Effect of debt on corporate profitability (Listed Hotel Companies Sri Lanka)

Abstract

The determination of a company’s capital structure constitutes a difficult decision, one that involve several and opposed factor, such as risk and return. This study an attempt has been made to find the effect of debt on company’s profitability during the 2008 to 2012(05 years). Eleven companies were selected form Hotel companies listed in Colombo stock Exchange as sample companies. Correlation and regression analysis are used to find out the effect of debt on corporate profitability. Accordance with the regression analysis there were no significant relationship between debt and profitability. But based on the correlation analysis, there were strong negative relationship between short term liabilities, ROE and ROA. Further total liabilities to total assets had the strong negative relationship between ROE and ROA.  But there was no significant relationship between long term liabilities, ROE and ROA.

Key words: Debt, Return on Assets and Return on Equity