Impact of Financial Leverage on the Profitability of Energy and petroleum Sector

Abstract

In order to maintain a competitive advantage and facilitate long-term prosperity, profitability is essential for any company. This study investigate the relation between leverage and profitability of petroleum industry operating in Pakistan. Leverage is mainly constituted by total debt to assets, but also by short-term and long-term debt to assets. Profitability is defined as Return on Assets, Return on equity and Net Profit Margin which indicates how profitable firms are relative to total assets. To account for the aspects of profitability that are not captured by leverage, control variables including size and age are also tested. The aim of the research is to find the connection between the financial leverage and financial performance or the profitability of the business in Pakistan's petroleum sector. The petroleum sector is the research's main concern as it is one of the major industries that plays a major role in the growth and development of the country. The same industry has a major contribution in growth and development of services, manufacturing, and trading industries of Pakistan. The petroleum sector operating in Pakistan has distinctive share in annual GDP growth of the country. The aim of the research is to observe and assess the impact of financial leverage on firms ' success in the oil sector. Besides, the research investigate that whether leverage, that a firm takes, has significant effect on profitability and if it exist, what would be nature of relationship that exists between the two.