The study examines impact of capital structure on the performance of selected quoted consumers goods manufacturer in Nigeria between 2016 and 2019. Basically, the study investigated the impact of equity financing, debt financing and debt-to-equity ratio on the financial performance of three selected companies namely Nestle Nigeria Plc, Nigerian Breweries Plc and Nascon. Capital structure has been and will continue to be a critical management decision of firms, and financial managers need to pay attention on the optimal capital structure that would help minimize cost of capital to the barest minimum. 

The data used in the study were obtained from the annual financial statement of selected companies within the sampled period. The descriptive statistic was used to explain the financial ratios in the study

The study revealed that; selected companies utilized more of debt securities in financing assets to expand operations and bolster profitability; equity ratio had negative impact on financial performance of selected companies; capital structure sub-variables had mild impact on financial performance of selected firms within the sampled period.

The study concluded that financial leverage (debt financing) positively impacts financial performance of companies in the manufacturing industry. The study further recommended that; it is important for government to pursue genuine policy measures targeted at revitalizing the market to ensure high volume of corporate debt issue, liquidity of market and market efficiency; There is need to ensure value maximization of shareholders’ funds; financial managers should ensure optimal employment of debt and equity finance; There is need for change in the attitude of banks towards quoted firms so that they can provide easier access to long-term debt financing.




1.1 Background to the Study

Capital structure is a fundamental concept in manufacturing companies because the Capital structure is how an organization is financed. It is the mix of debt and equity capital maintained by a firm (Osuji and Odita, 2012). How an organization is financed is of paramount importance to both the managers of the firms and providers of funds. This is because if a wrong mix of finance is employed, the performance and survival of the business enterprise may be severely affected.

The trouble affecting entities in Nigeria lies within financing; either to source equity or debt assets. Finance is so vital and serves as an instant cause for companies not commencing or progressing. Therefore, the Capital structure serves as one of the important variables considered by firms when considering financial performance. Considering a firm’s capital structure is imperative not to just boost earnings but also its effect on organization’s capability to manage competitive environments where it exists and operate. The aim of a firm’s capital structure may not only be focused on wealth maximization but to safeguard management’s interest mostly in firms where control is dictated by directors and shares of the corporation carefully held (Dimitris and Psillaki, 2008).

The Nigerian manufacturing sector is no exception to this, a manufacturing business is any business that uses components, parts or raw materials to make a finished good, and these finished goods can be sold directly to consumers or to other manufacturing businesses that use them for making a different product. Manufacturing businesses in Nigeria and today's world at large are normally comprised of machines, robots, computers and humans that all work in a specific manner to create a product., Looking inward therefore to the manufacturing sector, it is observed that the association amid capital structure and performance is for long a matter of substantial deliberations for equally scholars and practitioners. Strategic management looks towards capital structure because it is related to a corporation’s capability to satisfy numerous stakeholders’ demands according to (Roy and Minfang, 2000). The performance of management is often measured regarding profitability which reflects managers’ ability to earn optimum returns on assets at their disposal over a period. Furthermore, Profitability according to Owolabi and Obida (2012) is the ability of a business to make returns higher than the cost of financing their core operations to ensure the continued survival of the company. This implies that profitability entails the capability of a company to make a profit from its operating, investing and financing activities to maximize the values and wealth of the shareholders. Regularly, manufacturing companies in Nigeria find it difficult to make a profit; this does affect their performance which may be attributed to inadequate finance or where the finance is available at a cost too expensive (Salawu, 2009, Akintoye, 2016; Akinyomi and Olagunju, 2013, Lambe, 2014). The problem of capital structure, therefore, arises from determining the quantum of each source of finance that will yield optimum return with little risks (Akintoye, 2016; Dada and Ghazali, 2016; Gambo, 2016)

The concept of capital structure is therefore essential to strengthen the financial performance of the manufacturing firm, and the term performance is a controversial issue in finance largely because of its multidimensional meanings (Mihaela, 2012). It can be defined as outcome-based financial indicators that are assumed to reflect the fulfilment of the economic goals of the firm (Chepkemoi, 2013). It is the process of identifying the financial strengths and weaknesses of the firm by` properly establishing relationship between the items of the balance sheet and the profit and loss account (Leno, 2013), and it relates to the motive of maximizing profit both to the shareholders and on assets (Ishaya, 2014), while the operational performance concerns with growth and expansions in relations to sales and market value (Zeitun, 2007).

The strength and financial sustainability of manufacturing companies in Nigeria can be better influenced by proper capital structure, Chepkemoi (2013) recognizes the inherent advantage of financial measures and these measures include, accounting-based measures calculated from firm’s financial statements such as Return on Equity (ROE), Return on Asset (ROA), and Gross Processing Margin (GPM), market-based measures such as stock returns and volatility (Mohammad, 2013)

1.2 Statement of the Problem

Manufacturing companies are very paramount for any economy that will not depend on foreign products alone. Financial performance of manufacturing companies in Nigeria, being one of the major characteristics, defines competitiveness, potentials of the business, and economic interests of the company’s management and reliability of present or future contractors. Therefore, financial performance in manufacturing companies analyzes and identifies their opportunities, threats, strengths and weaknesses of the company, and the political, economic, social and technological factors using financial performance indicators as its contribution to the management, shareholders, the public (customers), the regulator (the government), the financial sector and the economy as a whole which made capital structure very important for any manufacturing company.

Manufacturing companies in Nigeria are significant in terms of net worth, which made the manufacturing business capital intensive. Also, there is a question as to which financing and capital  to raise finances in manufacturing companies to ensure financial sustainability, which is the foundation of this research.

