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Capital Structure And Its Impact On Profitability: A Study Of Listed Manufacturing Companies In Sri Lanka

Author

Listed:
  • Balasundaram Nimalathasan

    (University of Jaffna Faculty of Management Studies & Commerce Jaffna, Sri Lanka)

  • Assoc. Prof. Valeriu Brabete Ph.D

    (University of Craiova Faculty of Economics and Business Administration Craiova, Romania)

Abstract

Capital structure is one of the most complex areas of financial decision making due to its interrelationship with other financial decisions variables. Capital structure is the composition of debt and equity capital that comprise a firm’s financing its assets and can be rewritten as the sum of net worth plus preferred stock plus long-term debts. In this study an attempt has been made to analyze the capital structure and its impact on profit earning capacity during 2003 to 2007 (05 years) financial year of listed manufacturing companies in Sri Lanka. The results shows that debt to equity ratio (D/E) ratio is positively and strongly associated to all profitability ratios [gross profit ratio (GPR); operating profit ratio(OPR); and net profit ratio(NPR)] except return on capital employed (ROCE) and return on investment (ROI). Debt to assets (D/A) ratio is positively and strongly associated to OPR, NPR and ROCE. Similarly capital gearing (CG) ratio is also positively correlated to GPR and NPR. Further, interest coverage (IC) ratio is significantly correlates to ROCE and NPR. Further capital structure has a great impact on all profitability ratios except ROCE and ROI. The outcomes of the study may guide entrepreneurs, loan- creditors and policy planners to formulate better policy decisions in respect of the mix of debt and equity capital and to exercise control over capital structure planning and thereby to control and reduce bankruptcy costs.

Suggested Citation

  • Balasundaram Nimalathasan & Assoc. Prof. Valeriu Brabete Ph.D, 2010. "Capital Structure And Its Impact On Profitability: A Study Of Listed Manufacturing Companies In Sri Lanka," Revista Tinerilor Economisti (The Young Economists Journal), University of Craiova, Faculty of Economics and Business Administration, vol. 1(15), pages 7-16, November.
    • Handle: RePEc:aio:rteyej:v:1:y:2010:i:10:p:7-16
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    Citations

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    Cited by:

    1. V.A.Subramaniam & S.Anandasayanan, 2018. "Capital Structure and Stock Prices: Empirical Evidence from Listed Beverage, Food and Tobacco Companies in Sri Lanka," International Journal of Social and Administrative Sciences, Asian Economic and Social Society, vol. 3(2), pages 83-90, June.
    2. REHAN, Muhammad & KARACA, Suleyman Serdar & ALVI, Jahanzaib, 2020. "Capital Structure And Financial Performance: Case Study From Pakistan Pharmaceutical Sector," Studii Financiare (Financial Studies), Centre of Financial and Monetary Research "Victor Slavescu", vol. 24(3), pages 66-82, September.
    3. Jason Stephen Kasozi, 2018. "Capital Structure and The Profitability of Listed Retail Firms," Journal of Economics and Behavioral Studies, AMH International, vol. 10(1), pages 171-181.
    4. Chaleeda & Md. Aminul Islam & Tunku Salha Tunku Ahmad & Anas Najeeb Mosa Ghazalat, 2019. "The Effects of Corporate Financing Decisions on Firm Value in Bursa Malaysia," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 11(3), pages 127-135, March.
    5. Yakubu, Ibrahim Nandom & Alhassan, Mohammed Mubarik & Mikhail, Abdul Azeez & Alhassan, Abdul-Nasiru Iddrisu, 2017. "Commercial Banks Performance in Ghana: Does Capital Structure Matter?," MPRA Paper 95115, University Library of Munich, Germany.
    6. Amit Hedau & Shailender Singh & Huwati Janor, 2018. "Determinants Of Capital Structure – A Sector Specific Approach," Romanian Economic Business Review, Romanian-American University, vol. 13(4), pages 14-30, december.
    7. Nida Shah, 2016. "The Impact of Working Capital Management on Firms Profitability in Different Business Cycles: Evidence from Pakistan," Journal of Finance and Economics Research, Geist Science, Iqra University, Faculty of Business Administration, vol. 1(1), pages 58-70, March.
    8. Andreea Claudia Chiurtu, 2020. "The Financial Performance – Risk Correlation Of Companies Listed On The Bucharest Stock Exchange," Annals of University of Craiova - Economic Sciences Series, University of Craiova, Faculty of Economics and Business Administration, vol. 1(48), pages 47-62, August.
    9. Sohail Younus & Khurram Ishfaq & Muhammad Usman & Muhammad Azeem, 2014. "Capital Structure and Financial Performance: Evidence from Sugar Industry in Karachi Stock Exchange Pakistan," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 4(4), pages 272-279, October.

    More about this item

    Keywords

    capital structure; profitability; manufacturing companies; financial decision;
    All these keywords.

    JEL classification:

    • M1 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration
    • M4 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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