RELATIONSHIP BETWEEN THE FINANCIAL LEVERAGE AND OPERATING LEVERAGE OF LISTED COMPANIES IN SRI LANKA

Abstract

In present era competitive world having business is very important to identiff relationship between operating and financial leverage. Because of Should a business increase or reduce the number of units it is producing, should it rely more or less heavily on borrowed money, the answer depends upon how a change would affect risk and return. Operating leverage is the name given to the impact on operating income of a change in the level of output. Financial leverage is the name given to the impact on returns of a change in the extent to which the firm's assets are financed with borrowed money. Financial leverage plays an important role to make a control over the financial statement of the organization. Operating leverage represents an important decision variable at all stages of product manufacturing and sales. Secondary data collection method was used in this research. From 2015 to 2019 was gathered for the analysis from the annual reports of twenty (20) listed companies on the Colombo Stock Exchange. Measures of operating leverage were examined and related to proxies for efficient financial management by listed companies. There were286 listed companies on Colombo Stock Exchange and 20 companies were selected as sample using random sampling method. Further collected data were analyzed by using the STATA- 15 package for interpreting and obtaining conclusion. The main objective of this study is determining the relationship between financial leverage and operating leverage of listed companies in Sri Lanka. The overall research findings indicate that there is a significant negative relationship between financial leverage and operating leverage. Findings of this research help to make effective decision of related parties.