Impact of Capital Structure on Financial Performance of Real Estate Essay

Impact of Capital Structure on Financial Performance of Real Estate Firms Listed In Chinese Stock Exchange - Essay Example Since the real estate industry is capital intensive, a firm’s capital structure greatly impacts on its financial performance. Capital structures dictate the financial ratios of these companies and subsequently these ratios are used to determine a firm’s performance. In addition, the capital structure of these real estate firms also determines the extent of ownership by different shareholders. The study determined that the profitability and the debt levels of the twenty selected firms have an inverse relationship. It can as well be concluded that the capital structure affects the growth rate of these firms. This means that real estate firms in China that post high profits in their financial statements have financial debts that are lower that the industry’s average. In this regard, managements of real estate firms in China prefer capital structures that attract low costs of debt and will have minimal adverse effect on the firms’ performance in terms of profi tability and capitalization. According to the results of the analysis, high debt means high interest payments and this has a direct effect on the firms’ profitability and subsequently the firms’ Earnings per Share. The major factor that influenced capital structures of the twenty firms under this study is that the real industry shifted to the Chinese capital market for capital sourcing since privatization of state owned corporations. This study used an inductive approach on the twenty selected listed real estate companies in the methodology section. The quantitative methods objectively determine the impact of capital structure on the performance of the 20 selected and listed real estate firms. The reason for was because listed firms are regulated and they represent the best samples that would give reliable results for this study. However, the study would have given better results if a larger sample was used for this study and more time allocated for analysis. These