EFFECT OF CAPITAL STRUCTURE ON FIRM PROFITABILITY: EVIDENCE FROM SAUDI ARABIA

Abstract

This research investigates the intricate relationship between capital structure and firm profitability within the unique economic landscape of Saudi Arabian companies. Employing regression models, the study delves into the complexities of how financial indicators and capital structure elements impact Return on Assets (ROA) and Return on Equity (ROE). The comprehensive analysis unfolds in five parts: Descriptive Statistics, Model 1 Analysis (ROA and ROE), Model 2 Analysis (ROA and ROE), and Synthesis of Findings. Descriptive statistics underscore the considerable variation in financial metrics, revealing insights into debt reliance, operational efficiency, and financial risk management practices. Model 1 explores the modest impact of debt ratios and firm size on ROA, highlighting the need for nuanced examinations. Model 2 refines the analysis by incorporating the cost of capital, debt servicing, and firm size, revealing significant positive associations between the cost of capital and profitability metrics. Findings suggest larger firms benefit from economies of scale, challenging traditional views on the cost of capital's influence. Overall, the study contributes to a deeper understanding of how capital structure nuances guide decision-making for financial managers, investors, and creditors in Saudi Arabia.