Determinants of Firm Performance in the Indian Manufacturing Sector

Abstract

This research paper examines the determinants of firm financial performance in the Indian manufacturing sector from 2019 to 2023, with a particular focus on the role of capital structure. Utilizing data from 26 NSE/BSE-listed manufacturing companies across 130 firm-year observations, the study investigates how leverage (Debt-to-Equity ratio), firm size (natural log of total assets), and sales growth influence two widely accepted performance proxies: Return on Assets (ROA) and Return on Equity (ROE).
The methodology is quantitative and empirical, employing secondary financial data sourced from Moneycontrol, Screener.in, and published annual reports. Multiple linear regression models were estimated using Microsoft Excel's Data Analysis ToolPak. The study period spans a highly significant economic arc, encompassing pre-pandemic stability (2019), COVID-19 disruption (2020–2021), and recovery (2022–2023).
Findings reveal that leverage exerts a statistically significant negative effect on ROA (β = –0.0237, p < 0.0001), indicating that higher debt burdens erode operating profitability. For ROE, leverage shows a negative but statistically insignificant coefficient, suggesting equity returns are shaped by a broader set of financial and strategic factors. Firm size is negatively associated with both ROA and ROE, albeit not at conventional significance levels, implying diminishing returns to scale. Sales growth significantly enhances ROE (β = 0.1277, p = 0.025) and shows marginal positive effects on ROA, supporting the view that revenue expansion translates into superior value creation for shareholders.
The ROA model exhibits superior explanatory power (Adjusted R² ≈ 27%) compared to the ROE model (Adjusted R² ≈ 2.6%), indicating that capital structure variables better capture operational efficiency than equity returns. These findings are consistent with Trade-off Theory, Pecking Order Theory, and Agency Cost Theory, and contribute new sector-specific empirical evidence for the post-COVID period in India.
The study offers actionable insights for corporate managers, investors, and policymakers regarding the optimal use of financial leverage and growth strategies in capital-intensive manufacturing industries.