The Influence of Capital Structure on Financial Performance: A Statistical Analysis of Robin Corporation Ltd in Zimbabwe’s Beverage Industry

The capital structure of a corporation refers to the mix of its long-term and short-term liabilities, as well as its common and preferred equity, and this combination is used to finance the company’s operations and growth (M​o​d​i​g​l​i​a​n​i​ ​&​ ​M​i​l​l​e​r​,​ ​1​9​5​8). Understanding how capital structure affects financial performance is particularly significant in emerging markets like Zimbabwe, where economic instability, inflation, and currency fluctuations pose substantial challenges for companies, particularly in the beverage industry. The beverage industry serves as a critical sector for economic development, contributing to both employment and GDP. However, companies within this industry are faced with unique challenges, including volatile raw material prices, regulatory constraints, and intense competition, all of which influence their capital structure decisions and ultimately their financial performance (C​h​i​k​w​i​r​a​,​ ​2​0​2​3).

This research seeks to identify the elements that impact decisions regarding capital structure. Specifically, this research aims to identify factors that affect capital structure choices, focusing on both external sources (debt and equity) and internal sources (retained earnings and reserves). This examination is particularly pertinent given the challenges faced by the beverage industry in Zimbabwe, which include economic fluctuations and changing consumer preferences.

The problem statement for this research is anchored in the observation that many firms in Zimbabwe’s beverage industry struggle with financial performance issues, and there is an insufficient understanding of how variations in capital structure affect this performance. Previous studies have suggested that while capital structure is a critical determinant of financial performance, external economic factors, management efficiency, and industry-specific challenges may also play pivotal roles (C​h​i​k​w​i​r​a​,​ ​2​0​2​3). This research posits that despite these additional variables, a positive relationship exists between a well-structured capital framework and financial success.

The concept of capital structure is interpreted in various ways across the literature (W​a​d​e​s​a​n​g​o​ ​e​t​ ​a​l​.​,​ ​2​0​2​2). As described by B​r​e​a​l​e​y​ ​e​t​ ​a​l​.​ ​(​2​0​2​0​) and R​o​s​s​ ​e​t​ ​a​l​.​ ​(​2​0​1​7​), capital structure is defined as the specific blend of debt and equity utilized to finance a firm’s operational and production activities. In essence, it is the ratio of long-term debt against equity that influences how a company finances its endeavors, establishing its capital structure. Consequently, the structural correlation of a firm’s capital is generally reflected by its debt and equity proportions. Specifically, a company’s financial performance is significantly affected by its effectiveness in acquiring, employing, and managing capital. Business performance serves as a key economic indicator, showcasing how efficiently inputs are utilized during production. It constitutes a broad economic measure that evaluates the efficiency with which an entity utilizes both its financial and material resources (M​i​n​n​e​m​a​ ​&​ ​A​n​d​e​r​s​s​o​n​,​ ​2​0​1​8). The evaluation of financial performance remains one of the most contentious topics in financial management.

A significant body of research has investigated the connection between financial leverage and performance (W​a​d​e​s​a​n​g​o​ ​e​t​ ​a​l​.​,​ ​2​0​2​2). For instance, a study by A​l​i​ ​e​t​ ​a​l​.​ ​(​2​0​2​0​) indicated that as companies increase financial leverage, their performance tends to decline. The above authors noted a notable negative correlation between financial leverage and performance in heavily leveraged firms located in the United Arab Emirates and South Africa. Conversely, a study by K​h​a​t​u​n​ ​e​t​ ​a​l​.​ ​(​2​0​2​1​), which exploring financial leverage in the Bangladeshi banking sector, found a significant positive association between leverage and performance metrics such as ROA and ROE, indicating that greater leverage can enhance financial outcomes. However, this study also highlighted a weaker correlation in highly leveraged banks. The results highlight the intricate and diverse nature of the connection between financial leverage and performance, which is affected by various contextual elements such as the type of industry and geographic region (A​l​-​T​a​a​n​i​,​ ​2​0​1​3).

