Analysis of Financial Structure of Private Limited Manufacturing Companies- With Special Reference to Selected Units in Mekelle Zone

Abstract

This paper used financial statement data for the period 2004-2009, from Ethiopian Revenue and Custom authority,Mekelle branch, to analyze the financial structure of Private limited manufacturing companies. Five companies have been considered for the study, out of the total 25 companies in Mekelle. They are selected purposively based on a criteria, a company established prior to 2004 and which have adequate financial statements. A questionnaire is distributed to finance managers of the companies, to collect the primary data. Various litrature show, finance as a significant determinat for the success of a firm. Hence, it becomes a supporior and debatable topic of argument , yet there is no consensus on the optimal capital structure. This paper detailed the financing pattern and decision of the companies,the challenges the companies are facing and examined the relationship between firm characterstics and financial leverage, measured in terms of total debt, long term debt and current liability. Descriptive statistics and OLS multiple regression analysis was employed. The descriptive statistics depicts that majority of the firms finance their assets using short term debt and their financing strategy is debt deriven.Collateral requirement is found to be the major constraint, as a result firms have prefered for current liabilities such as trade credits and accruals which are the major component of the short term liabilities.The multiple regression analysis revealed that explanatory variables determine leverage differently. Size,profitability and tangebility of asset are found to be significant determinants of total debt and long term debt and liquidity determines both current liability and total debt. Growth is not a significant determinat for financial leverage. Size, collateral and profitability have an opposite relation between long term and short term debt. Size and collateral found to have strong significant effect on long term debt than short term debt, liquidity has a strong significant effect on short term debt, but not for long term debt. The results for leverage(total debt) are generally supportive of the pecking order theory explanations.