Capital Structure and Profitability of Foreign Direct Investment Companies in the Indian Pharmaceutical Industry

Abstract

Abstract: The financial performance of a company is also influenced by a good amalgamate of debt and equity portions in the financing patterns of that particular company. Using firm-level data, the current study has examined the relationship between capital structure and profitability of FDI (foreign direct investment)-based enterprises in the Indian pharmaceutical industry. 25 FDI-accepted companies in the Indian pharmaceutical sector were selected as a sample for an 11-yearlong study; from 2010–2011 to  2020–2021. To investigate the impact of capital structure on the profitability of FDI-based companies, multiple regression analysis has been utilised. The profitability was assessed using the following metrics: Return on Net Worth (RONW), Return on Total Assets (ROTA), and Return on Total Income (ROTI). In order to investigate how capital structure affects profitability of FDI firms, two debt indicators are used. These are Debt/Equity (D/E), Short Term Debt/Total Net Assets (STD/TNA), and Total Outside Liabilities/Total Net Assets (TOL/TNA). The findings show that the Debt/Equity ratio significantly effects negatively  the profitability of FDI companies, but the Total Outside Liabilities/Total Net Assets (TOL/TNA) and Short-Term Debt/Total Net Assets (STD/TNA) have no discernible effect on profitability. The findings show that capital structure has a substantial effect on profitability and the success of the FDI firms  in the Indian pharmaceutical sector may be dependent on the financing patterns they choose.

Index Terms: Capital Structure, Profitability, Foreign Direct Investment, Debt/ Equity Ratio, and Indian Pharmaceutical Industry.