Abstract:
A business concern can go for different levels of the mixtures of equity,
debt and or other financial facilities with equity having the emphasis on
maximizing the firm's value. The primary objectives of this study are
to investigate the significant impact of capital structure on profitability
and analysis the relationship between financial leverage and capital
structure determinations of manufacturing listed companies in
Sri Lanka. In this regard, researcher has selected a sample of 15
manufacturing companies for a period of five financial years from 2006
-2010. The data are collected from the financial statements of these 15
manufacturing firms and hand book of listed companies 2010.
Researcher has used Pearson's correlation, and regression analysis.
Multiple Linear Regression (MLR) models are used in the estimation of
a function relating to the Return on Equity (ROE) with the independent
variables including short-term debt, long-term debt, total debt, sales
growth and size of the firm measured in terms of natural logarithm of
sales. The empirical findings suggest that firm structure emerges as an
important factor affecting profitability. The results indicate that the
capital structure of the manufacturing companies listed on Colombo
Stock Exchange has a significantly positive relationship between the
ratio of short-term debt to total assets and ROE. However, an
insignificant relationship between the ratio of long-term debt to total
assets and ROE was found. With regard to the relationship between total
debt and return rates, the results show a significantly positive association
between the ratio of total debt to total assets and return on equity.
