AN INVESTIGATION ON THE IMPACT OF CAPITAL SYSTEM ON THE PROFITABILITY OF INSURANCE COMPANIES IN NIGERIA

AN INVESTIGATION ON THE IMPACT OF CAPITAL SYSTEM ON THE PROFITABILITY OF INSURANCE COMPANIES IN NIGERIA

Background of Study

Capital structure decision is very crucial to any organization; it is very difficult to decide the best combination of debt and equity. The success of insurance companies in the business environment of Nigeria depends on the ability of the managers to effectively determine the optimal capital mix. This is necessary to ensure that they make profit and shareholders get to see that objective fulfilled, which is wealth maximization. The company's finance strategy is reflected in its capital structure. Therefore, one can say that a company has achieved the optimum capital structure when it is able to mix debt and equity in a way that lowers the cost of capital and increases the profitability of the company. Sbeti, 2022).

Serrasqueiro, (2022) demonstrated that the firm's capital structure is irrelevant to its value. However, this assumption is valid only in ideal market conditions, such as when all investors have free access to market information, there are no transaction costs, and there is no difference in taxation between dividends and capital gains. However, real economies are far from perfect, and as a result, many theories regarding financing decisions have been developed over time in order to demonstrate the purpose of capital mix and its role in company value. These theories have been developed in response to the fact that real economies are not perfect. (Shyu, 2021)

The capital structure of a company refers to the method by which it funds its operations, and this may be done either via debt or equity, or through a mix of the two (Sibindi, 2022). Several different hypotheses attempted to explain the connection between a company's profitability and its market value. It has been suggested that companies that have a fast growth rate also have a high debt to equity ratio, and it has been noted that bankruptcy has an influence on the capital structure of a company (Sibindi, 2022). According to (Tran, 2020), having a bad capital structure might result in a potential decrease or loss in the value that is obtained from strategic assets. In light of this, the capacity of a company to manage its financial policies is essential if the company is to realize benefit from its specialized resources (Vincent, 2022). The ability to raise sufficient cash inside an organization will assist the company in its day-to-day operations. As a result, it is essential for businesses in Nigeria to have a solid understanding of the debt-to-equity ratio that will provide the most productive results after a comprehensive evaluation of the company's operations and commitments (Vincent, 2022).

The cost of capital is having a stronger impact on the level of Earnings before interest and tax that the company has, which will immediately affect the amount of income that is accessible to the investor and will ultimately reflect on the value of the company. If the management of an organization makes the decision not to maintain the capital structure of the company, it will have an impact on the growth and profitability of the firm, which will eventually have a negative effect on the firm's profitability due to financial hardship. Additionally, companies have the ability to issue hundreds of different securities, which may be combined in an infinite number of ways to maximize total market value (Vincent, 2022). When evaluating the effectiveness of a corporate organization, profit is an important metric to consider. The capacity of an endeavor to create income that is greater than the expenditures associated is what determines whether or not it is profitable. The terms "profitability ratios" and "accumulated margin" refer to the measurements of financial success (Shyu, 2021). The capacity of a company to generate a profit from all of its business operations is what we mean when we talk about profitability. A particular investment is considered profitable if it is able to generate a return from the activities to which it is put (Sibindi, 2022) shareholders have access to tools that allow them to analyze a company's historical financial performance as well as its present condition, and it should be emphasized that financial performance measures, such as profitability and liquidity, are among such tools. Every company should strive to be profitable, since a company that is unable to turn a profit cannot remain in operation for very long. Earnings per share (EPS), return on investment (ROI), return on capital employed (ROCE), gross profit margin, and net profit margin are the ratios that are used in the process of measuring a company's level of profitability. The term "financial performance" refers to the extent to which monetary goals have either been attained or are in the process of doing so. It refers to the method of calculating the monetary value of the outcomes of an organization's policies and activities. The efficiency with which a company manages its resources is reflected in the firm's performance. According to Serrasqueiro (2022), there are a plethora of capital structure indicators that have an effect on the firm's performance and profitability. Firm performance and capital structure have been successful in attracting a significant amount of public interest due to the fact that they are a tool for socio-economic development (Tran, 2020). According to Serrasqueiro (2022), financial performance measures such as profitability and liquidity, amongst others, provide shareholders with the tools necessary to assess the previous financial success of a firm as well as its present position in the market. The ability of a company to succeed on the market may in large part be gauged by its financial performance. Productivity, profitability, and growth in market share are the three components that should be considered when analyzing a company's success.

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