Are the Syariah Compliant Companies Performance Influenced by Leverage?

Abstract

Shariah compliant securities have become popular among investors nowadays because these securities are found to be more ethical stance and transparent over product profitability activities. This paper studies on the influences of debt toward financial performance of shariah compliant companies which are listed under Kuala Lumpur Shariah Index of Bursa Malaysia from the year 2006 to 2010. It was found that Shariah Compliant Companies’ performance are influenced by leverage ratio as Debt ratio and Long term debt ratio showed a significant negative relationship with performance proxy by EPS. In order to sustain the level of companies’ performance the managers need to reduce the level of debt financing so that the company will not suffer a high financial risk. Generally, 38.1%. of the shariah compliant securities have an ideal debt ratio around 17% - 33%. However, 24.1% of shariah compliant companies have more that 34% debt ratio which is not healthy for the companies in the long run. Industrial product market sectors have the highest percentage of leverage level at 28% followed by consumer product at 20.6% and trading and services. Therefore there are needs to overcome the problem in order to improve the performance of shariah compliant securities to be listed in KLSI in the future.