Abstract:
The primary strategic financial objective of any profit oriented entity is to optimize the wealth of the proprietors, which means achieving the maximum profit possible consistent with balancing the needs of the various stakeholders in the entity. To achieve this objective any organization must have sufficient funds invested for smooth functioning of their business. Equity and debt represents the two broader sources of finance available for a business entity. The mix of the debt and equity capital maintained by a company is known as capital structure which is vital to a great extent in any company. The relationship between capital structure and profitability is one that received considerable attention in finance history.
In the light of the available literature, there are contradictory findings of the relationship between the capital structure and the profitability, possibly because of the differences in considered variables, theories, countries, economies and industry-sectors and in different environmental conditions. For instance Kester (1986) finds a significantly negative relation between profitability and debt/asset ratios while Taub (1975) in a regression analysis of four profitability metrics against debt ratio found a significantly positive association between debt and profitability. Therefore, it is important to investigate the relationship between capital structure and profitability in Sri Lankan context.
Plantation sector is a very important sector in Sri Lankan economy. Though the local and foreign demand for the plantation sector products are increasing year by year, the profitability of the sector shows gradual decrease as explained by the RAM Ratings (Lanka) Ltd-sectorial report on plantation sector. Therefore, this research was conducted to investigate the impact of capital structure on profitability with special reference to Plantation Sector in Sri Lanka
