IMPACT OF DEBT ON PROFITABILITY OF FIRMS; EVIDENCE FROM NON-FINANCIAL SECTOR OF PAKISTAN

Abstract

This study focuseson expanding the existing empirical knowledge on the impact of debt
on profitability of companies. Different sets of variables havebeen used to investigate
the relationship between debt and profitability of firms with empirical evidence from the
non-financial sector of Pakistan; using panel data of 10 years, ranging between 2003-
2012. Return on Assets is used as the profitability measure and is the dependent
variable, whereas; Short Term Debt to Asset, Long Term Debt to Asset, Total Debt to
Asset are used as independent variables, while Size, Sales Growth, and Growth
Opportunity are used as control variables. Random effect regression analysis is used to
find out the impact of debt on profitability. Results indicate a significant but negative
relationship between short term debt, long term debt, total debt, and return on assets.