CHAPTER - 3

METHODOLOGY
3.0 Introduction
In this chapter a detailed discussion of the research methodology is required since the
central part of research activity is to develop an effective research strategy or design.
In this effort trying to forward concept& variables in developing the study as well as
how to arrive at identified methodologies. The researcher will try to eliminate any
avoidable errors, and will bring possible analytical tool to make the research as far as
possible. It will give a frame work of this aspect.

3.1 Organizational profile

The Colombo Stock Exchange (CSE) is the main stock exchange in Sri Lanka. It is
one of the most modern exchanges in South Asia, providing a fully automated trading
platform. The vision of the CSE is to contribute to the wealth of the nation by creating
value through securities. the Colombo Stock Exchange had 287 listed companies
with a combined market capitalization over 18.3 billion US dollars. As of 26 June
2013, 293 companies are listed on the CSE, representing twenty business sectors with
a market capitalization of 2.4 trillion rupees (over US$18.5 billion), which
corresponds to approximately 1/3 of the Gross Domestic Product of the country.
There are currently two indices in the CSE:
1. The All Share Price Index (ASPI)
2. The S&P Sri Lanka 20 Index (S&P SL20)
(Milanka Price Index - MPI was abolished after 30/12/2012)

3.2 Geographical profile

The headquarters of the CSE have been located at the World Trade Center
Towers [1] in Colombo since 1995 and it also has branches across the country
in Kandy, Matara, Kurunegala, Jaffna, Negombo and Anuradhapura,Ratnapura
,Hambantota .

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3.3 Conceptualization
The research design choice of this study is analytical, which focuses on the impact of
capital structure on firm performance. The study analyzes the companys capital
structure and performance data of sample listed companies in the beverage food &
tobacco sector. This study will utilize Return On Assets (ROA), Return On Equity
(ROE), Net profit ratio and the capital structure data from the financial statements of
the sample companies as a secondary data.
In this manner the following figure: (3.1) depicts the research conceptualization
(design) of this study. Here, capital structure is independent variable which is
measured by debt & equity ratio. Financial performance is dependent variable which
is measured by ROE, ROA, and Net profit ratio.

Table:-3.1 conceptualization
Financial performance

Capital structure

Gross profit

Debt &
equity
Long term
debt & equity

Net profit

ROI/ROCE

ROE
ROA

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3.4 Definition of key concept

Performance measures
This study has primarily focused on the relationship between company performance
and Capital structure for the chosen sample companies. As stated earlier, the chosen
Performance measures are ROE, ROA, and Net profit.

3.4.1 Return on Equity (ROE)

ROE is calculated by taking the net result over shareholders equity for each specified
year. ROE represents what return the company is making on the shareholders funds
invested in the company. ROE assesses leaderships ability to get the job done. A
business

that has a high return on equity is said to be one that is capable of

generating cash internally (Ross. et.al, 2002)

3.4.2 Return on Assets (ROA)

ROA is defined as the operating earnings before interest, depreciation and taxes over
the book value of total assets. ROA measures how efficiently the companys assets are
used to generate profit. This ratio is often used by the investors and potential investors
to evaluate a companys leadership.

3.4.5 Net profit ratio

It measures the rate of net profit earned on sales. This is an overall measurement of
Profitability.

3.4.6Performance
It is measured by, net profit ratio, , ROE ratio and ROA ratio.

3.5 Research Hypotheses

Based on assumed casual relationship given in the conceptual model. The following
hypotheses are developed for testing.
H1:- There is positive relationship between capital structure and financial performance
H2:-The capital structure has great impact on financial performance.
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3.6 Operationalization
Table: - 3.2 operationalization
Concept
1.capital
structure

Variable

Indicator

Role of debt

Leverage ratio

and equity

Measurement
Debt
100
equity
Debt

100

Total funds
Long term debt

Leverage ratio

& equity
2.financial

Net profit

performance

Net

equity
Net profit

Net profit 100

Based on sales

Sales

profit
ROE

ROA

Performance

Total fun
Long term debt x 100

Net
profit
Profit based on

PAIT 100

Equity capital

Equity

Profit based on

PAIT

Total assets

Assets

100

Average of net

Performance = Net

profit ratio, ROE

profit + ROE +

ratio and ROA

ROA /

ratio

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3.7 Data collection and sampling

3.7.1 Data collection
According to Jankowicz (2000), a research method is a systematic and orderly
approach to the collection and analysis of data. What is collected is data, which is raw,
specific, undigested and therefore largely meaningless.
This study utilized a data collection, which means that the data have been collected
over the sample period of 2009 to 2012. In this study, the data will be collected by
using the secondary sources, such as:

CSE hand book

CD record of Colombo stock exchange

Colombo stock exchange annual report

Companies annual report and etc.

3.7.2 Sample selection

According to Jankowicz (2000) sampling can be defined as the deliberate choice of a
number of people, the sample, who are to provide with data from which the researcher
will draw conclusion about some larger group, and the population, whom these people
represent.
This study utilizes the listed companies in beverage food & tobacco sector in Sri
Lanka as its population. As the sampling methods differ in the type of study to be
conducted, the research technique applied to get the sample of this study is the
random sampling. The sample of this study composed of eleven listed companies in
beverage food & tobacco sector and four years from 2009 to 2012.
The following table shows the sample companies based on the sectors:
Table: 3.3 Sampling framework
Sectors
beverage food & tobacco

Total population

Number of samples

20

11
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Total No. of. Samples

20

11

Source: Handbook of listed companies(CSE)

3.8 Method of Analysis

In this study, different methods of statistical processing have been applied. SPSS
(version13.0) software programmed exclusively applicable to statistical processing is
used for processing the data. Here, Correlation, Regression, and descriptive statistics
are used to analyze the data.

3.8.1 Descriptive statistics

Descriptive Statistics are used to describe the basic features of the data gathered from
an experimental study in various ways. The usual descriptive statistical methods such
as means, medians and standard deviation are used to analyze the data.

3.8.2 Inferential statistics

Correlation
Correlation is concern describing the strength of relationship between two variables
by measuring to the degree of scatter of data values. In this study the correlation coefficient analysis is under taken to find out the relationship between capital structure
and financial performance.
The co efficient of correlation is calculated using the following equation.
Co efficient of correlation between x and y:

n(xy) (x) (y)

r=
[ n (x2) - (x2) ] [ n (x2) (y)2]
Where,
n Number of data points

x Sum of the x value

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y Sum of the y value

x2 Sum of all x2 value

y2 Sum of all y2 value

x y Sum of the product of x and y

The coefficient of correlation (r) is a number that, for given set of data, will be
somewhere between -1 and +1 and tells direction and strength of the relationship
between two variable. In this research, the analysis is under taken to find out the
relationship between capital structure and financial performance.

Regression
Regression is also concern the relationship between two variables. It is used for drive
the line of best fit.
Y=abx
Where
a =the line crosses the vertical y-axis.
b =slope of the line.
3.9 Chapter Summary
In this chapter, the research methodology followed to achieve on acceptable result is
discussed. The identification and definition of the target population in terms of the
objectives of study is represented. Further, hypotheses and the sample selection
procedures and analysis techniques are presented. Data analysis is done by using the
SPSS.

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