Financial Leverage and Firm Performance –An Empirical Study of Select Public Sector Undertakings listed at BSE, India
Journal Title: International Journal of Business and Management Invention - Year 2018, Vol 7, Issue 12
Abstract
In the process of profit magnification, operating leverage and financial leverage play a vital role in the organization. Operating leverage magnifies the effect of change in sales on operating profit as measured by Earnings Before Interest and Tax (EBIT). The Financial Manager uses financial leverage to magnify the effect of changes in operating profit on Earnings Per Share (EPS). Even though increase in financial leverage leads to increase in return on equity (ROE), companies will not prefer to increase their debt financing portion as it leads to increase in financial risk. The rise in financial risk will cause more fluctuations in return on equity and it also will result in higher interest rate on debts. Hence, the present study is carried out to analyze the impact of financial leverage as measured by debt ratios, on the performance of the public sector companies as measured by Return on Equity (ROE) and Return on Assets (ROA). The results indicate a positive relationship between debt ratios and ROE and a negative relationship between debt ratios and ROA.
Authors and Affiliations
Mr. K. Hari Krishna, Dr. T. V. V. Phani Kumar
Keywords
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