Impact of capital structure on financial performance: Evidence from telecommunication operators in Africa

The study adopts a panel regression approach and examines the impact of capital structure on financial performance for mobile telecommunications operators based in sub-Saharan Africa. It considers eight (8) companies with publicly available annual reports for the seven (7) year period from 2010 to 2016. Financial performance was measured by return on equity (ROE), return on assets (ROA) and operating profit margin (OM), while capital structure was measured by short-term debt to total assets ratio (STDtTA), long-term debt to total assets ratio (LTDtTA), and total debt to total assets ratio (TDtTA). The total number of subscribers, size as measured by revenue and tangibility were used as the controlling variables. The study provides evidence of a mixed impact of capital structure on financial performance and shows that mobile operators prefer short-term debt to long term debt. The findings suggest that mobile telecommunication operators need to focus on other factors that have a direct and stronger influence on financial performance; while regulators and governments must ensure a stable operating environment to support the industry’s long-term commitments. Furthermore, operators must develop a profitability mindset and shift their focus from average revenue per user towards profitability per user metrics to have a complete value creation picture that considers the costs associated with these revenues. In doing so, they should embark in digital transformation and explore innovative business models. Although size (revenue) matters, operators should be cautious about narrow pursuits of subscriber growth for growth’s sake at this stage of the industry’s lifecycle. Tangibility also showed a mixed impact on financial performance and operators should strive to own strategic fixed assets that are key in driving their performance, but at the same time consider the efficiency benefits of sharing models as they prepare for 5G. In this respect, strategies that seek to take asset ownership away from the operators, like monopoly wholesale open access networks (WOAN), require very careful considerations before being adopted as universal policy.