Impact of Capital Structure on Firm’s Financial Performance: Evidence from Food Sector of Pakistan

Abstract

The main aim of the study is to find the impact of capital structure on firm’s financial performance in food sector. Firm’s performance is measured by using the five dependent variables which are return on assets, earnings per share, net profit margin, return on equity, and return on capital employed. Four independent variables are taken for quantifying the capital structure like debt equity ratio, debt to total assets ratio, short term debt to total assets ratio and long term debt to total assets ratio. For this study,Quantitative data is gathered from annual reports of 49 firmsin food sector listed at Karachi stock exchange in Pakistan over the six years from 2007-2012. Linear Regression analysis is used to discover the impact of capital structure on financial performance of firms.Results of this study indicate that capital structure has a significant negative impact on firm’s return on equity, net profit margin, return on capital employed and return on assets. It is also concluded that capital structure has insignificant negative impact on firm’s earnings per share. Therefore, it is concluded that capital structure has a significant negative impact on financial performance of firm in food sector of Pakistan. The results of correlation analysis find out that significant negative relationship exist among capital structure and financial performance of firms in food sector of Pakistan. Descriptive statistics analysis is also applied to find the level of capital structure used in food sector of Pakistan and to find the performance of firms.

Keywords: Capital Structure, Firm’s Financial Performance, Return on Equity, Return on Assets, Food Sector, Pakistan