The Impact of Capital Structure on Profitability: The Role of Firm Value and Risk Management in SMEs in Dili, Timor-Leste
Keywords:
Capital structure, trade-off theory, firm value, risk management, profitability, DER, SMEs
Abstract
This study examines the impact of capital structure choices on the profitability of small and medium enterprises (SMEs) in Dili, Timor-Leste, with firm value and risk management serving as mediating variables. SMEs play a critical role in the economic development of Timor-Leste, yet their financial performance often hinges on strategic financial decisions, particularly capital structure. Using a quantitative-method approach, this research explores the relationship between debt-equity composition and profitability while assessing how firm value and risk management practices mediate this relationship. Data were collected through distributions of questionnaires with SME owners, managers, and financial officers in Dili, alongside secondary data analysis of financial reports. The findings highlight that balanced capital structure choices significantly enhance profitability, primarily when firms effectively manage financial risks and optimize firm value. Furthermore, the study emphasizes the need for tailored financial strategies and capacity-building initiatives to strengthen SMEs’ resilience and sustainability in Timor-Leste’s evolving economic landscape. The results provide actionable insights for policymakers, financial institutions, and SMEs in adopting robust risk management practices and aligning capital structure strategies with long-term growth objectives.
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2025-12-27
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Monteiro, A., Belo, T., A.S. de Carvalho, E., Supadmi, N. and da Cruz Alves, O. (2025) “The Impact of Capital Structure on Profitability: The Role of Firm Value and Risk Management in SMEs in Dili, Timor-Leste”, Timor Leste Journal of Business and Management, 7, pp. 1-16. doi: 10.51703/bm.v7i0.184.
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