Examining the relationship between financial performance indicators and capitalization ratios: Analysis of Ghana's banking sector

https://doi.org/10.35912/ijfam.v6i3.2594
Published: Mar 17, 2025

Abstract:

Purpose: This study examines the relationship between the capitalization ratio and business profitability, particularly its effect on return on assets (ROA) and return on equity (ROE). Capitalisation is crucial for financial growth and operational stability; however, an imbalance in the capital structure can adversely affect profitability. This study examines the essential issue of optimising capitalisation to improve firm performance, particularly under fluctuating economic conditions.

Method: This study employs a quantitative research approach to analyse firm-level data and to examine the relationship between capitalisation and profitability, with E-veiw as the analytical tools for regression analysis. The results indicate that elevated capitalisation ratios correlate with diminishing profitability and lower equity returns, highlighting the danger of excessive leverage. Overreliance on debt financing increases financial and operational risks, restricts liquidity, and reduces shareholders’ net returns.

Results: This research provides practical recommendations for corporate executives and governments. Businesses are urged to use balanced capital structures to improve financial flexibility and secure sustainable returns. Policymakers must strengthen regulatory frameworks to promote prudent financial management and mitigate the dangers linked to excessive debt financing.

Contribution: This study contributes to the literature by offering empirical information regarding the relationship between capitalization and profitability, specifically in emerging markets. The work's novelty is in its concrete advice that links academic frameworks to practical financial strategies.

Keywords:
1. Capitalization Ratio
2. Corporate Profitability
3. Financial Management
4. Capital Structure
5. Emerging Economies
Authors:
1 . Caleb Kwasi Owusu
Accra Institute of Technology, Ghana
https://orcid.org/0009-0002-2966-5332
2 . David Kwashie Garr
Presbyterian University College, Ghana
https://orcid.org/0000-0003-1241-4422
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How to Cite
Owusu, C. K., & Garr, D. K. (2025). Examining the relationship between financial performance indicators and capitalization ratios: Analysis of Ghana’s banking sector. International Journal of Financial, Accounting, and Management, 6(3), 445–460. https://doi.org/10.35912/ijfam.v6i3.2594
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Issue & Section
Vol. 6 No. 3 (2024): December
Articles
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This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

References

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    Anafo, S. A., Amponteng, E., & Yin, L. (2015). The impact of capital structure on profitability of banks listed on the Ghana Stock Exchange. Research Journal of Finance and accounting, 6(16), 26-34.

    Arhinful, R., & Radmehr, M. (2023). The impact of financial leverage on the financial performance of the firms listed on the Tokyo stock exchange. Sage Open, 13(4), 21582440231204099.

    Baciu, R., & Petre, B. (2018). Impact of financial structure on return on equity: evidence from wholesale of motor vehicle parts and accessories industry. Eurasian Journal of Economics and Finance, 6(4), 38-47.

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    Graham, J. R., & Leary, M. T. (2018). The evolution of corporate cash. The Review of Financial Studies, 31(11), 4288-4344.

    Gropp, R., & Heider, F. (2010). The determinants of bank capital structure. Review of finance, 14(4), 587-622.

    Hajisaaid, A. M. S. A. (2020). The effect of capital structure on profitability of basic materials Saudi Arabia firms. Journal of Mathematical Finance, 10(4), 631-647.

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    Iqbal, M., & Javed, F. (2017). The moderating role of corporate governance on the relationship between capital structure and financial performance: Evidence from manufacturing sector of Pakistan. International Journal of Research in Business and Social Science (2147-4478), 6(1), 89-105.

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    Nimalathasan, B., & Brabete, V. (2010). Capital Structure And Its Impact On Profitability: A Study Of Listed Manufacturing Companies In Sri Lanka. The Young Economists Journal, 1(15), 7-16.

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    Pratheepkanth, P. (2011). Capital structure and financial performance: evidence from selected business companies in Colombo stock exchange Sri Lanka. Researchers World, 2(2), 171.

