1.Introduction

Finance is one of the most useful elements for every business concern and companies cannot run without financial resources. Companies require different types of financial assets and resources to carry out business operations. This research is related with financial aspects of business concerns. In this research, the impact of capital structure on the profitability of textile sector of UK will be analyzed. According to Abor (2005) capital structure is actually the combination of equity and debt securities that are used to finance the assets of organizations. It includes long term debt as well as permanent short-term debt along with common equity and preferred stock used to finance the company. Moreover, capital structure includes two basic elements including ‘structure’ and ‘capital’. The capital is considered to be the investment amount made by the owner to run a business concern while structure is related with the formation. The structure explains that what elements and financial sources have formed the capital. The aim of this research is to determine the impact of capital structure on the profitability of textile sector of UK. According to Filatotchev and Toms (2003) the textile sector of UK is highly developed and is one of the main employment sources for local and international labor force. In addition, the textile sector of UK is highly dependent on yarn and fabric production, and this sector is highly useful for the fashion industry of UK. The UK’s exports of clothing and textile are more than six billion pounds and UK’s textile industry uses highly advanced technology. In this research, the capital structure analysis of textile sector of UK will be carried out through which it will be assessed that what type of capital sources are used by this sector and what is their impact on the profitability as well as performance.

The main objectives of this research are:

1. To analyze the impact of capital structure on profitability of textile sector of UK
2. To evaluate the relationship between capital structure and profitability

The research will be carried out on the basis of theories, literature as well as statistical analysis. This research will include different chapters and the major chapters will be literature review, methodology, analysis, discussion as well as conclusion. This study will be backed up by past literature as well as various statistical tests.

2.Literature review

There are different scholars and researchers that have conducted various studies all over the world to find out the impact of capital structure on profitability of companies. They have focused on various sectors including automobile, manufacturing and retail sector. However, the studies specific to textile sectors are not huge in number. By reviewing different studies and researches, it will be understood that either there is an impact of capital structure on profitability of companies in textile sector and what the relationship between these two factors is.

The study conducted by Cullinan et al., (2002) indicated that both capital structure and profitability are related with each other, the study was conducted by taking sample from thirty-five different companies that were listed on the stock exchange of Hong Kong. Another study carried out by Abor (2007) found a significantly positive relation between return on equity and the ratio of short-term debt to total assets. In addition, the relationship between return on equity and the ratio of long-term debt to total assets was found to be negative. The research of Abor (2005) was further extended by Ali et al., (2016) and it was found that there is a positive relationship between profitability and short-term debt to total assets in various American manufacturing companies. However, it is highly important to understand that there are different studies conducted in past which showed different results. As per Arbabiyan and Safari (2009) and Filatotchev and Toms (2003) there is significant relationship between profitability and capital structure but liability was found to be inversely proportional to profitability. This indicates that if the liabilities of companies are high then it is not a positive or favorable sign for the business concerns and their profitability can be negatively impacted. In the view of Amjad (2007) the debts and profitability are positively and significantly correlated with each other. Moreover, the study was associated with the static trade-off theory and it was argued that the total debts have no significant relationship with financial performance for the reason that there exist hereditary differences between the features of short term and long term debts. There are different studies which have found different results. For instance, the research of Onaolapo, Kajola & Sunday (2010) and Pandey (2004) found that there is negative relationship between capital structure financial performances of business concern.

It was mentioned by Margaritis and Psillaki (2010) that the financial performance of business concern is impacted by capital structures because of the adjusted worth methods, book value as well as market rate. Moreover, it was also mentioned that capital structure is not a single factor but it contains different elements including long term and short term loans that can impact the financial performance and profitability of business concerns. The negative relation between firm’s profitability and financial leverage was found by Khan (2012). It was also found that there is a significantly negative relationship of financial leverage with the company’s performance.

