Impact of Leverage on Profitability (A case of Pakistani Textile Companies)

Sadia Saeed, Saba Majid, Itrat Zahra, Sana Akram

Abstract

We have conducted our research to check the impact of leverage on profitability with respect to the targeted Textile corporations in Pakistan. We utilized degree of leverage, degree of financial leverage and the degree of combined leverage in the form of proxy variables for representing the leverage and the profitability is explained with the return ratios as return on equity, return on assets and the return on investment. This study also indicates as how the business organizations particularly the textile organization enhance their efficiency scale by utilizing the debt amount. Hypotheses are analyzed with the help of the balanced panel utilizing descriptive statistics, correlation analysis and regression analysis. It is supposed that there is positive relation among variables to prove that levered firms are more profitable than non-levered firm. Conversely, profitability of a firm can be increased using amount of leverage. Results showed that there is correlation between variables but out of three results of regression one was insignificant and two were highly significant supporting alternate hypotheses that leverage enhances profitability.

Keywords

Textile Companies;Leverage;Profitability

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