Research has established a significant relationship between profitability and capital structure (B​a​j​a​j​ ​e​t​ ​a​l​.​,​ ​2​0​2​1). For example, K​e​t​e​r​ ​e​t​ ​a​l​.​ ​(​2​0​2​3​) identified a trend where firms with higher leverage ratios exhibited reduced profitability, attributing this to the increased financial risk associated with debt. Businesses were found to be more profitable when relying on equity financing. Similarly, investigations by U​l​l​a​h​ ​e​t​ ​a​l​.​ ​(​2​0​2​0​) in Pakistan’s industrial sector revealed a connection between profitability and the debt-to-equity ratio, suggesting that maintaining an optimal ratio can enhance profitability. Moreover, K​a​u​r​ ​e​t​ ​a​l​.​ ​(​2​0​2​2​) reported a positive correlation between capital structure and profitability among Indian manufacturing firms, asserting that a profitable capital structure is essential for firms aiming to enhance financial performance.

In addition, emerging evidence has begun to explore the interplay between capital structure, liquidity, and solvency. A recent study by C​h​e​n​ ​e​t​ ​a​l​.​ ​(​2​0​2​3​) investigated this relationship within Chinese listed companies and concluded that an increase in leverage ratios resulted in lower liquidity and solvency metrics, thereby establishing a direct relationship between capital structure and these financial parameters. Additionally, S​a​l​a​m​ ​&​ ​S​h​o​u​r​k​a​s​h​t​i​ ​(​2​0​1​9​) investigated Malaysian firms and similarly found that higher debt levels correlated with reduced liquidity and solvency. K​a​u​r​ ​e​t​ ​a​l​.​,​ ​(​2​0​2​2) echoed these findings in the context of Indian manufacturing companies, confirming a negative relationship between capital structure and both liquidity and solvency metrics.

While most studies conclude that the relationship between gearing and profitability is negative (A​j​i​b​o​l​a​ ​e​t​ ​a​l​.​,​ ​2​0​1​8; I​t​a​n​ ​&​ ​C​h​e​l​e​n​c​i​a​,​ ​2​0​2​2; M​e​m​o​n​ ​&​ ​T​a​h​i​r​,​ ​2​0​1​6), they indicate that the interplay between equity return rates and levels of debt is significantly inversely related. He argued that empirical evaluations of capital structures’ impact on performance remain insufficient, thereby calling for more focused research in this area.

A​b​a​t​a​ ​e​t​ ​a​l​.​ ​(​2​0​1​7​) examined companies listed on the Johannesburg Stock Exchange in South Africa, investigating various influencer ratios, including the total debt in relation to total assets and total equity. They discovered an inverse correlation between debt ratios and performance but highlighted a positive association between the return on equity (ROE) and the total debt-to-equity ratio. Similar investigations by M​a​m​a​r​o​ ​&​ ​L​e​g​o​t​l​o​ ​(​2​0​2​0​) observed inconsistency in results regarding how capital structure impacts performance among retail companies listed on the exchange.

M​a​g​o​m​o​ ​(​2​0​2​0​) investigated Zimbabwe’s manufacturing sectors, showing a negative correlation between financial performance and capital structure. J​a​b​a​n​g​w​e​ ​&​ ​K​a​d​e​n​g​e​ ​(​2​0​1​5​) employed semi-annual data from fourteen companies to explore this relationship, concluding a generally weak positive correlation between capital structure and overall performance. They called for further inquiry into the tourism sector to clarify existing inconsistencies in findings.

The study adopted a quantitative research methodology. A carefully designed questionnaire was created to collect information from essential personnel, such as senior management, employees in the accounting and auditing departments, and members of various operational teams.

It comprised sections that evaluated:

1. Demographic information of respondents (e.g., role within the company, years of experience).

2. Perceptions of capital structure components, including debt, equity, retained earnings, and reserves.

3. Other variables that may affect financial performance, including management efficiency and external economic factors.

A targeted sampling method was utilized to ensure that the sample comprised employees with significant knowledge and influence over capital structure decisions. The total sample size of 31 participants as reflected in Table 1 was deemed sufficient, based on recommendations from prior literature, which suggests that samples can yield meaningful insights even below 30, particularly in exploratory studies. Future research could benefit from a larger sample size to validate and expand upon these preliminary findings.

