Research Symposium-2015

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Browsing Research Symposium-2015 by Author "Amarawansha, T.G.A.H.C."

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    Impact of financial leverage on firm performance: with special reference to manufacturing sector in Sri Lanka
    (Uva Wellassa University of Sri Lanka, 2015) Amarawansha, T.G.A.H.C.; Kulathunga, K.M.M.C.B.
    Capital structure plays a crucial role in enhancing performance of firms, by helping financial manager to select optimal mix of debt and equity to give required rate of return for shareholders. Generally, due to great cost of capital within the equity and tax advantage of debt, leverage consider as the optimal solution for a company, to gain financial resources. Therefore research is going to identify impact of financial leverage to the performance of firms within Sri Lankan context. According to the Akhtar et.al (2012) leverage is consider as proportions of borrowing funds from outside sources. Through past decades, various theories set the foundation to optimize the debt financing usage in organizations. Warne and Rasoolpur (2013), mention that the greater use of debt will increases the net return to the equity shareholders. Moreover, Akthar et.al (2012) stated that leverage may enhance the profit after taxes; due to lower interest rates .Then eventually the higher earnings of firm will result to the higher earnings per share and then these higher dividend payout ratios which may increase the firm’s performance. Duties of owners (shareholders) and managers are different in every organization. Due to that, management is more concern about personal gains. This may cause conflict situations within organizations. For that debt finance act as a control tool to restrict the opportunistic behavior of managers. On the other hand, Usage of debt is tradeoff between risk and return. Risk of the firm increase simultaneously with increasing leverage and leads towards liquidations and takeovers. Moreover, unbalanced debt will cause to financial distress cost and bankruptcy cost. Therefore, this research aims to investigate this scenario within manufacturing industry in Sri Lanka. Accordingly, objectives of research were concluded, to examine the relationship of firm performance with short term debt (STDA), long term debt (LTDA) and total debt (TDA) respectively. Methodology Research was conducted regarding the Colombo Stock Exchange and population consists with manufacturing industry in Sri Lanka. 30 companies were used for the analysis. Data was collected through secondary data sources such as annual reports of companies through 5 years. Further, leverage was measured by using Long -Term Debt Ratio (LTDA), Short- Term Debt Ratio (STDA), Total Debt Ratio (TDA) which were used by Musiegaeth.al (2013) and Abort (2008). Firm performance proxy by Return on assets (ROA), Return on equity (ROE) and Gross pro fit margin (GPM) developed by Musiegaeth.al (2013) and Khan (2012). Data was analyzed by using Descriptive analysis, Correlation coefficient method and Regression analysis.