Volume 6 • Issue 4 • 1000222 Arabian J Bus Manag Review ISSN: 2223-5833 AJBMR an open access journal Research Article Open Access Arabian Journal of Business and Management Review A r a b i a n J o u r n a l o f B u s i n e s s a n d M a n a g e m e n t R e v i e w ISSN: 2223-5833 Hussain et al., Arabian J Bus Manag Review 2016, 6:4 DOI: 10.4172/2223-5833.1000222 Keywords: Capital Structure; Proftability; Financial leverage; Pakistan; Textile frms Introduction Finance is basic element for running, developing or acquire any business and necessary for achieving strategic plans. All companies of textile as well as other sector of economy need investment for fnancing their assets. Tere are diferent ways for raising capital or fnancing the businesses. Te basic ways of collecting capital are issuing shares and getting debts. We have selected 10 textile frms listed in KSE during the data period 2009 to 2014. Tis study defnes the efects of proftability and fnancial leverage on the capital structure in Pakistan textile sectors. Textile sector is one of the biggest manufacturing industries in Pakistan. It plays a major role in economy of Pakistan. It makes addition of forty six percent to the total output of a Gross Domestic Product. Pakistan is one of the huge exporters of textile goods. Capital structure is a combination of long term, short term debts and equity. On the other hand capital structure represent how a frm fnance overall work performance by utilization diferent funds. It plays a vital role in making fnancial decision by the management. Proftability Proftability means the relationship among business earnings from the capital assets of business. Proftability is measured by earning before tax to the total assets. According to pecking order theory a frm can increase its proftability by using its inside funds. Tere are two theories about proftability: Trade of Teory and Pecking Order Teory. Trade of theory claims that by using debts a frm can increase its proftability, as per trade of theory there is positive relationship among proftability and leverage. By increasing debts proftability also increase and vice- versa. Pecking order theory says that managers have better information about their company future than outsider and they protect the interest of existing shareholders. Tey should use retained earnings and if not available then they should prefer debt over equity. Financial leverage Te amount of debt used by the company to fnance its assets is known as fnancial leverage. Financial leverage is way of enhancing estimated return in an entity whereas at the same time it’s also threat to the shareholder interest because it creates problems to repay the debts. Financial leverage can be measured by dividing a frm total debt to its total assets. Signifcance of study We have taken the capital structure as a dependent variable and proftability, fnancial leverage are treated as an independent variables which have not been used before. Research question ¾ Is fnancial leverage has efect on capital structure? ¾ Is proftability has efect on capital structure? ¾ Is there any relation exist between fnancial leverage and proftability? Research objective How textile frms can increase their value in the market. It is important to note that textile sector is one of the largest sectors of Pakistan economy and purpose of the study is to grow the textile sector and to promote the economy, and fnd the relationship between capital structure, fnancial leverage and proftability. Section 1 of this paper is introduction and next is literature review of textile frms. In section 3 describe data source and justify the select of variables. At last section methodology used of this study. Literature Review Modigaliani and Miller in 1958 [1] tried to look into the connection among capital structure and earnings/market value. Teir argument was that in an nation without corporate and personal taxes, capital formation had no consequence on frm value. In other words under some given preventive hypothesis, an un-leveraged frm *Corresponding author: Hassan Shahid, MBA, University of Gujrat City Campus, Pakistan, Tel: 00923055088105, 3006248838; E-mail: hassanshid2008@gmail.com Received March 02, 2016; Accepted March 16, 2016; Published March 23, 2016 Citation: Hussain M, Shahid H, Akmal M (2016) Effect of Proftability and Financial Leverage on Capita Structure in Pakistan Textile Firms. Arabian J Bus Manag Review 6: 222. doi:10.4172/2223-5833.1000222 Copyright: © 2016 Hussain M, et al. This is an open-access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited. Effect of Profitability and Financial Leverage on Capita Structure in Pakistan Textile Firms Muzzammil Hussain 1 , Hassan Shahid 2* and Muhammad Akmal 2 1 Faculty of Management Sciences, University of Gujrat, Pakistan 2 MBA, University of Gujrat City Campus, Pakistan Abstract This study concentration the effect of proftability and fnancial leverage on capital structure in Pakistan textile frms. This study is based on selected 10 listed KSE textile frms the data for the period 2009 to 2014. Estimated regression model and correlation between the fnancial leverage and proftability on capital structure. According to our fnding there is negative relationship between capital structure and proftability and positive relationship between capital structure and fnancial leverage if the fnancial leverage is increase the proftability is decrease and vice versa there have negative correlation.