IMPACT OF FINANCIAL LEVERAGE ON PROFITABILITY CEMENT SECTOR OF PAKISTAN

Abstract

Purpose. The purpose of this research being undertaken is to identify the variables relationship i.e. Debt to equity and debt ratio of cement sector as what are their impacts on the profitability measures which are identified by Net Income, Return on Assets and return on Equity. As debt is the important part of the industrial growth because it is utilized for investment purpose and earning more from those investments and paying back the interest to debt owners. This research tests the trends of debt being taken by cement sector industries and to identify as what it has the impacts on the profitability measures. Methodology: This research has been conducted on the top 3 cement factories financial results, these companies are the market leaders of the cement sector and accounts for the more than 60% of cement delivery all over Pakistan. These companies includes Attock cement Pakistan limited (Formerly Falcon cement), Lucky cement Pakistan limited and DG Cement Pakistan limited. The method used is this research to measure relationship between financial leverage and profitability is Linear regression and the variables includes Debt ratio and Debt to equity ratio as independent while Net Income, Return on asset and equity as profitability measures which were kept dependent. This research used independent variables i.e. Debt ratio and debt to equity ratio to test their impacts on dependent variables i.e. (Net Income, ROA, ROE) and what are the possible reasons for which they are affecting the profitability. Debt As a certain debt is necessary for such big companies to operate because debt is utilized for them to achieve economies of scale and profitability targets but there is a certain optimal level of debt utilization after which the debt becomes a cost to the firm and hurt the profitability rather helping the company in achieving its targets of profitability and growth. Findings: The research was carried out using SPSS linear regression test to check the impacts of financial leverage and found out that the debt ratio has a negative impact on the profitability of the organization and same as that debt to equity also has a negative relationship with profitability Practical Implications: This research would be helpful in decision making of the optimal level of debt utilization and would help in achieving the profitability targets.