Abstract:
Financial Leverage is most
crucial and significant when making financial decisions for
a firm. Literature provides conflicting opinions about the optimal debt equity mix.
Furthermore, most researchers have taken the same indicators to measure financial
performance. Financial leverag e is a significant point when making decisions.
Therefore, this study was conducted using a quantitative approach to examine the
impact of financial leverage on financial performance in companies listed on the
Colombo Stock Exchange. Fifty listed companies were selected as the sample. The
data was collected using published annual reports for the ten years from 2011 to 2020.
The debt to asset ratio and debt to equity ratio were used for measuring the financial
leverage. Tobin’s Q and Price Earnings ratio wer e used as indicators of financial
performance. Moreover, firm growth, liquidity, and tangibility were used as control
variables. Data were analyzed using multiple regression analysis. The results suggest
that high leverage negatively affects financial perf ormance. Using only secondary data
and excluding the banking sector are limitations of the study.
