Abstract:
For any business capital structure decisions are vital role and highly significant because of their
effect on the financial performance of firms. The aim of this paper is to provide evidence on
capital structure and its effect on financial performance using a new database of Addis Ababa
metal and engineering industry over the past ten (11) years period from 2010 to 2020 using
secondary data collected from the audited financial statements. Data was then analyzed on
quantitative approach using panel data regression models. In this study ROE and ROA used as
an accounting measure of financial performance (dependent variables) and debt ratio, debt to
equity ratio, long term debt to capitalization ratio, short term debt to total liability and asset
tangibility consider as independent variables in this study. The panel data regression result
indicate that financial performance, which is measured by return on equity and return on asset
were statically significant and positive effect on financial performance of the Metal and
Engineering Industry with capital structure proxies such as, debt ratio, debt to equity ratio, long
term debt to capitalization ratio, short term debt to total liability and asset tangibility has
statically significant and positive effect on financial performance. Thus, the study concluded
that data from Addis Ababa’s metal and engineering industry companies support Trade-off
theories and despite to their significances no different effect in direction on financial
performance was found caused by levels of debt maturity. On the other hand, asset tangibility as
a control variable was found to have a significant and positive. Finally, the study recommended
that companies in Metal and Engineering industry should employ more debt in to their capital
structure; however, the industry companies should give a through consideration to determine the
optimal point to which they exhaustively take the benefits of debt.
