Abstract:
This study investigates the relationship between capital structure and profitability of
listed manufacturing and service sector companies in Sri Lanka. The study covers
six years period from 2009 to 2014 and the sample size is five companies from
service sector and twenty companies from manufacturing sector. The study uses
return on assets (ROA) and return on equity (ROE) as performance variables. In
addition debt equity ratio (DER) and debt assets ratio (DAR) are used as capital
structure variables. The relationship between the performance and capital structure
variables are analyzed using correlation coefficient and regression techniques.
According to the results of this comparative study the relationship between capital
structure and return on assets is not significant across all the observations carried
out for both manufacturing and service sector except one observation in
manufacturing sector. It also shows an insignificant relationship between profitability
between debt assets ratio. However, there is a significant relationship in all
observations between return on equity and debt to equity in both manufacturing and
service sector. Moreover the study reveals that the nature of the industry also
determines the effect of capital structure on their profitability. In manufacturing firms,
there is a negative significant relationship between return on equity and debt equity
ratio while service sector reveals a positive significant relationship between return on
equity and debt equity ratio.
