THE IMPACT OF FINANCIAL LEVERAGE ON FIRM PROFITABILITY: AN EMPIRICAL STUDY OF SRI LANKAN HEALTHCARE EQUIPMENT AND SERVICES COMPANIES DURING AND POST-COVID-19 ERA (2020-2024)

Abstract

"This research examines the impact of financial leverage on the profitability of healthcare and equipment companies listed on the Colombo Stock Exchange (CSE) from 2020 to 2024. This study specifically examines how Sri Lankan healthcare firms modified their capital structure through financing decisions during and after the COVID-19 pandemic and evaluates the impact of these decisions on their profitability. The study analyses financial data using panel data techniques, considering both fixed effects and random effects models. Four proxy variables were used to capture financial leverage and profitability. Debt-to-Equity Ratio (D/E) and Interest Coverage Ratio (ICR) represent financial leverage, while Return on Assets (ROA) and Return on Equity (ROE) represent profitability. Firm size was used as a control variable in the analysis, measured by the total assets of the companies. The empirical results show several important relationships between financial leverage and profitability. A higher D/E ratio lowers ROA and ROE, indicating that excessive debt reduces financial performance and increases risk for healthcare companies. In contrast, a higher ICR contributes to increased profitability because of the positive relationship between ICR and profitability. These results highlight the significance of capital structure decisions in Sri Lanka's healthcare sector during a pivotal economic period. Future research could extend to other sectors to compare leverage effects on profitability and incorporate qualitative methods to capture managerial perspectives. This is crucial for gaining a deeper understanding of how financial leverage affects firm profitability across various industries.