Degree of Indebtedness and Short Term Solvency - A Study on Manufacturing Companies of Bangladesh

Abstract

Financial leverage refers to the extent to which a firm relies on debt. The main objective of the study was to measure the degree of indebtedness as well as effect of corporate borrowings on short-term solvency of DSE-listed manufacturing companies in Bangladesh over a 20-year period (1998-2017). The study was based on secondary data. Stratified and Quota Sampling techniques were applied for the selection of sample items of MNCs and domestic companies respectively. Seven companies from each of MNC and domestic company category were selected as sample from six industrial sectors. It is seen that MNCs’ mean short-term solvency is significantly higher and mean degree of indebtedness is significantly lower than that of domestic companies. All three DFL measures exert negative impact on domestic companies’ coverage ratios and on interest coverage ratio of MNCs. In case of domestic companies, only DFL (FS) has significant influence on TIE ratio. In case of MNCs, all measures of degree of indebtedness has significant influence on short-term solvency.