December 2013 Vol. 1 No. 2

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Full Length Research Paper

Capital structure and its impact on firm performance: A study on Sri Lankan listed manufacturing companies

R. Kajananthan*¹ and P.Nimalthasan²

¹Assistant Lecturer, Department of Commerce, Faculty of Management Studies and Commerce, University of Jaffna.
²Faculty of Management Studies and Commerce, University of Jaffna

*Corresponding Author's E-mail: k.r.kaja@gmail.com

Accepted December 30, 2013

Abstract

This paper examines the relation between capital structure and firm performance. The main objective of this study is to examine the relationship between capital structure and firm performance in listed manufacturing firms in Sri Lanka. In a way, the present study is initiated on “capital structure and firm performance “with the samples of 25 manufacturing companies using the data representing the periods of 2008 – 2012. Gross profit, net profit, returns on equity and return on assets, were used as the measures of firm performance whereas debt equity ratio and debt assets ratio were used as the measures of capital structure. The statistical tests were used includes: descriptive statistics, correlation and regression analyses. The results show that gross profit, net profit, return on equity, return on assets, are not significantly correlated with debt equity ratio and Gross profit margin and Return on equity are significantly correlated with debt assets ratio as the measures of capital structure and capital structure has significant impact on gross profit and return on equity. The study only used data from the 2008-2012 annual reports. However, the findings have highlighted the effects of the firm performance and capital structure. The study contributes to literature in Sri Lanka. Furthermore, the finding of the paper can be considered as helpful for managers and users that are anxious to develop financial description quality and practices of capital structure.

Keywords: Firm Performance, Gross Profit, Returns on Equity, Capital Structure, Debt Assets Ratio.