3.0 Introduction
In this chapter a detailed discussion of the research methodology is required since the
central part of research activity is to develop an effective research strategy or design.
In this effort trying to forward concept& variables in developing the study as well as
how to arrive at identified methodologies. The researcher will try to eliminate any
avoidable errors, and will bring possible analytical tool to make the research as far as
 possible. It will give a frame work of this aspect.
3.1 Organizationa !ro"i#
The Colombo Stock !change "CS# is the main stock e!change in Sri $anka. It is
one of the most modern e!changes in South %sia, providing a fully automated trading
 platform. The vision of the CS is to contribute to the wealth of the nation by creating
value through securities.  the Colombo Stock !change had '( listed companies
with a combined market capitali)ation over *'.+ billion S dollars. %s of - une
/*+, 0+ companies are listed on the CS, representing twenty business sectors with
a market capitali)ation of .1 trillion rupees "over S2*'.3 billion#, which
corresponds to appro!imately *4+ of the 5ross 6omestic 7roduct of the country.
There are currently two indices in the CS8
*. The %ll Share 7rice Inde! "%S7I#
. The S&7 Sri $anka / Inde! "S&7 S$/#
"9ilanka 7rice Inde! : 97I was abolished after +/4*4/*#
3.$ G#ogra!%ica !ro"i#
The headquarters of the CS have been located at the ;orld Trade Center 
Towers <*= in Colombo since *003 and it also has branches across the country
in >andy, 9atara, >urunegala, affna, ?egombo and %nuradhapura,@atnapura
3.3 Conc#!tuaization
 The research design choice of this study is analytical, which focuses on the impact of 
capital structure on firm performance. The study analy)es the companyBs capital
structure and performance data of sample listed companies in the beverage food &
tobacco sector. This study will utili)e @eturn n %ssets "@%#, @eturn n quity
"@#, ?et profit ratio and the capital structure data from the financial statements of 
the sample companies as a secondary data.
In this manner the following figure8 "+.*# depicts the research conceptuali)ation
"design# of this study. Aere, capital structure is independent variable which is
measured by debt & equity ratio. Dinancial performance is dependent variable which
is measured by @, @%, and ?et profit ratio.
Table8:+.* conceptuali)ation
P#r"or)anc# )#a*ur#*
This study has primarily focused on the relationship between company performance
and Capital structure for the chosen sample companies. %s stated earlier, the chosen
7erformance measures are @, @%, and ?et profit.
3.&.1 R#turn on E+uit( ,ROE
@ is calculated by taking the net result over shareholdersB equity for each specified
year. @ represents what return the company is making on the shareholdersB funds
invested in the company. @ assesses leadershipBs ability to get the Eob done. %
 business that has a high return on equity is said to be one that is capable of 
generating cash internally "@oss. et.al, //#
3.&.$ R#turn on A**#t* ,ROA
@% is defined as the operating earnings before interest, depreciation and ta!es over 
the book value of total assets. @% measures how efficiently the companyBs assets are
used to generate profit. This ratio is often used by the investors and potential investors
to evaluate a companyBs leadership.
3.&. /#t !ro"it ratio
It measures the rate of net profit earned on sales. This is an overall measurement of 
7rofitability.
 It is measured by, net profit ratio, , @ ratio and @% ratio.
3. R#*#arc% H(!ot%#*#*
Fased on assumed casual relationship given in the conceptual model. The following
hypotheses are developed for testing.
A*8: There is positive relationship between capital structure and financial performance
A8:The capital structure has great impact on financial performance.
3"
  1.ca!ita
*tructur#
equity
$."inancia
!#r"or)anc#
3..1 Data co#ction
%ccording to ankowic) "///#, a research method is a systematic and orderly
approach to the collection and analysis of data. ;hat is collected is data, which is raw,
specific, undigested and therefore largely meaningless.
This study utili)ed a data collection, which means that the data have been collected
over the sample period of //0 to /*. In this study, the data will be collected by
using the secondary sources, such as8
CS hand book 
Colombo stock e!change annual report
CompaniesB annual report and etc.
3..$ 4a)!# *##ction
%ccording to ankowic) "///# sampling can be defined as the deliberate choice of a
number of people, the sample, who are to provide with data from which the researcher 
will draw conclusion about some larger group, and the population, whom these people
represent.
This study utili)es the listed companies in beverage food & tobacco sector in Sri
$anka as its population. %s the sampling methods differ in the type of study to be
conducted, the research technique applied to get the sample of this study is the
random sampling. The sample of this study composed of eleven listed companies in
 beverage food & tobacco sector and four years from //0 to /*.
The following table shows the sample companies based on the sectors8
Table8 +.+ Sampling framework 
 beverage food & tobacco / **
3.5 M#t%od o" Ana(*i*
In this study, different methods of statistical processing have been applied. S7SS
"version*+./# software programmed e!clusively applicable to statistical processing is
used for processing the data. Aere, Correlation, @egression, and descriptive statistics
are used to analy)e the data.
3.5.1 D#*cri!ti6# *tati*tic*
6escriptive Statistics are used to describe the basic features of the data gathered from
an e!perimental study in various ways. The usual descriptive statistical methods such
as means, medians and standard deviation are used to analy)e the data.
3.5.$ In"#r#ntia *tati*tic*
Corr#ation
Correlation is concern describing the strength of relationship between two variables
 by measuring to the degree of scatter of data values. In this study the correlation co:
efficient analysis is under taken to find out the relationship between capital structure
and financial performance.
The co efficient of correlation is calculated using the following equation.
Co efficient of correlation between ! and y8
n(∑xy) – (∑x) (∑y)
;here,
n J ?umber of data points K! J Sum of the ! value
3#
 
Ky J Sum of the y value K! J Sum of all !value
Ky J Sum of all y value K ! y J Sum of the product of ! and y
The coefficient of correlation "r# is a number that, for given set of data, will be
somewhere between :* and * and tells direction and strength of the relationship
 between two variable. In this research, the analysis is under taken to find out the
relationship between capital structure and financial performance.
R#gr#**ion
@egression is also concern the relationship between two variables. It is used for drive
the line of best fit.
  LHa+ b!
  b Hslope of the line.
3.7 C%a!t#r 4u))ar(
In this chapter, the research methodology followed to achieve on acceptable result is
discussed. The identification and definition of the target population in terms of the
obEectives of study is represented. Durther, hypotheses and the sample selection
 procedures and analysis techniques are presented. 6ata analysis is done by using the
S7SS.
3$