In every firm financial decision related to assets plays vital role in business. The optimumproportion of debt and equity is a challenge for the manager dealing with financial matters ofthe firm. This study aims to investigate the relationship between capital structure andprofitability of listed pharmaceutical companies in Pakistan. The study spans over ten yearsby employing secondary data. The indicators of profitability in this study are return on assets(ROA) and return on equity (ROE) respectively. Simultaneously the indicators of capitalstructure are debt to equity ratio (DTE), long term debt to total asset (LDTA) and equity tofixed assets (ETFA) respectively. Furthermore the control variable is size of the firm (SZ).Results of the study show the relationship between profitability and capital structure isnegatively significant suggesting established pecking order theory.
Keywords: Capital Structure, Firm's Performance, Return on Assets, Return on Equity,Capital Structure Ratios, Pharmaceutical Industry, Pakistan Stock Exchange.