Capital Structure, Profitability and Sustainable Financing: Evidence from Pharmaceutical Companies

Abstract

This study examines the impact of capital structure on firm profitability in the Indian pharmaceutical sector using panel data analysis. The sample consists of five leading pharmaceutical companies listed in India over a ten-year period, resulting in 50 firm-year observations. Profitability is measured using Return on Assets (ROA) and Return on Equity (ROE), while capital structure is proxied by Debt–Equity Ratio (DER) and Debt Ratio (DR). Firm size and sales growth are included as control variables. Fixed-effects and random-effects panel regression models are employed, with model selection guided by the Hausman test. The results reveal that leverage has a negative but insignificant effect on ROA, indicating that debt does not significantly influence operational efficiency. However, leverage exerts a significant negative impact on ROE, suggesting that higher debt levels reduce shareholders’ returns. Sales growth positively affects profitability, while firm size remains insignificant. The findings highlight the cautious use of debt in capital structure decisions, particularly from a shareholder perspective (Myers, 1984; Boffo & Patalano, 2020). The study contributes to the limited empirical literature on capital structure profitability linkage in the Indian pharmaceutical industry.