Study On The Correlation Between Capital Structure And Profitability Of China's Manufacturing Listed Companies

The capital structure theory is one of the important cornerstones of modern financial theory. Study of the correlation between capital structure and profitability has never been interrupted, which continues to enrich the capital structure theory. There exist two different conclusions of the study: one is that the capital structure shows a positive correlation relationship with profitability; the other one is that the correlation relationship between capital structure and profitability is negative. These two different findings give rise to confusion, thus it is worthy of our ongoing in-depth study.This paper analyses the correlation relationship between capital structure and profitability using the financial data of China's manufacturing listed companies. The company profitability is calculated by selecting several financial indicators and employing factor analysis method to calculate a comprehensive evaluation score. And the capital structure indicators are selected as widely-used asset-liability ratio and the less-commonly-used long-term capital debt ratio. Then, respectively, the overall manufacturing industry and eight sub-industries are chosen for the empirical analysis.The main empirical conclusions are: 1. there exists a significant negative correlation between asset-liability ratio and profitability, but there is no significant correlation in the food and beverage industry and the textile, garment and fur industry; 2. there is no significant correlation between long-term capital debt ratio and profitability in manufacturing listed companies, just only a weak negative correlation.The paper provides three reasons to explain the empirical results including preferred equity financing, soft constraints in debt financing and unreasonable debt structure in the financing process of listed companies. Finally, several specific measures are proposed to improve the financing process. And it also points out the inadequacy of this study, as well as the problems that need to be further explored.