According to Voulgaris et al., (2004) the research conducted by Modigliani and Miller in 1958, related with capital structure is of great importance for today’s firm. In that work, it was mentioned that the market value of companies and their cost of capital were free of its capital structure under the perfect market conditions. Though, it is nearly impossible and difficult for this phenomenon to occur and it is highly difficult to make the definitive theory of capital structure and plan various empirical tests for studies. In the view of Yat Hung et al., (2002) the business concerns try to raise funds via internal resources rather than going for options of debt issues or bank loans. However, different companies focus on debt financing to decrease their capital cost and for lowering the WACC. In addition, the companies that use low cost of capital in different investment projects can increase their profitability. As per research of Akhtar et al., (2012) the business concerns that have lower expected cash flows find difficulties in attaining the higher level of loans or debt as compared with firms that have high expected cash flows and profitability level. Therefore, it is clear that an increase in the long-term debt position is related with a decline in profitability. 

It is highly important to understand that the researchers conducted studies related with capital structure by taking in consideration different factors and variables. That is why; the results of various studies differ from each other and scholars found different results. It was mentioned by Allwood et al., (2008) that the impact of capital structures on profitability of firms in different countries differ from each other because of various external as well as internal factors influencing the decisions related with capital structure. Moreover, it was also mentioned that the decisions regarding capital structures in developing countries are carried out in order to observe the factors which manipulate and control the capital manipulated. According to Ali et al., (2016) the decision making process regarding capital structure is highly crucial procedure and as per pecking order theory the business concerns cannot target a specific amount or ratios for debt. Moreover, a model was provided and it was mentioned that every business concern or sector would initially try to use internal available finance, and then it will go for debt as well as external equity at the end. Furthermore, the decisions regarding capital structure of company are highly dependent upon the competitive environment of a particular industry in which business concern is operating. It was stated by Akhtar et al., (2012) that the profitability of a leveraged company is highly dependent upon the grouping of the companies as per nature of industry or sector. This indicates that the profitability of different firms is dependent upon their nature and environment in which they operate. It was mentioned by Khan (2012) that there is a significantly negative relationship between financial performance and debts but a positive relationship size of company, asset, and opportunities for growth, asset turnover and profitability.  It was also found in the research that by decreasing the debt ratio, company’s management can make the firm’s profitability better and improve wealth of shareholders. Moreover, it was also mentioned that the capital structure of company has positive as well as statistically significant influence on the market performance along with accounting of firm.

By reviewing the past literature and studies, it can be seen that mixed findings are revealed by different researchers. The relationships found between capital structure and firm’s profitability is found to be different by different researchers. This is due to the fact that different researchers have taken under consideration different factors and variables for carrying out the studies. The current study will be highly useful in assessing the impact of capital structure on profitability of companies in textile sector of UK.

 

Hypotheses 1: There is a positive impact of capital structure on profitability of companies in textile sector of U.K.

 

3.Methodology

1. Research approach

According to Cohen, Manion and Morrison (2013), there are two research approaches which could be selected for any research i.e. inductive or deductive research approach. The present research will be based on deductive research approach. This approach will move from general to specific conclusions. In this research, as suggested by Matthews and Ross (2014), firstly, the previous studies about capital structure and profitability of firms will be reviewed. These studies will be the foundation for developing the research hypothesis. Then data will be collected from the specified sector and source. This data will be examined for testing the hypothesis. On the basis of the empirical results, hypothesis will be either accepted or rejected. Hence, conclusion will be drawn regarding the impact of capital structure on profitability of firms which belong from textile sector of U.K.

1. Research methods

Gray (2013) told that there are two research methods which could be selected for any research and these quantitative or qualitative research methods. It is of critical importance to select that method which has potential to fulfill the aim and objectives of the research. In this research, quantitative research methods will be used for examining the impact of capital structure on profitability in textile sector of U.K. The quantitative methods refer to the studies which are based on numeric and figures (Collis and Hussey, 2013). The rationale for using quantitative methods is that quantitative data is based on such measures through which objective data can be obtained. Along with the objectivity, accuracy of results could also be ensured through quantitative methods. Using the quantitative methods, data can be used for drawing generalized conclusions about the research issue (Creswell, 2013). For quantitative methods, it is preferred to have few variables and many cases where pre-defined procedure is used for ensuring reliability and validity of data. In this type of research, standards means are used hence it is easy to replicate the studies, hence, the findings can be compared. Moreover, this method is useful for summarizing vast information and comparing it over time. As this research intends to analyze vast data of 10 years and do comparison over time, so quantitative methods will be best suitable for this research. Cohen, Manion and Morrison (2013) has told that quantitative methods has no room for personal bias of the researcher, therefore, in this research the personal bias will also be avoided when quantitative methods will be used. Therefore, the selection of quantitative methods is done for this research. Most importantly, the set aim and objectives of this research can be effectively fulfilled with the help of quantitative methods, hence, it is selected.

