Effect of Capital Structure on the Financial Performance of South African Consumer Goods Firms

Abstract

This study examined the effects of capital structure on the financial performance of South African consumer goods firms. The study focused on the consumer goods sector and covered a period of eleven (11) years (2011-2021). A sample of ten (10) firms was purposively selected from the study’s population of twenty (20) consumer goods firms listed on the Johannesburg Stock exchange of South Africa. The study employed secondary data sources obtain from the annual accounts and reports of the selected firms. The data obtained were analyzed using random effects model. Findings from the study showed that the coefficient of share capital on return on equity is negative (−1.86262) and insignificant (p=0.7961>0.05) and the beta value of short-term debt on return on equity is positive (5.08662) and insignificant (P=0.0516 <0.05). The coefficient of long-term debt on return on equity is also positive (6.78568) and statistically significant (p=0.0298<0.05) and the beta value of retained earnings on return on equity is positive (3.55649) and significant (p=0.0017<0.05) for consumer goods firms in South Africa. The study concluded that share capital has a negative effect on the firms’ financial performance, while retained earnings, short-term debt and long-term debt have positive effects on the firms’ performance. The research also concluded that retained earnings, short term debt and long-term debt are the appropriate capital sources that could be considered for effective financial performance of consumer goods firms in South Africa. The study recommended that the firms should avoid financing their operations with share capital in South Africa without taking remedial actions on it persistence negative effect on their performance.