The effect of degree of financial leverage on firm profitability: special reference to standard and poor’s Sri Lanka (S&P SL) companies

Abstract

The purpose of this study is to empirically examine the effect of Degree of Financial Leverage on firm profitability of twenty Standard and Poor’s Sri Lanka (S&P SL) companies listed on the Colombo Stock Exchange (CSE) in Sri Lanka. This study used as the sample data for the period of six years from 2015 to 2020. The study was selected ROA (Return on Assets), TOBIN’S Q and EVA (Economic Value Added) to measure the firm’s profitability which were used as dependent variable. The independent variable was DFL (Degree of Financial Leverage). The random effect penal regression model was selected to examine the effect of Degree of Financial Leverage on firm profitability. DFL has statistically significant and positive relationship with ROA. DFL has inverse significant relationship with TOBIN’S Q but inverse and non-significant relationship between Degree of Financial Leverage and EVA. The result of this study had revealed that Degree of Financial Leverage has sufficient significant impact on financial performance of S&P SL. From the findings of the study it had recommended that the managers of firms should control the fixed cost and focus to increase the revenue of firms.