Capital structure and Profitability:A Details Study of Selected Listed Manufacturing Company in Sri Lanka

Abstract

Today in the competitive commercial world various sectors are developing competitively. In finance, the most debatable topic is capital structure. The main issue of debate revolves around the optimal capital structure. There are two schools of thought in this regard. One school pleads for optimal capital structure and other does against it. Former school argues that judicious mixture of debt and equity capital can minimize the overall cost of capital and maximize the value of the firm. Hence, this school considers capital structure decision as relevant. Latter school of thought led by Modigliani and Miller contends that financing decision does not affect the value of the firm. Since value of the firm depends on the underlying profitability and risk of investment .In this study, determinants of capital structure in Sri Lankan context are examined with reference to capital structure theories. This study examines the profitability and capital structure of the companies listed in Colombo Stock Exchange. According to the research findings, Debt Equity ratio has strong relationship with earning per share, Return on Equity and Return on Asset. Researcher concluded that there is strong relationship between Capital Structure and Profitability.