Leverage (Financial and Operating) Impact on profitability of oil and gas sector of SAARC Countries

Author(s)

Qasim Saleem , Dr. Ramiz Ur Rahman , Dr Naheed Sultana ,

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Volume 2 - January 2013 (01)

Abstract

The main objective of this topic is to analyze and understand the effect of leverage on the profitability of the oil and gas sector of SAARC countries. It analyzes the relationship between leverage (Financial, operating and combined) and EPS of this sector. It aims to analyze how earning capacity of this sector is affected by operating costs and fixed financial charges. This explains the relationship between the Debt equity ratio and EPS and how effectively this sector be able debt financing. In this study selected oil and gas companies are taken for analysis and hypothesis are examined with the statistical methods of one way ANOVA and t-test. Leverage is basically explained as the use of borrowed money to make an investment and return on that investment. It is more risky for a company which has ratio of financial leverage. But financial leverage is commonly used in various circumstances specially oil and gas sector as a means of altering the cash flow and financial position of a company. There are the following four positions which show a relationship with the level of financial leverage. First, it is the relation of equity and debt that means the rate of capital. The other is the influences on business operations and cycle of financial leverage. Then the company's industry and its branches as whole financial leverage level. Then the correlation between the current financial leverage ratio of the company with the middle leverage level. Lastly, the possibility of company's mission and philosophy with the situation connected to the ratios of financial leverage. The outcome of the financial leverage can also be used to push up income and growth however, it is much common for business industries in the phase of the boom period. Financial leverage ratio is relative to changing of profit and contrary to stability. Financial leverage greatly affects return on assets, return on investment and return on equity. 

Keywords

Leverage, Impact on profitability, oil and gas sector 

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