Relationship between Financial Leverage and Financial Performance : Evidence from Cement Sector of Pakistan

Abstract

This study evaluates the relationship and impact of leverage on financial performance of the cement industry in Pakistan. The cement industry in Pakistan comprises of 24 manufacturing units with installed capacity of 44.768 million tons. The analysis is conducted for a period of ten years from 2002 to 2011. Secondary data was obtained from balance sheet analysis of non financial companies listed on Karachi Stock Exchange, published by State Bank of Pakistan. In this study independent variable is leverage, which is debt to equity ratio calculated for ten years mentioned above. The dependent variable is financial performance, which is measures by three financial performance ratios: Return on Assets (ROA), return on Equity (ROE) and Net Profit Margin (NPM). These three ratios depend on net income before tax, which measures the financial performance of a firm or an industry. Methodology used is correlation and regression to check if leverage has an impact on financial performance of cement industry. The results obtained reflects that leverage i.e. debt to equity ratio has a positive impact on financial performance of cement industry of Pakistan. This is due to the fact that cement industry relied on long term financing for the expansion of their fixed assets and acquired short term financing enhance their operating assets.