The data obtained from the questionnaires were examined through both descriptive and inferential statistical techniques. Descriptive statistics, such as mean, standard deviation, and frequency distribution, offered insights into the characteristics of the sample and their views. To explore connections between different components of capital structure and measures of financial performance, inferential statistics, including correlation and regression analysis, were employed. Statistical software (e.g., SPSS or Excel) facilitated the analysis of the gathered data, ensuring accuracy and efficiency in processing.

The study’s small sample size of 31 participants and reliance on self-reported data pose limitations that may affect the findings’ generalizability and validity, suggesting a need for future research with larger samples and longitudinal approaches.

Table 2 shows that only one participant (4%) from the total of 26 expressed strong agreement with this assertion, whereas 21 respondents (81%) agreed. None disagreed or strongly disagreed, and four individuals (15%) remained neutral. Existing literature supports the idea that financial leverage influences profitability. Increased reliance on debt financing is thought to elevate the company’s capital costs, which subsequently influences its profitability. Nonetheless, this viewpoint faces criticism from M​o​d​i​g​l​i​a​n​i​ ​&​ ​M​i​l​l​e​r​ ​(​1​9​5​8​), who contend that a company’s profitability is unaffected by its financing methods.

The results indicate that most respondents generally agree that financial leverage affects Robin Corporation Ltd.’s liquidity.

Table 3 shows that 96% of respondents agreed or strongly agreed that financial leverage influences ROBIN Ltd.’s liquidity. Neutral respondents made up just 4% of the total. The fact that there was no disagreement or little disagreement among the respondents implies that they are of the opinion that financial leverage and Robin Corporation Ltd.’s liquidity are related. Interviewees also affirmed this relationship, and one even suggested that when a business employs debt financing, it is required to pay ongoing interest. These payments may decrease the company’s cash flow, making it more challenging to satisfy its immediate obligations.

Table 4 shows the participants’ opinions on how financial leverage affects Robin Corporation Ltd.’s solvency.

It appears that most respondents (81%) or those who strongly agreed (8%) agreed that financial leverage affects the company’s solvency. Only 4% of respondents disagreed with this assertion, and none of the respondents strongly disagreed. This may mean that the participants believe Robin Corporation Ltd.’s level of financial leverage impairs the ability of the company to meet its long-term financial obligations. Most researchers have found that financial leverage may potentially raise the company’s risk of bankruptcy or insolvency. A​c​h​a​r​y​a​ ​&​ ​P​e​d​e​r​s​e​n​ ​(​2​0​1​9​) also support this opinion, saying that, when a company uses debt financing, it may end up taking on greater risk than it would if it used only equity financing.

Table 5 shows that there isn’t a certain agreement on whether a higher debt-to-equity ratio is linked to greater profitability.

Some scholars contend that a definitive link between these two financial metrics is lacking. K​e​t​e​r​ ​e​t​ ​a​l​.​ ​(​2​0​2​3​) noted that companies can achieve significant profitability regardless of whether their debt-to-equity ratios are high or low. The above authors discovered that the relationship between the debt-to-equity ratio and profitability is intricate and influenced by various factors, including the industry in which the business operates. Their research suggests that elevated debt-to-equity ratios may enhance profitability in certain sectors while adversely affecting it in others.

Results in Table 6 show that a lower debt-to-equity ratio is linked to greater profitability.

The data gathered indicates a consensus that a lower debt-to-equity ratio is beneficial for profitability. This is reflected in the table above, where 79% of respondents agreed and an additional 4% strongly agreed that a lower debt-to-equity ratio correlates with enhanced profitability. These findings are consistent with conclusions reached by several other researchers. For instance, a study conducted by A​l​-​L​o​z​i​ ​&​ ​O​b​e​i​d​a​t​ ​(​2​0​1​6​) revealed that organizations with lower debt-to-equity ratios tended to achieve higher ROE and earnings per share (EPS).