    Rashid, H. A., & Bilal, A. R. (2020). Role of Capital structure in financial performance of non-financial sector firms: Evidence from Pakistan Stock Exchange. Global Economics Review, 5(2), 1-16.

    Saeedi, A., & Mahmoodi, I. (2011). Capital structure and firm performance: Evidence from Iranian companies. International Research Journal of Finance and Economics, 70, 20-29.

    Samour, S., & Hassan, L. (2016). Capital Structure and Firm Performance: Did the Financial Crisis Matter?: A cross-industry study.

    Sanda, A. U., Garba, T., & Mikailu, A. S. (2011). Board independence and firm financial performance: Evidence from Nigeria. Paper presented at the AERC Research Paper 213.

    Titman, S., & Wessels, R. (1988). The determinants of capital structure choice. The Journal of finance, 43(1), 1-19.

    Yapa Abeywardhana, D. (2015). Capital structure and profitability: An empirical analysis of SMEs in the UK. Journal of emerging issues in economics, finance and banking (JEIEFB), 4(2), 1661-1675.

    Zeitun, R., & Tian, G. G. (2014). Capital structure and corporate performance: evidence from Jordan. Australasian Accounting Business & Finance Journal, Forthcoming.

  1. Abbadi, S. M., & Abu-Rub, N. (2012). The effect of capital structure on the performance of Palestinian inancial institutions. British Journal of Economics, Finance and Management Sciences, 3(2), 92-101.
  2. Abor, J. (2005). The effect of capital structure on profitability: an empirical analysis of listed firms in Ghana. The journal of risk finance, 6(5), 438-445.
  3. Ahmed, A., & Teru, P. (2020). The impact of capital structure on financial performance of the listed deposit money banks: evidence from Nigeria. International Journal of Research in Finance and Management, 3(2), 13-18.
  4. Akabom, I. A., & Ejabu, F. E. (2018). Effects of thin capitalization and international law on performance of multinational companies in Nigeria. Journal of Accounting and Financial Management ISSN, 4(2), 2018.
  5. Akomeah, E., Bentil, P., & Musah, A. (2018). The Impact of capital structure decisions on firm performance: The case of Listed non-financial institutions in Ghana. International Journal of Academic Research in Accounting, Finance and Management Sciences, 8(4), 1-15.
  6. Altman, E. I. (1968). Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. The Journal of finance, 23(4), 589-609.
  7. Anafo, S. A., Amponteng, E., & Yin, L. (2015). The impact of capital structure on profitability of banks listed on the Ghana Stock Exchange. Research Journal of Finance and accounting, 6(16), 26-34.
  8. Arhinful, R., & Radmehr, M. (2023). The impact of financial leverage on the financial performance of the firms listed on the Tokyo stock exchange. Sage Open, 13(4), 21582440231204099.
  9. Baciu, R., & Petre, B. (2018). Impact of financial structure on return on equity: evidence from wholesale of motor vehicle parts and accessories industry. Eurasian Journal of Economics and Finance, 6(4), 38-47.
  10. Brigham, E. F. (2016). Financial management: Theory and practice: Cengage Learning Canada Inc.
  11. Creswell, J. W., & Creswell, J. D. (2017). Research design: Qualitative, quantitative, and mixed methods approaches: Sage publications.
  12. El?Sayed Ebaid, I. (2009). The impact of capital?structure choice on firm performance: empirical evidence from Egypt. The journal of risk finance, 10(5), 477-487.
  13. Freeman, R. E. (2010). Strategic management: A stakeholder approach: Cambridge university press.
  14. Freeman, R. E., Phillips, R., & Sisodia, R. (2020). Tensions in stakeholder theory. Business & Society, 59(2), 213-231.
  15. Gill, A., Biger, N., & Mathur, N. (2011). The effect of capital structure on profitability: Evidence from the United States. International journal of management, 28(4), 3.
