Abstract:
In the field of finance, the capital structure holds immense importance and has been an area of discussion over several years. The idea of capital structure is simply how the company decides to fund its growth strategies, expansion plans, regular expenses etc. There are two sorts of funds available; either equity or debt. The ratio in which each component of financing is utilized can be referred to as what forms the capital structure of a firm. When the company employs more debt into its capital structure the value of leverage in the firm’s structure increases as more debt is employed. In the study, the impact of financial leverage on the profitability of the companies, listed on the stock exchange of Pakistan and operating in the fuel and energy sector, using key financial indicators such as return on equity, return on assets and earnings per share is established. For the purposes, seventeen (17) companies, listed on the stock exchange of Pakistan, carrying out business in fuel and energy domain, were chosen, analyzed over a period of four (4) years (2014-2017), using the influence of financial leverage on indicators that are keen to the measurement of financial performance. The secondary data was used, published in the state bank reports on the subject sector under consideration; the data therein was compiled through audited financial statements, stock market, etc. Determination of relationship between financial leverage and key performance indicators was the objective of the study. In order to establish a relationship, the data was run in Statistical Package for Social Sciences (SPSS), and correlation and regression test were run between the independent and dependent variable to establish the results. Overall, there was a negative correlation of leverage with all the three (03) key financial indicators, return on equity, return on assets, earnings per share, meaning the more the debt was incorporated into the firm structure the less would be the result of the financial indicators of performance. However, the results of negative correlation were not considered to be Page 5 of 65 significant as depicted from the values of significance and regression results. Therefore, leverage had no major impact on the performance of key financial indicators in the case of sector under study. This may be partly due to that most energy companies are Independent Power Producers that have a guaranteed return by the Government of Pakistan. The results seen in the sector of fuel and energy would be different than if the study were conducted in another sector. Since our study was limited just to the specified sector, therefore the findings of the study conducted in this paper is limited to the fuel and energy sector only
