Impact of financial leverage on the profitability of real estate companies : A quantitative study from Swedish Stock Exchange

Abstract: Prudent usage of financial leverage by managers can significantly impact business operations and a corporate’s performance. Thus, the determination and the understanding of the influence of financial leverage on the profitability of a corporation are intrinsic and indispensable for not only maximising the value of a firm but also improving its financial performance. This study adopted a quantitative research method, in which the theories were tested by multiple regression analysis in line with the positivism paradigm and deductive measure. Moreover, ontology belongs to the objectivist perspective, in which the authors viewed reality as a mechanism from the outside and focused only on observable and measurable facts. The authors investigated the capital structure and profitability of the 18 largest listed real estate companies in Sweden from 2016 to 2020. Leverage essentially consists of total liability to assets, short-term liability to assets and long-term liability to assets. Profitability is defined as the rate of return on assets (ROA), which represents the company's degree of profitability relative to total assets from an overall business perspective widely used for financial analysts. In order to accomplish the trustworthy study in the regression model, control variables were also introduced that comprised company size, liquidity and solvency. The result of this paper reveals that financial leverage is irrelevant for determining ROA in the real estate industry in Sweden.