THE EFFECT OF LEVERAGE ON PROFITABILITY OF THE TEXTILE COMPANIES IN BANGLADESH

Abstract

The study examines the relationship between profitability and leverage of textile companies listed Dhaka stock exchange in Bangladesh. Literature review on the relationship between the firms’ profitability and leverage showed that there is either a positive, negative or neutral relationship between profitability and leverage. This study considers sample of 30 companies from 2013 to 2017 by using data from annual report of the companies listed on the Dhaka Stock Exchange. Degree of operating leverage has negative relationship with return on equity which implies increase in DOL causes decrease in return on equity which is similar to the study by Barker (1973), Selling &Stickney (1989). Degree of financial leverage has positive relationship with return on equity which implies that increase in financial leverage causes the increase in return on equity or decrease in degree of financial leverage also decrease return on equity. The relation is also found by Nimalathasan & Pratheepkanth (2012), Abid & Meseddi (2004). However, the results revealed a negative relationship between return on equity and total degree of financial leverage contrary to Nimalathasan & Pratheepkanth (2012), Abid & Meseddi (2004) study. Also found that degree of total leverage has a positive relationship between return on equity which implies increase in DTL can increase in profitability but within safety limits of the company.