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The Impact of Leverage on the Firm Performance: A Case of Fertilizers Sector of Pakistan

Author

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  • Alim, Wajid
  • Ali, Amjad
  • Minhas, Amna Shafiq

Abstract

The main aim of the study is to investigate the impact of leverage on financial performance. To maximize the wealth of the organization or for the shareholders is critical whereas its effects are due to the financial decision of management related to the optimal level. Moreover, managers use debt to maximize the return of shareholders, and if a high amount of debt is used by the manager of the firm it enhances the financial cost and financial risk as well. Therefore, this study examines the impact of leverage on the performance in the case of the fertilizers sector of the firm in which operating leverage, financial leverage, and combined leverage are included. The study includes the sample size from the annual report of five companies with 25 observations. The data was collected from 2016 to 2020. A descriptive study was used as well regression analysis examined the impact of leverage on profitability. The result showed that a company's leverage has significant results with Return on asset as companies should follow the return on asset for measuring the financial performance. While companies do not show significant relation with Return on Equity. It indicates that the debt ratio increased and it will make the lowest profit for companies. Results show negative relation with operating leverage as well as a positive relation with financial leverage and combine leverage of listed firms in the fertilizer sector of Pakistan.

Suggested Citation

  • Alim, Wajid & Ali, Amjad & Minhas, Amna Shafiq, 2022. "The Impact of Leverage on the Firm Performance: A Case of Fertilizers Sector of Pakistan," MPRA Paper 114200, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:114200
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    References listed on IDEAS

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    29. Ali, Amjad & Audi, Marc & Nisar, Sabahat & Senturk, Ismail, 2021. "Determinants of Public Procurement Efficiency: A Comprehensive Study of Public Procurement Rules of Punjab, Pakistan," MPRA Paper 111214, University Library of Munich, Germany.
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    32. Nisar, Sabahat & Asif, Rabia & Ali, Amjad, 2021. "Testing the Presence of the January Effect in Developed Economies," MPRA Paper 112548, University Library of Munich, Germany.
    33. Mohamad Kassem & Amjad Ali & Marc Audi, 2019. "Unemployment Rate, Population Density and Crime Rate in Punjab (Pakistan): An Empirical Analysis," Bulletin of Business and Economics (BBE), Research Foundation for Humanity (RFH), vol. 8(2), pages 92-104, June.
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    Cited by:

    1. Marc Audi & Fiaz Ahmad Sulehri & Amjad Ali & Razan Al-Masri, 2022. "An Event Based Analysis of Stock Return and Political Uncertainty in Pakistan: Revisited," International Journal of Economics and Financial Issues, Econjournals, vol. 12(5), pages 39-56, September.
    2. Audi, Marc & Sulehri, Fiaz Ahmad & Ali, Amjad & Al-Masri, Razan, 2022. "The role of terrorist events in determining stock returns in Pakistan: covering most vibrant era 2003-2013," MPRA Paper 115167, University Library of Munich, Germany, revised 26 Oct 2022.
    3. Mohamed Aymen Ben Moussa & Amira El Feidi, 2023. "The Impact of Leverage on Financial Performance of Tunisian Quoted Firms," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(4), pages 101-116.
    4. Marc Audi & Razan Al-Masri & Chan Bibi, 2022. "Challenging Assumptions about Women’s Empowerment and Economic Resources and Domestic Violence among Young Married Women in India," Journal of Policy Research (JPR), Research Foundation for Humanity (RFH), vol. 8(2), pages 23-33, August.
    5. Abdul Hai Rathore & Abdullah Sahi, 2022. "The impact of Corporate Governance on voluntary disclosure of R&D expenditure of USA Pharmaceutical firms," Journal of Policy Research (JPR), Research Foundation for Humanity (RFH), vol. 8(2), pages 34-53, August.

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    More about this item

    Keywords

    financial leverage; operating leverage; combined leverage; financial performance;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

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