Table 7 shows that 88% of respondents disagreed with the claim that capital structure affects profitability. Only 4% of those surveyed expressed neutrality, while 8% strongly disagreed. Profitability can, however, be positively or negatively impacted by capital structure in particular circumstances. When deciding how to finance their operations, businesses should carefully consider their capital structure. C​h​e​n​ ​e​t​ ​a​l​.​ ​(​2​0​2​3​) postulate that due to higher costs for equity investors and possible financial difficulty, large debt can have a detrimental influence on profitability. For some businesses, such as those with excellent growth prospects that can use debt to finance successful growth, this link could not hold true. An interviewee said that Robin Corporation Ltd’s profitability can be impacted by several variables, including its capital structure, cost-cutting initiatives, management efficiency, marketing strategy, and business climate.

The results as reflected in Table 8 indicate that 15% of the participants strongly agreed, 77% agreed, 8% were neutral, and none disagreed with the idea that a higher debt-to-equity ratio is linked to lower liquidity levels. This illustrates a significant agreement among the respondents on the relationship between a higher debt-to-equity ratio and decreased liquidity. Additionally, a recent study conducted by T​i​a​n​ ​e​t​ ​a​l​.​ ​(​2​0​2​4​) highlights a strong link between the debt-to-equity ratio and liquidity. Their findings suggest that an elevated debt-to-equity ratio means Robin Corporation Ltd carries more debt, which can hinder its capacity to fulfill short-term financial obligations. As a result, the company may need to sell off assets or seek additional funding to meet its commitments, which could further decrease its liquidity.

Table 9 illustrates findings on debt-to-equity ratio and liquidity.

According to Table 9, the survey results indicate that 15% of participants strongly support the assertion, while 69% are in favor, 8% remain neutral, 8% disagree, and none express strong disagreement regarding the idea that a reduced debt-to-equity ratio is connected to weaker liquidity. This shows that most respondents think there is an unfavorable connection between liquidity and debt-to-equity ratio. There are numerous reasons why this might be the case. C​h​e​n​ ​e​t​ ​a​l​.​ ​(​2​0​2​3​) argue that the relationship between the debt-to-equity ratio and liquidity is complex, and other variables, including the type of debt, the industry, and the country, can also have an impact. It appears that, if Robin Corporation Ltd’s debt-to-equity ratios are lower, the company might have less cash on hand because it would have utilized more of its available capital to pay down debt. This could make it more challenging for the business to fulfill urgent demands like payroll and accounts payable.

Most respondents as indicated in Table 10 disagree with the claim that capital structure has no bearing on liquidity. This implies that there is broad agreement among respondents that capital structure does influence liquidity. Numerous studies are of the view that capital structure impacts liquidity. For example, M​o​ ​&​ ​Y​a​n​g​ ​(​2​0​2​2​) supported that liquidity of a corporation is significantly influenced by capital structure. It can therefore be emphasized that capital structure decisions must critically be considered to ensure that short-term obligations are met.

A higher debt-to-equity ratio often indicates reduced financial stability as indicated in Table 11. This conclusion is supported by the fact that 92% of participants either agreed or strongly agreed with this assertion, whereas only 4% were neutral or disagreed. Furthermore, research conducted by T​i​a​n​ ​e​t​ ​a​l​.​ ​(​2​0​2​4​) suggests an inverse correlation between the debt-to-equity ratio and liquidity. Their findings show that firms with elevated debt-to-equity ratios generally exhibit lower levels of liquidity. Additionally, one interviewee reinforced the notion that a greater debt-to-equity ratio signifies that a company has more debt than equity, which increases financial risk because principal and interest obligations must be met regardless of the company’s financial performance.

Table 12 presents the regression coefficients, including the intercept, debt-to-equity ratio, and EBITDA margin, along with their respective standard errors, t-statistics, and p-values. Additionally, the overall significance of the model is indicated by the F-statistic and its associated p-value, while the R-squared and adjusted R-squared values reflect how well the model fits the data.

