Effect of Debt Financing on Firm Profitability: The Influence of Asset Growth and Sales Growth

Abstract

One of the oldest and maximum arguable questions of corporate finance is the bond among debt financing and the profitability of the corporation. It is an empirical study of the impact of debt financing, measured using debt to equity ratio (DER), on the profitability of firms primarily based totally on the return on assets (ROA) and it also explores whether or not the increase of belongings and sales growth mediates this relationship. The studies layout is a quantitative panel data examine primarily based totally on secondary financial facts based on the yearly report and balnce sheet of 40 manufacturing firms on the Pakistan Stock Exchange (PSX) between the year 2015 and 2024, which resulted in an unbalanced panel of 400 firm years. The firms are sampled using purposive sampling and must have all the available ten years of their financial records, which must be complete and audited. Descriptive facts are calculated to explain the sample, Pearson correlation evaluation is executed to check the two variable relationship and multicollinearity, panel regression evaluation primarily based totally on Pooled Ordinary Least Squares (OLS), Fixed Effect (FE) and Random Effect (RE) version is carried out and the Hausman specification test is used to select the preferred version. EViews 12 is used to carry out all of the estimations. Diagnostic tests: Im-Pesaran panel take a look at, Shin panel check, and the Breusch-Pagan Lagrange Multiplier take a look at of cross-sectional dependence, and the Wooldridge check of serial correlation are used for you to validate the regression inferences. The empirical proof helps the truth that debt financing has a sturdy terrible effect on ROA ( 83 = -0.083, p < 0.01), that is consistent with monetary misery and employer fee hypothesis. The asset increase is observed to definitely and considerably mild the connection among debt and ROA in which the bad impact of leverage is softened in case corporations are withinside the system of growing their efficient capability. This connection additionally undoubtedly moderates with income increase, because the revenue-producing momentum allows groups to fulfill debt duties and continue to be profitable. The studies is an addition to the empirical capital shape literature with the lens of a growing economic system and gives realistic recommendation to the economic managers of Pakistani production groups in a macroeconomic surroundings with a excessive hobby charge to barter leverage choices.