The effect of capital structure on profitability: A study on manufacturing firms traded in Istanbul Stock Exchange

This study aims to examine the relationship between the capital structure and profitability of companies operating in the manufacturing industry sector, which has been traded in Istanbul Stock Exchange (BİST) for a period of eight years. With the help of Eviews 10 program, regression analysis was used to estimate the functions associated with return on equity (ROE) and Total Asset Return (ROA) and capital structure measures. Results while showing a significantly positive relationship between the ratios of short and long term debt and ROE, regarding the relationship between short and long term debt and ROA, these results showed a negative relationship at the %1 significance level. However, while a negative relationship was found between the ratio of total debt to equity and ROE, this relationship was found to be positive with ROA. Based on this, it can be said that the findings about the ROE variable show a great deal of conformity with the traditional theory in the financial literature. Regarding the relationship between the ratio of reserves to total assets and the ratio of ROE and ROA, the results show that the ratio of reserves to total assets has a significantly negative effect on both return on equity and return on total assets. On the other hand, regarding the relationship between the annual growth rate of sales and the ROE and ROA ratios, the results show that the annual growth rate of sales representing the control variable has a positive effect at the %5 significance level on the dependent variables ROE and ROA. The study shows that profitable firms are more dependent on debt as their main financing option. In the example of companies traded on the Turkish Istanbul Stock Exchange (BİST) and operating in the manufacturing industry, it was observed that on average they operated with a ratio of total debt %47 and a high portion of this debt %70 was represented by short-term debt.