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The Impact of Leverage on the Firm Performance: A Case of Fertilizers Sector of Pakistan

Alim, Wajid and Ali, Amjad and Minhas, Amna Shafiq (2022): The Impact of Leverage on the Firm Performance: A Case of Fertilizers Sector of Pakistan.

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Abstract

The main aim of the study is to investigate the impact of leverage on financial performance. To maximize the wealth of the organization or for the shareholders is critical whereas its effects are due to the financial decision of management related to the optimal level. Moreover, managers use debt to maximize the return of shareholders, and if a high amount of debt is used by the manager of the firm it enhances the financial cost and financial risk as well. Therefore, this study examines the impact of leverage on the performance in the case of the fertilizers sector of the firm in which operating leverage, financial leverage, and combined leverage are included. The study includes the sample size from the annual report of five companies with 25 observations. The data was collected from 2016 to 2020. A descriptive study was used as well regression analysis examined the impact of leverage on profitability. The result showed that a company's leverage has significant results with Return on asset as companies should follow the return on asset for measuring the financial performance. While companies do not show significant relation with Return on Equity. It indicates that the debt ratio increased and it will make the lowest profit for companies. Results show negative relation with operating leverage as well as a positive relation with financial leverage and combine leverage of listed firms in the fertilizer sector of Pakistan.

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