Leveraging Capital Structure for Profitability: Insights from Nepal's Commercial Banks

Abstract

This study aims to examine the relationship between capital structure components and profitability in Nepalese commercial banks. Specifically, it explores how debt management, measured through variables like Debt-to-Asset Ratio (DTA), Short-Term Debt Ratio (STDR), Long-Term Debt Ratio (LTDR), and Total Debt-to-Equity Ratio (TDE), influences profitability indicators such as Return on Equity (ROE) and Earnings Per Share (EPS). A descriptive and causal-comparative research design is employed, analysing secondary data from four leading Nepalese commercial banks—Prime Commercial Bank, Himalayan Bank, NABIL Bank, and Prabhu Bank—over a 10-year period. Regression and correlation analysis are conducted to investigate the relationships between the independent variables (DTA, STDR, LTDR, TDE) and the dependent variables (ROE, EPS). The results reveal that DTA, STDR, and LTDR exhibit weak and statistically insignificant correlations with ROE. In contrast, TDE shows a significant positive relationship with both ROE and EPS, suggesting that a higher Debt-to-Equity Ratio improves profitability. For practitioners, the study suggests that commercial banks should focus on optimising their debt-to-equity ratios to enhance profitability. The limited influence of other debt ratios (DTA, STDR, LTDR) implies that TDE should be a primary focus in capital structure management strategies. Effective debt management strategies that improve bank profitability could contribute to overall economic growth, enhance financial stability, and create better opportunities for financial inclusion in Nepal. This study contributes to the limited body of research on the relationship between capital structure and profitability in Nepalese commercial banks, offering fresh insights into how different debt ratios impact financial performance. Its focus on long-term data from key banks provides a robust analysis of capital structure dynamics in the region.