The findings from the regression analysis provide insights into how the capital structure of Robin Corporation Ltd relates to its financial performance, as gauged by ROE. This analysis reveals that the intercept coefficient is 0.051, suggesting that even when both the debt-to-equity ratio and EBITDA margin are at zero, the predicted ROE will still be approximately 5.1%. The statistical significance of this intercept is confirmed by a p-value of 0.020, indicating that it is significantly different from zero at the 5% significance level. This implies that factors other than the capital structure still contribute positively to the firm’s ROE.

The coefficient for the debt-to-equity ratio is reported at 0.035, accompanied by a standard error of 0.007. With a t-statistic of 5.000 and a p-value of 0.001, the results indicate a robust and statistically meaningful association between the debt-to-equity ratio and ROE. Specifically, this implies that a one-unit rise in the debt-to-equity ratio is associated with an increase in ROE by 0.035 units, suggesting that Robin Corporation Ltd successfully utilizes debt to boost returns for its shareholders. This finding aligns with the established finance literature, which posits that an optimal level of debt can amplify profits through financial leverage (B​r​e​a​l​e​y​ ​e​t​ ​a​l​.​,​ ​2​0​2​0; M​o​d​i​g​l​i​a​n​i​ ​&​ ​M​i​l​l​e​r​,​ ​1​9​5​8).

Additionally, the EBITDA margin exhibits a coefficient of 0.092, with a standard error of 0.029, a t-statistic of 3.17, and a p-value of 0.008. This indicates a statistically significant positive effect on ROE. In practical terms, this means that for every unit increase in the EBITDA margin, ROE increases by 0.092 units. These results highlight a strong operational capacity and efficiency in generating profits, thereby enhancing financial performance. This finding is consistent with prior research, which suggests that higher profitability from core operations directly boosts shareholder value (G​r​a​h​a​m​ ​e​t​ ​a​l​.​,​ ​2​0​1​5).

The robustness of the model is evidenced by an adjusted R-squared value of 0.701 and a primary R-squared value of 0.745, suggesting that around 74.5% of the variation in ROE can be accounted for by the independent variables used. Furthermore, with an F-statistic of 17.019 and a highly significant p-value of 0.0001, the overall model is confirmed to be statistically significant. These results show that both the debt-to-equity ratio and EBITDA margin serve as meaningful predictors of ROE.

These findings not only contribute valuable insights into the capital structure dynamics of the company but are also in line with prevailing theories in corporate finance surrounding the advantages of leveraging debt and enhancing operational efficiency.

The findings align largely with existing literature, revealing that respondents overwhelmingly agree that financial leverage impacts profitability (81%), liquidity (96%), and solvency (81%) of the firm. Nonetheless, there exists a connection between the debt-to-equity ratio and profitability that was found to be more complex, with significant skepticism among respondents regarding a direct correlation, highlighting a nuanced understanding of financial structures within the corporation. Furthermore, a considerable majority (69%) believe that higher debt-to-equity ratios lead to lower liquidity, emphasizing the risks associated with increased debt financing.

The results carry significant implications for both theoretical frameworks and practical applications. Theoretically, they reinforce established perspectives on how capital structure influences corporate performance while also shedding light on inconsistencies identified by researchers such as M​o​d​i​g​l​i​a​n​i​ ​&​ ​M​i​l​l​e​r​ ​(​1​9​5​8​). Their seminal work posited that financing choices do not impact a firm’s profitability. Practically, these insights suggest that Robin Corporation Ltd should strive to maintain an optimal debt-to-equity ratio, balancing risk and return while ensuring profitability and liquidity. Specifically, the corporation might consider adopting a conservative borrowing strategy to enhance financial stability, enabling sustained growth without excessively burdening cash flow.

To further enhance capital structure decision-making, Robin Corporation Ltd should engage in regular financial assessments to align its debt policies with operational objectives. This could include scenario planning to understand the impacts of various levels of debt on profitability, liquidity, and solvency under different economic conditions. Additionally, the findings of this study can serve as a benchmark for similar industries facing comparable economic environments. Other companies might explore these insights when considering their capital structures, aiming to balance financial leverage with strategic operational needs. Ultimately, diligent management of capital structure will assist Robin Corporation Ltd in achieving long-term organizational success and resilience against economic fluctuations.