Impact of Capital Structure on Firm Financial Performance in the Pharmaceutical Sector of Pakistan

Abstract

Capital structuring has always remained one of the vital aspects of corporate strategy, although the effectof capital structuring on profitability remains debatable, especially within the pharmaceutical industry in the emerging economy of Pakistan, which remains capital-intensive and heavily regulated. Although financial theories state the advantages of structuring through debt, the effectiveness within the emerging economy that remains dominated by higher interest rates and higher price regulations remains to be established. In this context, the paper aims to analyze the existing relationship using the sample data of the top pharmaceutical companies in the Pakistan Stock Exchange across the period of ten years (2014-2024). S&P Global data were accessed through the annual reports of the company for the purpose of using Panel Least Square Regression and testing the effect of the Debt/Equity ratio on Return on Assets (ROA) and Return on Equity (ROE) in the pharmaceutical industry in Pakistan. The results showed that Market Capitalization emerged as the most robust and significant positive driver for both ROA and ROE across the dataset. Total Equity demonstrated an inverse relationship with ROE, while Firm Size showed a marginal negative impact specifically on asset efficiency (ROA). Interestingly, the measures of debt (total debt and debt-to-equity ratio) did not provide any meaningful results in both models, which might indicate that their influence on performance has a direct linear effect that is limited by the specific sample under study. The consequences of this article are thus key to the establishment of financial policies that would alleviate the high costs of the high cost of debt, offering important indicative information to policy makers who are interested in the sustainability of the healthcare sector in cases of financial instability.