1. Research design

As told by Bryman and Bell (2015), there are always various alternatives for research design which could be selected for a research. The present research will be based on the correlational research design where there are two variables which will be analyzed. These variables are named capital structure and profitability. Theoretically, it is found that there exists relationship among these two variables, now this will be studied empirically using data from textile sector of U.K.

1. Measurement

Consistent with many of previous studies, research study of Abor (2005) will be used for taking the measures for the variables of this research. As the measurement procedure is considered most crucial in quantitative research studies, it will be ensured to select the reliable measures for operationalizing the variables of this study. For measuring profitability, this research will use the value of earnings before interest tax and extraordinary income. For measuring the capital structure, this research will use debt ratios where short term debt to total assets, long term debts to total assets and total debt to total assets as proxies. In the model of this research, two control variables will also be added. These control variables will be the ones which are most commonly used in the similar research studies. The names of these control variables will be firm size and sales growth. For measuring size, natural logarithm of sales will be used. For finding out sales growth figure, the value of current sales will be subtracted from previous year’s sales and it will be divided by the previous year sales.

1. Data Analysis

The collected data will be analyzed using the Statistical Package for Social Sciences (SPSS). The data will be transferred to data sheet of SPSS. There are two statistical tests which will be used in this research for examining the relationship among capital structure and profitability. These tests are named correlation and regression. The correlation analysis will be helpful for finding the strength of relationship which will be found among capital structure and profitability while regression analysis will help to find out causal relationship among the variables which are under investigation.

4.Data Sources

According to Bryman and Bell (2015), there are two alternatives for data sources i.e. primary and secondary. Primary data sources refer to the first hand data while the secondary data sources are the ones which are already available in some data base. This research will be based on secondary data sources where previous data bases are used for finding out the impact of capital structure on profitability in textile sector. The rationale for selecting the secondary data sources over the primary data sources is that it will enable the researcher to complete this research in a timely manner which might not be possible in case of primary data sources as that is time consuming approach. Moreover, the secondary data which is available in the data bases is also feasible for the research aim and objectives (Clark, 2013). As per suggestion of Zikmund et al., (2013), secondary data should be avoided only when aims and objectives could not be fulfilled with this data source. Therefore, secondary data will be given preference in this research.

A database will be developed by the researcher where 200 financial reports which are publically available will be downloaded. The date range will be January 1^st, 2005 to December 31^st, 2015. Mergent Online is one of the most commonly used data base for financial reports, hence, this will be used for collecting the secondary data i.e. financial reports. From the selected reports, those which are usable will be used for further analysis. It is expected that approximately, 100 usable financial reports will be obtained. This research will be based on cross sectional yearly data. The sampling technique which will be used for collecting secondary data i.e. financial reports, is purposive sampling technique. Only those financial reports will be selected which belonged from the textile sector of U.K.

5.Project Plan and Timescale

The following project plan will be followed for this research. The research will be completed in the period of 4 months.

	Month one	Month two	Month three	Month four
Writing introduction
Finding articles and books for literature
Writing literature review
Constructing methodology
Collecting secondary data
Analyzing data on SPSS
Writing analysis
Writing conclusion
Final proofreading and formatting
Revisions after feedback

 

6.Any foreseen problems

There might be few problems which might be encountered in completing this research. It is expected that at least 100 financial reports will be obtained which will have usable data. It might not be possible to be certain that 100 reports will actually have the usable data. Moreover, this research will face the problem of time constraint. Even though, it is a secondary research but still it needs significant time for its completion. If not managed effectively, it will not be possible to meet deadline (Bryman and Bell 2007). Further to this, this research is totally based on quantitative methods and now days few researchers are criticizing to use it as the only method. When used alone, in-depth findings could not be obtained about the research issue by using the quantitative methods. So one foreseen problem is that level of in-depth analysis will be limited (Blaxter, Hughes and Tight, 2010). 

 

 

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