The Relationship between Leverage And Financial Performance.

Abstract

Shariah compliant securities become popular among investors nowadays because they found that these securities are more ethical stance and transparent over product profitability activities. This paper study on the influences of debt toward financial performance of shariah compliant companies which listed under Kuala Lumpur Shariah Index of Bursa Malaysia from the year 2006 until 2010. We found that Shariah Compliant Companies performance are influence by leverage ratio when Debt ratio and Long term debt ratio showed a significant negative relationship with performance proxy by profitability. 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, 78% of the shariah compliant securities have an ideal debt ratio around 0% - 33%. However, 22% 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 27% follow by consumer product at 26% and trading and services (16%). Therefore there are needs to overcome the leverage problem among shariah compliant companies in order to improve the performance of shariah compliant securities to be listed in KLSI in the future