THE EFFECT OF CAPITAL STRUCTURE ON THE FIRM'S FINANCIAL PERFORMANCE [CEMENT SECTOR)

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.