Advanced International Journal for Research

E-ISSN: 3048-7641   •   Impact Factor: 9.11

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Volume 7 Issue 3
May-June 2026

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A Study on Capital Structure and Its Effect on Firm Performance

Author(s) Himayath ullah HM, Dr. Karthik JP
Country India
Abstract The capital structure of a firm represents one of the most critical financial decisions influencing its overall performance, risk profile, and long-term sustainability. This study examines the relationship between capital structure and firm performance by analysing how the proportion of debt and equity impacts key financial indicators such as Return on Assets (ROA), Return on Equity (ROE), and Earnings per Share (EPS). Drawing on secondary data collected from financial reports, journals, and industry sources, the study evaluates firms across different sectors to understand patterns in financing behaviour and their implications.
The findings indicate that moderate use of debt can enhance firm performance due to tax advantages and financial leverage, while excessive dependence on debt increases financial risk and negatively affects stability. Equity financing, although safer, may dilute ownership and reduce returns to shareholders. The study also highlights that the relationship between capital structure and performance is not uniform and varies depending on firm-specific factors such as size, industry, and growth opportunities.
Overall, the research concludes that there is no universal optimal capital structure; instead, firms must adopt a balanced and flexible financing approach tailored to their operational and market conditions. The study provides practical insights for financial managers to make informed decisions that optimize firm value and ensure sustainable growth.
Keywords Keywords These are the main terms repeatedly used across the report (especially in Abstract, Introduction, and Analysis): Capital Structure Firm Performance Debt-Equity Ratio Financial Leverage Return on Assets (ROA) Return on Equity (ROE) Earnings per Share (EPS) Profitability Financial Risk MSMEs (Micro, Small and Medium Enterprises) Optimal Capital Structure Corporate Finance
Field Business Administration
Published In Volume 7, Issue 3, May-June 2026
Published On 2026-05-12
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E-ISSN 3048-7641
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