The effect of financial leverage on profitability of manufacturing companies listed on the Ghana stock exchange

Abstract

For many years many studies have focused on the effect of financial leverage on firm performance and yet there has been no specific result that can be generalized regarding the extent of the relationship between financial leverage and firm performance. This study examines the effect of financial leverage on profitability of manufacturing companies listed on the Ghana Stock Exchange. The study covers the period 2007 to 2012 involving thirteen manufacturing companies using descriptive, correlation and regression analyses. From the findings, it was realised that short term debt has significant negative relationship with profitability. Total debt also has a significant negative relationship with profitability. Further, the findings revealed that company size has significant negative relationship with profitability while sales growth has significant positive relationship with profitability. The study recommends that first, manufacturing companies must use moderate debt as a financing option in other to make higher profits. Second, manufacturing companies must expand their sales in order to enjoy higher profits.

Key Words: Financial Leverage, Profitability, Returns on Asset, Capital Structure, Manufacturing Companies