  16. Graham, J. R., & Leary, M. T. (2018). The evolution of corporate cash. The Review of Financial Studies, 31(11), 4288-4344.
  17. Gropp, R., & Heider, F. (2010). The determinants of bank capital structure. Review of finance, 14(4), 587-622.
  18. Hajisaaid, A. M. S. A. (2020). The effect of capital structure on profitability of basic materials Saudi Arabia firms. Journal of Mathematical Finance, 10(4), 631-647.
  19. Harris, M., & Raviv, A. (1991). The theory of capital structure. The Journal of finance, 46(1), 297-355.
  20. Hausman, J. A. (1978). Specification tests in econometrics. Econometrica: Journal of the econometric society, 1251-1271.
  21. Iqbal, M., & Javed, F. (2017). The moderating role of corporate governance on the relationship between capital structure and financial performance: Evidence from manufacturing sector of Pakistan. International Journal of Research in Business and Social Science (2147-4478), 6(1), 89-105.
  22. Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance and takeovers. American economic review.
  23. Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of financial economics, 3(4), 305-360. doi:https://doi.org/10.1016/0304-405X(76)90026-X
  24. Koech, S. K. (2013). The effect of capital structure on profitability of financial firms listed at Nairobi Stock Exchange. Unpublished masters’ research project). University of Nairobi, Nairobi.
  25. Komara, A., Hartoyo, S., & Andati, T. (2016). Analisis pengaruh struktur modal terhadap kinerja keuangan perusahaan. Jurnal keuangan dan perbankan, 20(1), 10-21.
  26. Kurshev, A., & Strebulaev, I. A. (2015). Firm size and capital structure. Quarterly Journal of Finance, 5(03), 1550008.
  27. Modigliani, F., & Miller, M. H. (1958). The cost of capital, corporation finance and the theory ,of investment. The American economic review, 48(3), 261-297.
  28. Myers, S. C. (1977). Determinants of corporate borrowing. Journal of financial economics, 5(2), 147-175.
  29. Nimalathasan, B., & Brabete, V. (2010). Capital Structure And Its Impact On Profitability: A Study Of Listed Manufacturing Companies In Sri Lanka. The Young Economists Journal, 1(15), 7-16.
  30. Nyamekye, K. A., Bunyaminu, D. A., Abdul-Mumuni, A., Sherif Sumani, A., & Kweku, B. (2022). Effect of Financial Risk on Banks’ Performance in Ghana. Available at SSRN 4166734.
  31. Pratheepkanth, P. (2011). Capital structure and financial performance: evidence from selected business companies in Colombo stock exchange Sri Lanka. Researchers World, 2(2), 171.
  32. Rashid, H. A., & Bilal, A. R. (2020). Role of Capital structure in financial performance of non-financial sector firms: Evidence from Pakistan Stock Exchange. Global Economics Review, 5(2), 1-16.
  33. Saeedi, A., & Mahmoodi, I. (2011). Capital structure and firm performance: Evidence from Iranian companies. International Research Journal of Finance and Economics, 70, 20-29.
  34. Samour, S., & Hassan, L. (2016). Capital Structure and Firm Performance: Did the Financial Crisis Matter?: A cross-industry study.
  35. Sanda, A. U., Garba, T., & Mikailu, A. S. (2011). Board independence and firm financial performance: Evidence from Nigeria. Paper presented at the AERC Research Paper 213.
  36. Titman, S., & Wessels, R. (1988). The determinants of capital structure choice. The Journal of finance, 43(1), 1-19.
  37. Yapa Abeywardhana, D. (2015). Capital structure and profitability: An empirical analysis of SMEs in the UK. Journal of emerging issues in economics, finance and banking (JEIEFB), 4(2), 1661-1675.
  38. Zeitun, R., & Tian, G. G. (2014). Capital structure and corporate performance: evidence from Jordan. Australasian Accounting Business & Finance Journal, Forthcoming.