The Effect of Profit Margin on Capital Structure: A Study of Listed Manufacturing Companies of Colombo Stock Exchange (CSE), Sri Lanka

Abstract

Profit margin is a way of measuring how well a company is doing, regardless of size of the organizations. The capital structure is how a firm finances its overall operations and growth by using different sources of funds. The successful selection and use of the debt-to-equity ratio is one of the key elements of firms’ financial strategy. The profit margin is a key element to determine the capital structure. The firms may have their retained earnings to increase their capital structure. The purpose of this study is to investigate the effects of profit margin on Capital Structure of listed manufacturing companies in Sri Lanka. The present study tries to investigate the relationship between net profit margin on sales and debt - to - equity ratio by taking into consideration in the level of firms’ investment. The research question is arisen “What extent the profit margin affects the capital structure?” For this purpose 13 listed manufacturing companies in Colombo stock exchange in Sri Lanka have been selected for the period of 2005 – 2009. The data have been analyzed by using correlation and regression analysis to find out the association between the variables. In our study we may say that the firms finance their investment activities by retained profits are more profitable than those that finance their activities through borrowed capital and it depends on their level of investments.