Abstract:
In finance, Leverage in the extent or degree to which the company total capital is composed
of debt financing which increase overall risk and return of the company. Leverage is a
technique for magnify gains and losses. This present study empirically investigated the
relationship between leverage and profitability of financial sector of Sri Lanka, by using five
years data (2008-2012) extracted from the financial statements of the fifteen companies listed
on Colombo stock exchange. Hypotheses were formed and results were analyzed through
correlation and regression analysis. Based on the results degree of operating leverage (DOL),
degree of financial leverage (DFL) and degree combined leverage (DCL) had significantly
impact of return on Assets (ROA) and return on equity (ROE).financial industries have to pay
more attention on leverage. While leverage magnifies profits when the returns from the asset
more than offset the costs of borrowing, losses are magnified when the opposite is true.
