Organizations, Industries, companies, formal sectors are becoming more porous and open in highly globalised world today. Competition among companies and organizations also become high in today world. Sri Lanka also has very dynamic competitive business market. Therefore every organization has to perform well to provide good contribution to the economic growth. To survival and sustain growth of company lies in its ability to attract more market shares and investors. There are several factors affect to the organization performance. Among them capital structure decision is a crucial factor which leads to the high performance. The determination of a company’s capital structure constitutes a difficult decision, one that involve several and opposed factors, as risk and profitability. That decision becomes even more difficult, in times when the economic environment in which the company operates present a high degree of instability. Capital Structure decision is the vital one since the probability of an enterprise is directly affected by such decision (Niresh, 2012).Capital Structure plays vital role in financial decision making process, maximizing the firm performance and its value (shah, muhanmad, ; Islam, 2014)
Capital Structure is used to signify the proportionate relationship between debt and equity. (shah, muhanmad, ; Islam, 2014).Capital structure has two major sourse of funds.They are equity capital and debt capital. Equity represents the ownership of the company and debt shows the obligation of company.Oragnization should maintain better capital structure to achieve high growth and profit. Capital structure decisions are not only important for managers and regulators but are also for interset to shareholders (kayed, dussar, ; Mohd Zain, 2014).
Financial Performnce means measuring the results of a firm’s polocies and operations in monetory terms. Oragnization Financial performance measured by using return on assets, Return on capital employed and return on equity etc.Investors and other stakeholders invest their money in the organization to get some benefits and debenture holders, bankers give their money to business to get intreset and loan repayment.Befor invest money they consider the organization performance.Therefor Management of organization should decide what mix of debt and equity to use, should more debt financing used in order to earn high return, should more equity finace be used to avoid the risk of debt bankruptcy.If the organization perform well, it will help to create goodwill in open market and also it will help to attract new investors and market share.
Managers of the organization should consider this relationship to get oragnization decision and manage oraganization capital structure well.Resercher will discuses about the impact of capital structure on firm performance of listed Beverage Food and Tobacco companies in colombo stock and exchange.
Research Problem, Research Question and Objectives
Beverage Food and tobacco industry provide major contribution to Sri Lankan gross domestic product (Annual Report, 2017). Business should maintain high performance to give high contribution to economy. And also managers of the organization must use their strategies to increase the financial performance of the company. Financial Managers face a critical problem not the choice between debt and equity but the mix between them. A high debt ratio indicated the claims of the creditors are higher than owners of the company. This is an adverse situation. If the company earn losses or less profit, managers of the company will face huge financial problem like how they pay interest and loans. On the other hand shareholders want to earn high return of their investment. Because of that managers must involve more economic activities to achieve high performance. Therefor they need to find the optimal capital structure to the firm. It means, managers are needed to strike a proper balance between the use of debt and equity. However there is complex and contrast view on the relationship between capital structure and firm performance in existing literature. Some researchers find the negative relationship between capital structure and performance (Sheikh & Wang, 2013) and also some reserchers fine positive relationship. Because of that reason it is very important to examine capital structure changes and financial performance.
What type of relationship exists between capital structure and the firm financial performance of beverage food and tobacco industry in Sri Lanka?
What is the impact of capital structure to the firm financial performance of the beverage food and tobacco industry in Sri Lanka?
The Main objective is this research is to find out whether there is significant relationship between the capital structure and the financial performance.
To identify the impact of the capital structure to the firm financial performance.
Significance and limitations of the study
Beverage Food and tobacco industry has huge competition among firms in today economy in Sri Lanka. Because of that company use various and more powerful strategies to compete with others. Some companies use equity finance and some are use debt finance only. Most of the firms use both sources of finance. Therefor managers need to get better decision about capital structure. This study helps to get financial decision special with Sri Lankan context.
Foreign and local investors are investing their money in beverage food and tobacco industry. Before get the investment decision they find the information about companies’ performance, profitability, goodwill etc. To get better investment decision investors need to gather better knowledge about capital structure. This study helps to the investors who invest their money in beverage food and tobacco sector in Sri Lanka.
This study result is also help to the students who interest in finance management. They can gather information about the relationship of capital structure and finance performance in beverage food and tobacco sector in Sri Lanka.
There are several limitations of this study. They are,
There are several factors affect to the firm Financial Performance. Among them this study only consider the capital structure of the firm.
The time period of this study is only five years.
This study only consider the 17 companies listed beverage food and tobacco sector in Colombo stock exchange
This literature review part presents the details about definition of capital structure and financial performance ,pervious researchers findings and their measurement techniques.
Capital structure refers to the way how company finance its assets by using equity, debt, or hybrid securities. Simply the mean of capital structure is the combination of equity and debt that make up the overall capital of a firm(Ross, Westerfield et al. 2008).
Financial performance means measuring financial health of the organization by considering organizations outcomes and results over a specific period of time. It shows that how company utilizing its resources better to get maximum profitability and shareholders wealth.
