Abstract:
Capital structure is one of the most complex areas of financial
decision making due to its interrelationship with other financial decisions
variables. Capital structure is the composition of debt and equity capital
that comprise a firm’s financing its assets and can be rewritten as the sum
of net worth plus preferred stock plus long-term debts. In this study an
attempt has been made to analyze the capital structure and its impact on
profit earning capacity during 2003 to 2007 (05 years) financial year of
listed manufacturing companies in Sri Lanka. The results shows that debt
to equity ratio (D/E) ratio is positively and strongly associated to all
profitability ratios [gross profit ratio (GPR); operating profit ratio(OPR); and
net profit ratio(NPR)] except return on capital employed (ROCE) and return
on investment (ROI). Debt to assets (D/A) ratio is positively and strongly
associated to OPR, NPR and ROCE. Similarly capital gearing (CG) ratio is
also positively correlated to GPR and NPR. Further, interest coverage (IC)
ratio is significantly correlates to ROCE and NPR. Further capital structure
has a great impact on all profitability ratios except ROCE and ROI. The
outcomes of the study may guide entrepreneurs, loan- creditors and policy
planners to formulate better policy decisions in respect of the mix of debt
and equity capital and to exercise control over capital structure planning
and thereby to control and reduce bankruptcy costs.
