. Correlation value support this fact positively
as its value is 0.94b which reflects that there is very strong and positive relationship among the variables. Thus, overall conclusion is
that operating profit is heavily affected by the capital structure of the business firm.
In case of net profit same trend is not observed and it is identified that there is a moderate value of correlation which is 0.54. It is
concluded on this basis that net profit and capital structure are moderately interrelated to each other and net profit is moderately
sensitive to the capital structure. This happened because in the income statement finance cost which is interest and dividend are
directly subtracted from the operating profit in order to compute net profit. Thus, due to this reason dividend affected the capital
structure of the business firm. It can be seen from the relevant table that is given in the data analysis section that 63% variation comes
in the dependent variable which is net profit due to change in the capital structure. On this basis it can be said that moderate variation

comes in the net profit with single change in the capital structure because in order to compute net profit simply from the operating
profit finance cost is subtracted. Value of level of significance reflects that there is no significant mean difference between values of
the variables. Hence, slight change in capital structure does not bring big variation in the net profit. This reflects that both variables are
moderately correlated to each other.
In case of return on capital employed positive results are identified which is that there is significant mean difference between
dependent and independent variable. As value of level of significance is equal to 0.05. In case of return on equity moderate
relationship is identified with independent variable which debt equity ratio. However, in case of return on asset high value of
correlation is identified. This reflects that return on asset and capital structure are closely related to each other . Hence, it is concluded
that with change in independent variable only medium or low percentage change comes in the return on equity. In case of return on
capital employed significant mean difference is identified between dependent and independent variable. So, final conclusion is that
debt equity ratio moderately affect the operating profit and net profit ratio, return on equity in comparison to return on capital
employed relative to return on asset.

CHAPTER 7: RECOMMENDATION
On the basis of above discussion it is recommended that firm must focus on the net profit and operating profit while making
capital structure related decisions. If capital structure will be imbalanced then there will be heavy cost of finance in the business. This
will lead to heavy reduction in the operating profit and net profit in the business. Thus it is recommended that business firms must
follow a specific policy under which they must try to maintain balance in the capital structure. If there will be balanced capital
structure in the business then in that case strong control will be maintained on the finance cost and this will lead to decline in the
operating profit and net profit in the business. There must be appropriate strategy by using which balance can be maintained in the
capital structure. For example suppose there is a very low proportion of equity in the firm capital structure then in that case firm may
issue shares in the primary market and can raise human amount of capital for the business. By doing proportion of equity in the
capital structure can be increased and balance can be maintained on same. It is possible that there is a very high proportion of the
equity in the firm capital structure then in order to make same balance firm can repurchase shares from the market when in a specific
year it earn high amount of profit in its business. By doing so, percentage of debt in capital structure can be increased and same of
equity can be reduced. In this way capital structure can be made balanced. This was recommendation about equity. It is possible that
there is a high portion of debt in the firm capital structure then in a year when firm earn huge amount of profit in its business profit
amount can be used to make payment to the creditors. Means that instead of paying dividend to the shareholders business firm will
choose to make payment to the creditors. By doing so overnight proportion of debt in the capital structure can be reduced to some
extent. In this way capital structure can be made more balanced. Such kind of steps must be taken by the business firm time to time so
that capital structure always remain balanced and cost of capital remain in control which lead to increase in operating and net profit in
the business. It is also recommended that managers must keep a keen eye on the changes that are taking place in the capital structure.
This is because it is possible that risk management system may weak in the business firm. In that case it may happen that capital
structure may become imbalanced and firm face loss in its business. If manager will keep eye on developments that are happening in

the capital structure then in that case on time steps can be taken by the business firm to improve capital structure thus, by following a
proactive approach many problems can be eliminated from the business at preliminary stage.

REFERENCES
Books and journals
Ahangar, R.G., 2011. The relationship between intellectual capital and financial performance: An empirical investigation in an Iranian
company. African journal of business management. 5(1). p.88.
Ahmad, Z., Abdullah, N.M.H. and Roslan, S., 2012. Capital structure effect on firms performance: Focusing on consumers and
industrials sectors on Malaysian firms. International review of business research papers. 8(5). pp.137-155.
Almajali, A.Y., Alamro, S.A. and Al-Soub, Y.Z., 2012. Factors affecting the financial performance of Jordanian insurance companies
listed at Amman Stock Exchange. Journal of Management Research. 4(2). p.266.
Andrews, R., 2010. Organizational social capital, structure and performance. human relations. 63(5). pp.583-608.
Arain, M. and et.al., 2010. What is a pilot or feasibility study? A review of current practice and editorial policy. BMC medical
research methodology. 10(1). p.67.
Bender, M., 2011. Introduction. In Spatial Proximity in Venture Capital Financing (pp. 1-9). Gabler.
Berger, A.N. and Bouwman, C.H., 2013. How does capital affect bank performance during financial crises?. Journal of Financial
Economics.109(1). pp.146-176.
Berger, A.N. and Bouwman, C.H., 2013. How does capital affect bank performance during financial crises?. Journal of Financial
Economics. 109(1). pp.146-176.
Boone Jr, H.N. and Boone, D.A., 2012. Analyzing likert data. Journal of extension. 50(2). p.n2.
Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice. Cengage Learning.
Carter, D.A. and et.al., 2010. The gender and ethnic diversity of US boards and board committees and firm financial performance.
Corporate Governance: An International Review. 18(5). pp.396-414.
Cheng, M.Y. and et.al., 2010. Invested resource, competitive intellectual capital, and corporate performance. Journal of Intellectual
Capital. 11(4). pp.433-450.

