Relationship between Financial Leverage and Financial Performance: Evidence from Fuel & Energy Sector of Pakistan

Abstract

Fuel and energy sector serves as the backbone of the economy. The segment provides support, not only for the economic development of the country by showing positive trends towards the sectoral growth, but also serves as a steering wheel for the growth of manufacturing, trading and service sector. It provides significant inputs for production, trade and service. A general concept prevails that the financial leverage is helpful to enhance the financial performance of the companies. For measuring the impact of financial leverage on the financial health of the companies, it is essential to know whether a positive relationship exists between the financial leverage and financial performance or not? So, this study is intended to test the hypothesis and to measure a relationship between the financial leverage and the financial performance of the fuel and energy sector in Pakistan. The paper also examines the generalization that firms with higher profitability may choose high leverage by using various statistical tools. The findings of the study show a positive relationship between the financial leverage and the financial performance of the companies by accepting the alternate hypothesis H₁ and Ho is rejected. The results of the study confirm that the firms having higher profitability may improve their financial performance by having high levels of financial leverage. The study provides evidence by evaluating different facts. It reveals that the players of the fuel and energy in Pakistan can improve at their financial performance by employing the financial leverage and can arrive at a sustainable future growth by making vital decisions about the choice of their optimal capital structure.

Key Words: Financial leverage, Firms’ Performance, Key Indicators- Financial Ratios, Fuel and Energy Sector in Pakistan