"IMPACT OF CAPITAL STRUCTURE ON PROFITABILITY: A STUDY OF CEMENT SECTOR PAKISTAN"

Abstract

This study focuses on the relationship between capital structure and profitability of cement sector Pakistan by taking up the sample of eight cement companies during 2007-2011. These companies are sorted out on the basis of having high and low debts in their capital structure. Four variables are used to measure capital structure i.e. Short Term Debts to Assets Ratio, Long Term Debts to Assets Ratio, Long Term Debts to Capitalization Ratio and Total debt to Assets Ratio. Profitability is measured by two variables there are: Return on Assets and Return on Equities. The results show that companies with low debts in their capital structure except for STDA has positive and significant impact on profitability. Companies with high debt in there capital structure except for STDA has negative relationship with ROA and ROE but these result are not statistically significant. However when overall impact was studied, there was negative relationship of short term debts with ROA but positive relationship with ROE, but other capital structure variables have positive relationship but these results were not statistically significant. When ratios was studied, it is observed that companies with low debt in there capital structure has positive ROA and ROE. However highly leveraged cement companies have negative ROA and ROE. In addition to that when collective ratios was studied, it is observed that ROA and ROE was not promising which means that cement sector’s poor performance is not only due to more debts but there are other factors also which are affecting there financial performance.