Impact of Capital Structure on Profitability: An Empirical Analysis of Cement Sector of Pakistan

Abstract

The purpose of this paper is to examine the impact of capital structure on profitability of cement sector of Pakistan. A panel data of 16 firms listed on the Karachi Stock Exchange was put under study for a period of 6 years (2005-2010). Two major sets of variables are used: to indicate capital structure i.e. Debt/Equity Ratio, Debt Ratio, Interest Coverage Ratio, Short term debt to asset, and Long term debt to assets and for Profitability i.e. Return On Equity. The variables were analyzed using Fixed and Random effect methodology by using STATA 11. The results implied that profitability is significantly related to capital structure. Specifically, profitability was inversely related to the amount of liability in a company’s capital structure. Therefore, the more debt a firm incur, the worse its earnings is hurt.

Keywords: Return on equity, Debt, Equity, capital structure