Effect of Financial Leverage on Financial Performance: A Study of Listed Companies in Pakistan Stock Exchange

Abstract

This study aims to investigate the effect of financial leverage (measured through debt to equity ratio, debt to asset ratio, ) on the financial performance measured through (ROA, ROE and Profit margin) in the cement sector by taking ten companies as a sample indexed at Pakistan Stock Exchange (PSX) at some stage in the 2020-2023 period. Annual reports of these companies and Pakistan stock exchange (PSX) are selected for gathering data and was analyzed through linear regression model. The study results shows that the leverage has negative effect on ROE and profit margin but leverage do not affect the return on assets. Similarly, the negative relationship between leverage and ROE suggests that firms with higher debt levels are likely to experience lower equity returns. However, leverage’s effect on PM is more nuanced, with both DER and DAR showing significant negative impacts on profit margins, suggesting that increased debt burden reduces profitability. Overall, the study underscores the critical role of leverage in influencing financial outcomes, with higher leverage leading to reduced performance in terms of profitability and returns. The findings suggest that firms should carefully manage their debt levels, as excessive leverage can constrain financial performance and shareholder returns.