The Effect of Capital Structure on Profitability: Evidence from the Petrochemical Companies in the Kingdom of Saudi Arabia

Abstract

The study aims at exploring the relationship between the capital structure and the profitability (measured by ROI, ROE and NPR) of the petrochemical industry firms in the Kingdom of Saudi Arabia, and the direction of this relation for the targeted firms during the period 2008-2011.

The researchers used the simple regression model to estimate the relationship between the independent variable (Debt Ratio) and the measures of the dependent variable (Profitability ratios), this was done by using the Cross Section – Time Series (Panel Data) since it is appropriate for the nature of data (group of firms for a multiple years).

The results revealed that there’s no significant relationship between capital structure and ROI and ROE, while it showed very week relationship with NPM. This means that the profitability performance of the petrochemical industry firms in KSA is not relevant to capital structure, and there’re other factors that affect the profitability of these firms.

Keywords: Capital Structure, Petrochemical Industries, Profitability Ratios, Saudi Arabia

JEL Classification: G320