An empirical analysis of financial leverage and financial performance: Empirical evidence from Indian listed firms

Abstract

The purpose of this paper is to examine the determinants of financial performance, firm liquidity and financial leverage of Indian listed firms. This study uses both static models (pooled, fixed, and random effects) and Generalized Moment Methods (GMM). Financial leverage (FINLE) is defined by the ratio of total liabilities to total assets, whereas the current ratio and the quick ratio are used as firm liquidity factors. Further, a set of financial performance determinants such as return on assets, profit after tax, return on capital employed, return on equity, and Tobin-Q are used as independent factors. The results indicated that profit after tax, return on equity, return on capital employed, and Tobin-Q are the most significant financial success variables that influence financial leverage of Indian listed companies. Furthermore, profit after tax, return on capital invested, return on equity, and Tobin-Q are considered to have a substantial effect on financial leverage among the financial success indicators. In the case of firm liquidity, the findings show that the current ratio and the quick ratio have a substantial effect on the financial leverage of Indian listed companies.

The Effect of Financial Leverage on Profitability in the Food and Beverage Industry (2017-2021)

“…ROA can also be used as a tool to measure the effectiveness of a company's investment. Investments that produce high ROA can be considered successful, while low investments that produce low ROA can indicate potential problems or changes that need to be made (Senan, 2021). By tracking ROA over time, companies can identify financial performance trends.…”

Moderating effect of board independence on the determinants of financial performance in listed non-financial companies of Colombo Stock Exchange

“…Numerous scholars have researched the relationship between leverage and financial performance, yielding a variety of findings. Thi Kim et al (2021), Senan et al (2021), Burca and Batrinca (2014), have all identified leverage as a determinant of financial performance. Murigu (2014) found that leverage significantly and positively influences profitability based on a study of 23 general insurance companies in Kenya.…”

The Significance and Influence of Financial Ratios on Performance of Non-Financial Companies Listed at Dar es Salaam Stock Exchange Tanzania

“…The company's increase or decrease in capital transactions from various sources is reflected in profit, which is a performance measurement method. Investors are continuously looking for a single index or ratio from the financial statements of companies that can instantly tell them the financial performance and going concern status of the business in order to avoid making risky investment decisions (Senan et al, 2021).…”

“…The study by Senan et al(2021) examined the financial performance of Indian listed firms from 2007-2018 using a generalize moment method. Findings showed that current ratio and return on capital employed positively impact financial performance.…”