Capital Structure and Profitability of Small and Medium Enterprises in Lusaka, Zambia

Abstract

This study examines the relationship between capital structure and profitability among small and medium enterprises in Lusaka, Zambia. A quantitative cross-sectional design was used, and structured questionnaires were administered to a target sample of 397 enterprises. A total of 355 usable responses were obtained, representing an 89.4% response rate. Profitability was measured using ordinal categories of return on assets, while capital structure was represented by total debt to assets and long-term debt to assets; sales growth was included as a control variable. The instrument demonstrated acceptable internal consistency (Cronbach's alpha = 0.71). Pearson correlation showed a weak positive association between total debt to assets and return on assets (r = 0.159, p = 0.003). The multiple regression model was statistically significant (F(3,351) = 9.939, p < 0.001) and explained approximately 7.8% of the variation in return on assets. Long-term debt to assets (B = 0.175, p = 0.003) and sales growth (B = 0.168, p < 0.001) were positive significant predictors, while total debt to assets was positive but not significant at the 5% level (B = 0.117, p = 0.059). Inadequate financial literacy, high interest rates, collateral constraints, and complex application procedures were the leading financing barriers. The findings suggest that debt maturity and the productive use of finance matter more than leverage alone. SMEs should align borrowing with cash-flow-generating investments and avoid treating a single debt-equity ratio as universally optimal.