Effects of Capital Structure on Company Performance, A Perspective of Small Cap Companies In South Africa

Chikeya, Richard

Effects of Capital Structure on Company Performance, A Perspective of Small Cap Companies In South Africa

Master Thesis

2019

Abstract

The Johannesburg’s Alternative Exchange (JSE’s Altx) is a public equity exchange for small and medium enterprises (SMEs) with high growth potential. It was established with the main objective to mentor the firms, provide them with the necessary support and management capacity building so as to grow them into large companies that will eventually list on the Johannesburg Stock Exchange (JSE) main board. This study sought to evaluate the effects of capital structure on company performance of small cap companies listed on the AltX of the JSE. The results from this may be used as proxy for general SME’s in South Africa. A quantitative research was used to determine the relationship between the independent variables (capital structure variables of trade finance, long-term debt and short-term debt) and the dependent variable (financial performance which was measured using: 1. return on assets (ROA); 2. return on equity (ROE); and 3. gross profit (GP) margin). The study used secondary data from financial reports of small cap SMEs listed on the JSE’s AltX. The data collected from these financial reports was analysed and discussed using descriptive statistics. Inferential analysis was undertaken using correlation tests and multiple regression analysis. The study finds the following: trade credit is the most prevalent capital source used by small cap firms but has no statistically significant effect on the company’s performance. Short-term debt is second most used financing mechanism and has a significant effect on ROE. On the other hand, long-term debt was the least used source of capital by the firms but in terms of financial performance, it had a significant effect on the ROA. Results also showed that firm size has a positive effect on all the performance variables of ROA, ROE and GP margin. It was also confirmed that trade credit, short-term debt and long-term debt are expensive financing mechanisms as the results showed inverse relationships with financial performance. Hence, an increase in either trade credit, short-term or long-term debts by the small cap SMEs leads to a decrease in their profitability.

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