A study of the relationship between financial leverage and profitability of listed chemicals and pharmaceuticals companies in Sri Lanka

Abstract

The major objective of this paper is to analyze and understand the relationship between financial leverage and profitability of the firm. This paper aims to know the impact of financial leverage on profitability for the listed Chemicals and Pharmaceuticals companies for the period from 2005 to 2010 in Sri Lanka. This study also explains the relationship of debt financing, total assets and size of the firm on the profitability of listed Chemicals and Pharmaceuticals companies in Sri Lanka. In this study, listed Chemicals and Pharmaceuticals companies are taken for analysis and hypothesis are examined with the help of Pearson's correlation and regression analysis. Simple least square model is used in the estimation of a function relating to the Return on equity with the independent variables including Equity multiplier, Total assets turnover, and size of the firm. The results indicate that debt negatively affects companies' profitability and Firms with high percentage of debt have less profitability. Further Total assets turnover positively affects companies' profitability and Firm size has a significant effect on companies' profitability.