The relationship between financial leverage and the performance of Sri Lankan listed manufacturing companies

Abstract

Purpose: The objective of this study is to examines the impact of financial leverage on the performance of listed manufacturing companies in Sri Lanka.

Methodology: The present study employed ratio analysis to examine whether the financial leverage in listed manufacturing firms in Sri Lanka affected their performance involving the financial performance indicators of return on assets (ROA), return on operating assets (ROOA), return on net operating assets (RNOA), return on equity (ROE) and the impact on the financial level indicators as the debt to equity (DE) and financial spread.

Findings: The results found both a positive and negative relationship between financial leverage and the firms’ performance using two different methods of analysis (overall business analysis and main business analysis). The overall business analysis showed a positive relationship between financial leverage and firm performance, which supports the agency cost theory of financial leverage, whereas the main business analysis showed a negative relationship between financial leverage and the firms’ performance.

Originality/Value: The article presents significant evidence in terms of its scrupulous approach towards checking the toughness of results. The article offers insights to the capital structure and the performance of manufacturing companies in Sri Lanka which helps to investors, managers and debtors on their investment decision.