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ABSTRACT
This study aimed to establish the impact of the capital structure on firms' financial performance of capital goods sector listed CSE in Sri Lanka. The study developed secondary data consisting of audited financial statements of 22companies at the CSE, totalling 33 firms for five years (2015 to 2019). The study was to examine the nature of the relationship between capital structure and the financial performance of capital goods companies listed in the CSE Sri Lanka from 2015 to 2019. Debt to Equity and Debt Ratio represented capital structure proxies; Gross Profit, Net profit, Return on Equity, and Return on Capital Employed represented financial performance. The study was attached to the positivism paradigm and guided by the following capital structure theories: static trade-off theory, pecking order theory and agency theory. The study concerns descriptive and inferential statistical methods to analyse the data, and multiple regressions were applied to establish the extent of the impact of the capital structure on firms' financial performance of the capital goods sector. In contrast, correlation and multiple regression were used to analyse the relationship between capital structure and firm performance. The study concluded that it established a significant negative correlation between capital structures and financial performance indicators of GP, NP, and ROE and positively correlated with ROCE. The financial performance, it was recommended that firms invest in easily relocatable and quality. Future studies to investigate other factors that account for variability in financial performance on the relationship between the capital structures of the capital goods sector in Sri Lanka
Keywords: agency theory, capital structure, Colombo stock exchange, financial performance, pecking order theory, static trade-off theory
