Capital structure and firm performance: evidence from energy sector

Zia-ur-Rehman Rao (), Muhammad Huzaifa () and Raheel Safdar ()
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Zia-ur-Rehman Rao: University of Education, UE Business School
Muhammad Huzaifa: University of the Punjab, Hailey College of Commerce
Raheel Safdar: University of Veterinary and Animal Sciences, UVAS Business School

Journal of Social and Economic Development, 2025, vol. 27, issue 3, No 5, 846-862

Abstract: Abstract The optimal mix of debt and equity capital is critical for significantly reducing a firm's cost of capital and improving overall performance. This study investigates the impact of capital structure on firm performance in the energy sector, focusing on companies listed on the Pakistan Stock Exchange (KSE-100 index). Using data collected from financial statements and the Pakistan Stock Exchange website from 2011 to 2020, the study employs multiple linear regression analysis to examine the relationship between capital structure and firm profitability. Firm performance is measured using return on assets and net profit margin as key indicators. The findings suggest that the debt ratio has a significant positive impact on firm performance. Firm size and liquidity positively influence financial performance, whereas growth exhibits a negative impact. The positive impact of liquidity and firm size suggests that firms should focus on improving operational efficiency and financial flexibility. The negative effect of growth on firm performance indicates the need for such growth strategies that are aligned with financial sustainability. The study provides key implications for financial decision-makers, policymakers, and investors highlighting the importance of maintaining an optimal debt level to enhance firm profitability and financial stability.

Keywords: Capital structure; Financial performance; Energy sector; Growth (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s40847-025-00442-z

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