Published Online:July 2024
Product Name:The IUP Journal of Accounting Research & Audit Practices
Product Type:Article
Product Code:
Author Name:Parveen Kumar and Anu Lohan
Availability:YES
Subject/Domain:Finance
Download Format:PDF
Pages:12
Profitability is associated with investment decisions made by finance managers and experts of the industry. This paper examines the influence of leverage on the profitability of financial service companies listed on India’s Nifty 50. Eleven financial service sector companies with the highest market capitalization were analyzed using secondary data to understand how leverage (debt-equity ratio) impacts profitability (net profit, return on capital employed and return on asset). Based on the results of panel data analysis, leverage was found to have a positive and significant effect on profitability, indicating that leverage is a critical factor in overall profitability. The direct implication for management is trying to achieve higher profitability, growth and expansion through external financing of listed service sector companies.
Financial leverage is the strategic endeavor of borrowing money to invest in assets. According to Kumar (2014), leverage means a firm has taken money from external sources to finance projects. The impact of leverage on the profitability of firms has been studied extensively in the past, with advanced economies receiving most of the attention. Modigliani and Miller’s (1958) irrelevance theorem holds that the option or combination of options that a business has in its capital structure does not change its actual market value. They observed that leverage has nothing to do with company value. As a result, the financial structure of a business will have no impact on the share value and worth of a business. According to Modigliani and Miller’s (1963), relevance theorem despite the tax benefits of debt financing, corporations should not always opt for the maximum amount of debt in their financial structure. Retained earnings, however, may be a cheaper source when considering the personal income tax of investors.