Investigating relationship between financial leverage and financial performance: case study – Bosnia and Herzegovina beverage industry (original) (raw)

Nowadays, managing a company is becoming a more and more complex task. Factors, such as fast-changing environment, highly competitive market put in focus managers’ abilities to recognize investment possibilities, establish flexible capital structure and consequently mitigate the level of financial risk and contribute to the overall company stability. One way in achieving above mentioned is an efficient use of financial leverage. Therefore, the aim of this paper is to investigate whether capital structure/financial leverage positively influences a company’s financial performance. This question has been discussed for decades, mostly in the developed world, while no similar research is done in B&H. The research is done using secondary data from Bisnode BH database for a period of last five years. The sample includes 28 companies from the beverage industry which is fast-growing and one of the strongest industry in B&H. Regression analysis was used to determine the relationship between the variation in firm value and capital structure. The debt to equity ratio was used as a proxy for capital structure and the following ratios were used for firm value: Net Profit Margin, Return on Assets, Return on Equity, Operative Margin, and Value added per employee. Results of this study will provide valuable inputs for managers of companies as well as potential investors in the sector of beverage industry.