Capital Structure and Profitability of Small Pharmaceutical Firms: Evidence from the Alternative Investment Market

The relationship between capital structure and profitability remains a critical issue for finance scholars and corporate decision-makers. While prior studies have examined this relationship in the pharmaceutical sector, limited attention has been given to small pharmaceutical firms. This study investigates the impact of capital structure on the profitability of small pharmaceutical companies listed on the Alternative Investment Market (AIM) of the London Stock Exchange (LSE). Using a five-year panel dataset (2018–2022), three regression models (Ordinary Least Squares, Fixed Effects, and Random Effects) were estimated with R statistical software. Profitability was measured by return on assets (ROA) and return on equity (ROE), while capital structure was captured through debt-to-equity ratio, short-term debt, and long-term debt, with firm size included as a control variable. The findings reveal a significant negative relationship between short-term debt and ROA, and between debt-to-equity and ROE, while firm size exhibits a positive relationship with both profitability measures. This study extends existing literature by focusing on small pharmaceutical firms, offering insights into their capital structure decisions and the implications for firm performance.