Analysis Of The Influence Of Capital Structure On Profitability In Bse-500 Companies Through A Comprehensive Examination

ABSTRACT This research examines the effect of capital structure on BSE-500 firms' profitability, and on capital structure policies and their optimality. On the basis of an unbalanced panel data of 420 companies for a period of 18 years (2006–2023), this research explores the contribution of financial leverage towards firm performance. Return on Equity (ROE) and Return on Assets (ROA) are selected as the dependent variables, while Debt-Equity Ratio (DER), Long-Term Debt Ratio (LTDR), and Total Debt to Market Capitalization (TDMCAP) are utilized as the determinants of capital structure. Firm-specific control variables such as Size (SZ), Liquidity (LQ), and Tangibility (TANG) are included to enhance the precision of analysis. Fixed effects and random effects panel data regression models are used to establish the relationship between profitability and capital structure. The most appropriate model is established by the Hausman test, and the fixed effect model gives a more accurate estimate in ensuring that. Results show a significant negative impact of DER and TDMCAP on ROE, implying that high debt results in lower firm profitability. Liquidity exerts a negative impact on profitability, while firm size has a positive impact on firm performance. The threshold regression analysis determines an optimal debt-equity ratio of 1.57 after which more debt has a negative impact on firm performance. The conclusion presents the call for balance in the capital structure for increased profitability. Such data is useful to corporate managers, policymakers, and financial institutions to make the right funding choices. It is contended in the research that firms have debt-equity ratios that are in ranges suitable to attain increased profitability as well as guarantee stability in the accounts.