Abstract:
Capital structure decision is a complex issue since it has greater impact for the
sustainability of an organization. The commercial banks play a vital role in adopting
the best financial management practices in the Sri Lankan economy. This study
examines the impact of capital structure on financial performance of the commercial
banks based on secondary data collected from the financial statements of a leading
commercial bank for the period of six years from 2010 to 2015. Seven indicators were
used to measure the firm’s performance; Gross Profit Margin, Return on Capital
Employed, Return on Assets, Return on Equity, Net Profit Ratio, Earnings Per Share
and Net Interest Margin. Debt to Equity Ratio and Debt to Total Fund Ratio were
used as proxies for the capital structure. The data was analyzed using the panel data
regression method. The results indicate that Debt to Equity Ratio has a significant
impact on Net Profit Ratio and Return on Assets as well as Debt to Total Assets Ratio
has significant impact on Return on Capital Employed, Gross Profit Margin and
Earnings per Share. The findings are helpful to the practitioners in the banking
industry to determine the proper mix of debt and equity in order to maintain the
optimum financial performance level for the firm’s success.