Capital Structure decisions are important for every organization and management of the company has duty to maximize the firm value. But maximize firm value is not an easy task. When the managers of organization do not get correct decision about capital structure may lead financial distress and eventually to bankruptcy. To determine the optimal capital structure, many theories have been developed in past. They are trade off theory, pecking order theory and cash flow theory. These theories help the company to understand the financial behaviour and potential factors that affect the capital structure(Ahmed Sheikh and Wang 2011).
Debt Policy and capital structure choice are very important for get financial decision. Organization capital structure is mix of debt and equity finance. There are many alternative capital structure decisions. Firm can use more debt or low debt. To achieve maximum market value, very important firm to identify the appropriate mix of debt and equity(Abor 2007)..
Abor (2007) Examine the debt policy and performance of SMEs from Gahanna and South African firms. They found that there is a positive relationship between short term debt and return on assets. Researcher argued that this is attributed to the fact that short term debt is cheaper than the long term debt. Because of that this study hypothesis that there is a positive relationship between short term debt and ROA and ROE.
Ahmed Sheikh and Wang (2011) studied that the determines of capital structure of 60 manufacturing firms listed in Pakistan during the period of 2003- 2007. They used different conditional theories of capital structure may affect the firm’s capital structure decision. They analyse several attribute (profitability, size, non-debt tax shields, tangibility, growth opportunity, earning volatility and liquidity) and their relationship to get optimal capital structure choice. The results are showed the profitability, liquidity, earnings volatility and tangibility are related negatively to the debt ratio and firm size is positively link to the debt ratio.
V?tavu (2015) examine the impact of capital structure on financial performance in Romanian listed companies. capital structure measured by using long term debt, short term debt, total debt, total equity and return on assets and return on equity used as indicator of performance. They identified when they avoid debt and operate based on equity their manufacturing company can achieve high performance. Results are showed shareholder’s equity has positive impact on performance indicators while total debt and short term debt have negative relationship with ROA and ROE.
El-Sayed Ebaid (2009) through this study on emerging market economy of Egypt fined that the selection of capital structure mix has very week relationship with performance. Researcher found the insignificant relationship among capital structure variable (short term, long term and total debt to total assets) and performance variable( ROE). Whereas relationship of short term debt and total debt to total assets is negative and statically significant with performance. A negative insignificant relation exists for long term debt with return on assets.
Dawar (2014) examined the relationship between leverage and firm performance. After controlling several factors like size, age, tangibility, growth, liquidity and advertising. Then the found the negative relationship between the leverage and financial performance by analysing ten years data of the Indian firms.
Tarek Al-Kayed, Raihan Syed Mohd Zain et al. (2014) studied that the relationship between capital structure and performance of Islamic banks. After the control of macroeconomic environment, financial market structure and taxation they found IB’s performance measure respond positively to increase in capital.
This methodology part presents the details about conceptual framework, sample, sample selection, data collection and analyses method and hypothesis.
This Framework shows independent and dependent variables. The Independent variable is measured by using debt to equity ratio, Long term debt to total assets ratio and Short term debt to total assets ratio. Return on Assets, Return on capital employed, are used to measure the dependent variable.
Researcher is selected listed Beverage Food and Tobacco sector in CSE for gathered data. Researcher has several reasons to select this sector for done the research. They are, this sector gives high contribution to Sri Lankan economy and few researchers are done the research related to Beverage Food and Tobacco sector.
The Colombo stock and exchange has 294 companies, representing 20 business sectors. The population is 21 Beverage food and tobacco companies listed in CSE. The researcher selects 80 % form the population as a sample. Because researcher wants to get clear idea about the sample. Dawar (2014) Study evaluate Agency theory, Capita structure and firm performance, the study use the list of S&P BSE 100 index companies as sample. It represent the 80% of the free plot market capitalization of stock listed BSE.
Researcher is selected 17 listed beverage food and tobacco companies using random sampling technique. There are two ways to collect appropriate data for a research as primary data and secondary data. This study is used only secondary data and primary data is not used. Also researcher had selected quantitative approach to be an appropriate approach for this study. This study analysed the impact of capital structure and financial performance over these five years. The data are finding from the published annual reports in Colombo stock exchange. The study covers the period from 2013 to 2017.
Data analysis is carried out with help to understand which relationship has among capital structure and financial performance. In this study has been using descriptive and quantitative analysis for measure variables. Regression analysis will used to find out the relationship between capital structure and financial performance.
Model 1, ROCE = ?0 + ?1DER + ?2LDA + ?3SDA+ ?
Model 2 , ROA = ?0 + ?1DER + ?2LDA + ?3SDA+ ?
In the regression model one, ROCE denotes return on capital employed. ROA denotes Return on Assets in model two. Common factors of those two models are denotes as follows. Debt to equity ratio, Long term debt to assets ratio and short term debt to assets ratio represent in this models DER, LDA and SDA respectively. ?0 indicates the constant and ?1, ?2, ?3 indicate coefficients of Independent variables. ? denotes the error term.
H11 : There is a relationship between capital structure and financial performance.
H01 : There is no relationship between capital structure and financial performance.