Chowdhury, A. and Chowdhury, S.P., 2010. Impact of capital structure on firm’s value: Evidence from Bangladesh. Business and
Economic Horizons. (03). pp.111-122.
Choy, L.T., 2014. The strengths and weaknesses of research methodology: Comparison and complimentary between qualitative and
quantitative approaches. IOSR Journal of Humanities and Social Science 19(4). pp.99-104.
Cozby, P.C. and Bates, S., 2015. Methods in behavioral research. McGraw-Hill.
du Plessis, H. and Van Niekerk, A., 2014. A new GISc framework and competency set for curricula development at South African
universities. South African Journal of Geomatics. 3(1). pp.1-12.
Inoue, Y. and Lee, S., 2011. Effects of different dimensions of corporate social responsibility on corporate financial performance in
tourism-related industries. Tourism Management. 32(4). pp.790-804.
Kundakchyan, R.M. and Zulfakarova, L.F., 2014. Current issues of optimal capital structure based on forecasting financial
performance of the company. Life Science Journal. 11(6). pp.368-371.
Maditinos, D. and et.al., 2011. The impact of intellectual capital on firms' market value and financial performance. Journal of
intellectual capital. 12(1). pp.132-151.
Margaritis, D. and Psillaki, M., 2010. Capital structure, equity ownership and firm performance. Journal of Banking & Finance. 34(3).
pp.621-632.
Margaritis, D. and Psillaki, M., 2010. Capital structure, equity ownership and firm performance. Journal of Banking & Finance. 34(3).
pp.621-632.
Mazzi, C., 2011. Family business and financial performance: Current state of knowledge and future research challenges. Journal of
Family Business Strategy. 2(3). pp.166-181.
Memon, F., Bhutto, N.A. and Abbas, G., 2012. Capital structure and firm performance: A case of textile sector of Pakistan. Asian
Journal of Business and Management Sciences. 1(9). pp.9-15.

Molly, V., Laveren, E. and Deloof, M., 2010. Family business succession and its impact on financial structure and performance.
Family Business Review. 23(2). pp.131-147.
Muzir, E., 2011. Triangle Relationship among Firm size, Capital Structure Choice and Financial Performance: some evidence from
Turkey. Journal of Management Research. 11(2). p.87.
Onaolapo, A.A. and Kajola, S.O., 2010. Capital structure and firm performance: evidence from Nigeria. European Journal of
Economics, Finance and Administrative Sciences. 25. pp.70-82.
Panas, A. and Pantouvakis, J.P., 2010. Evaluating research methodology in construction productivity studies. The Built & Human
Environment Review. 3(1). pp.63-85.
Pratheepkanth, P., 2011. Capital structure and financial performance: Evidence from selected business companies in Colombo stock
exchange Sri Lanka. Researchers World. 2(2). p.171.
Riedl, R., Davis, F.D. and Hevner, A.R., 2014. Towards a NeuroIS research methodology: intensifying the discussion on methods,
tools, and measurement. Journal of the Association for Information Systems. 15(10). p.I.
Roberts, T., 2013. Understanding the research methodology of interpretative phenomenological analysis. British Journal of Midwifery.
21(3).
Salim, M. and Yadav, R., 2012. Capital structure and firm performance: Evidence from Malaysian listed companies. Procedia-Social
and Behavioral Sciences. 65. pp.156-166.
Stevenson, M., 2010. Flexible and responsive research: Developing rights-based emancipatory disability research methodology in
collaboration with young adults with Down Syndrome. Australian Social Work. 63(1). pp.35-50.
Taani, K., 2014. Capital structure effects on banking performance: A case study of Jordan. International Journal of Economics,
Finance and Management Sciences. 1(5). p.227.
Thabane, L. and et.al., 2010. A tutorial on pilot studies: the what, why and how. BMC medical research methodology. 10(1). p.1.

Welch, I., 2011. Two common problems in capital structure research: The financial‐debt‐to‐asset ratio and issuing activity versus
leverage changes. International Review of Finance. 11(1). pp.1-17.
Xin, W.Z., 2014. The impact of ownership structure and capital structure on financial performance of Vietnamese firms. International
Business Research. 7(2). p.64.
Online
Kennon, J, 2015. [Online]. An introduction to capital structure. Available through< https://www.thebalance.com/an-introduction-to-
capital-structure-357496>. [Accessed on 15th February 2017].