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Impact of Capital Structure on Profitability in Saudi Arabia Sectors
Alahmadi, Manar
Alahmadi, Manar
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Abstract
This study attempts to find out the compositions of capital structure and their relationship with the profitability of companies in Saudi Arabia. The study used a 10 years (2012-2022) panel data of a sample of 50 companies as a major data input. By employing an explanatory research design, the study mainly tried to investigate the relationship between capital structure and profitability using a dependent variable (ROE ) and (ROA), independent variables that represented the capital structure: leverage , Long-Term Debt to Total Assets (LDA), Debt to Asset Ratio (DA), Debt to equity (DER), Short-term debt to total assets (SDA), total equity to total assets (TETA) and control variables: firm size, firm liquidity, and company growth and economic variables such as Gross Domestic Product growth rate, inflation rate , and SAIBOR rate .After the raw data had been collected and analyzed, results were computed, analyzed and presented using panel data analysis., descriptive statistics and correlation analysis methods fixed effect for ROA and random for ROE regression output model. The findings have shown that the capital structure of the sampled Saudi Arabia company was composed of more debt than equity. The regression analysis results the LDA, TETA, leverage, liquidity, growth, GDP, and inflation had positive and statistically significant effects on ROA, and SDA, DA, DER, size, and SAIBOR had negative and statistically significant effects on ROA. Where, LDA, TETA, leverage, liquidity, growth, size, and GDP had positive and statistically significant effects on ROA, and SDA, DER, inflation, and SAIBOR had positive and statistically significant effects on ROA at 1%, 5%, and 10% significant levels respectively . The study concludes that capital structure had a significant impact on the profitability of companies in Saudi Arabia and recommends that it become more profitable and attain optimal capital structure and company value. The Saudi company should give greater attention to the variables: DER, leverage, size, GDP, and SAIBOR which were found to be strongly related to their company performance.