A major difficulty Nigerian manufacturing firm’s face generally is the problem of determining the best financing method, which is either debt or equity. This issue, when not properly addressed, has been identified as a major reason for the failures of manufacturing businesses both within and outside the shores of Nigeria in recent years. It is therefore important for firms to understand how the financing method they go for affect their financial performance. This research therefore sets to investigate the impact of capital structure on the financial performance of manufacturing firms in Nigeria and determine the best method of financing manufacturing companies to ensure financial sustainability.

1.3 Research Objective

The broad objective of the research to examine the impact of capital structure on the financial performance of manufacturing firm, and determine the best method of financing manufacturing companies to ensure financial sustainability, the specific objectives are to:

1)      determine the effect of equity financing on return on asset of manufacturing companies

2)      analyze the impact of debt financing on return on asset of manufacturing companies

3)      evaluate the influence of debt to equity on return on asset of manufacturing companies.


1.4 Research Question

1)      To what extent does equity financing impact the return on asset of manufacturing companies?

2)      To what extent does debt financing impact the return on asset of manufacturing companies?

3)      To what extent does debt to equity impact the return on asset of manufacturing companies?


1.5 Research Hypotheses

Hypothesis One

Hₒ        :           Equity financing do not affect Return on asset of Manufacturing Companies in Nigeria.

Hypothesis Two

Hₒ        :           Debt financing does not have impact on Return on asset of Manufacturing Companies in Nigeria.

Hypothesis Three 

Hₒ        :           Debt to equity does not affect Return on asset of Manufacturing Companies in Nigeria.


1.6 Significance of Study

The research title impact of capital structure on the financial performance of manufacturing companies in Nigeria is targeted at measuring and evaluating the best capital structure to financing manufacturing companies. The significances of this study therefore is to illustrate an observed proof of the relationship which exists between the total debt to total liability, debt financing, equity financing, debt to equity ratio and return of asset in manufacturing companies in Nigeria and also to ascertain the extent at which changes in capital structure of manufacturing companies in Nigeria will affect their return on asset. Consequently, the research will be useful for the following set of people:

Management of manufacturing industry: The research will help the management and core decision makers of manufacturing companies in Nigeria to make the best decision as regards their organizational capital structure.

Investors: The research shall aid basic knowledge on the combination of debt and equity to ensure that he makes sound investment decisions in times to come.

Students: The stakeholders will find concepts and theories relevant for use when required.

Researchers: This group of stakeholders will find the study important to serve as basis or starting point for future researches on the concepts.

Finally, the study will add to the existing literature on Capital Structure management.


1.7 Scope of the Study

This research work covers four years, from 2016 to 2019. Secondary data will be obtained from the publication in the annual statement of the selected manufacturing companies in Nigeria. The selected manufacturing companies are Nestle Nigeria Plc, Nigerian Breweries Plc and Nascon Plc. The annual financial report of the companies shall be downloaded from the Nigerian Stock Exchange Database, and relevant data shall be extracted and analyzed using statistical package for social science (SPSS).



1.8    Operational Definition of Terms

Debt Financing: Debt financing occurs when a firm raises money for working capital or capital expenditures by selling debt instruments to individuals and institutional investors. In return for lending the money

Equity Financing: Equity financing is the process of raising capital through the sale of shares. Companies raise money because they might have a short-term need to pay bills or they might have a long-term goal and require funds to invest in their growth

ROA: Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets. ROA gives a manager, investor, or analyst an idea as to how efficient a company's management is at using its assets to generate earnings.

Capital: Capital consists of assets that can enhance one's power to perform economically useful work. For example, in a fundamental sense a stone or an arrow is capital for a hunter-gatherer who can use it as a hunting instrument, while roads are capital for inhabitants of a city.

Capital Structure: The capital structure is the particular combination of debt and equity used by a company to finance its overall operations and growth. Debt comes in the form of bond issues or loans, while equity may come in the form of common stock, preferred stock, or retained earnings. Short-term debt such as working capital requirements is also considered to be part of the capital structure.

Manufacturing Organization: Manufacturing organization is an organization involve in producing industry products from the scratch or converting into finished products.

Management: Management is the process of dealing with or controlling things or people in an organization to achieve the set goals and objectives.

Strategic Management: Strategic management involves the formulation and implementation of the major goals and initiatives taken by an organization's top managers on behalf of owners, based on consideration of resources and an assessment of the internal and external environments in which the organization operates

Profitability: Profitability is the primary goal of all business ventures. Without profitability the business will not survive in the long run. So measuring current and past profitability and projecting future profitability is very important

Finance: Finance is the management of large amounts of money, especially by governments or large companies

Financial Investment: Financial investment refers to putting aside a fixed amount of money and expecting some kind of gain out of it within a stipulated time frame.

Organizational Net worth: A "net worth" statement or "balance sheet" is designed to provide a picture of the financial soundness of your business at a specific point in time. Net worth statements are often prepared at the beginning and ending of the accounting period (i.e. January 1), but can be done at any time.

SWOT Analysis: A SWOT analysis is an incredibly simple, yet powerful tool to help you develop your business strategy, whether you’re building a startup or guiding an existing company. SWOT stands for Strengths, Weaknesses, Opportunities, and Threats. Strengths and weaknesses are internal to your company things that you have some control over and can change. Examples include who is on your team, your patents and intellectual property, and your location.


Liability: A liability, in general, is an obligation to, or something that you owe somebody else. Liabilities are defined as a company's legal financial debts or obligations that arise during the course of business operations. They can be limited, or unlimited liability.