Abstract:
Purpose-the aim of the study is to determine the effect of capital
structure on the financial performance of the companies. What affect do
the debt and equity have on the profitability of the firms?
Methodology/sample- the study involves the use of secondary data
i.e. financial statements of the 5 listed cement industries in KSE from
the period 2009 to 2012. For the purpose of analysis, regression
analysis is used for this study. Regression model is used to determine
the effect of independent variable which is capital structure on the
dependent variables which are ROE, ROA, EBIT and EPS.
Findings- The results indicated that the debt ratios bear negative
relationship with the ROE, ROA, EBIT and EPS which is indicative of
the fact that the company can benefit from the lowering level of debt
ratio which will have a positive impact on these financial measures
whereas the equity is found to have a negative relationship with these
financial measures which are ROE, ROA, EBIT and EPS.
Practical Implications- The companies should use the proper
combination of debt and equity. If the company prefers to use more
debt financing in its capital structure it will have financial leverage on
the higher side which will give the signal to market and investors about
its riskiness. However if the company uses more equity financing it will
indicate that the company have sufficient amount of retained earnings
but on the other hand it will indicate that the company avoids the risk of
taking debt.
