IMPACT OF CAPITAL STRUCTURE ON PROFITABILITY: A STUDY OF LISTED COMPANIES IN THE BALTIC COUNTRIES

Capital structure is of particular importance in estimating the value of a company; an accurately estimated and selected equity and debt ratios can maximise company value and minimise the cost of capital; therefore, this issue is especially significant in the changing conditions of economic development. Profitability ratios show the ability of the company to generate profit and these ratios are used by the company, financial institutions, etc. to determine the performance of the company. Previous research on the relationship of capital structure with profitability has discovered that capital structure impacts profitability, but provided mixed results regarding the trend (positive/negative relationship). The aim of the research is to evaluate the impact of capital structure on profitability and, based on empirical results, to make conclusions. In the research paper, the following qualitative and quantitative methods of research are applied: the monographic method, correlation analysis and multiple regression analysis. The correlation and regression analyses are used to estimate the functions relating to the impact of profitability on the measures of capital structure. The results of research indicate a significantly negative relationship between profitability and capital structure. This implies than an increase in the debt ratios is associated with a decrease in profitability. During the economic downturn, an increase in the debt levels is related to an even deeper fall in profitability. The results also show that the profitability increases with size and sales growth.