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This study tests the relationship between capital structure and financial performance of the companies in the textile sector. In this study, correlation matrix and linear regression equation are used by ordinary least squares (OLS) to investigate the impact of capital structure and financial performance. Data has been collected from textile sector companies of the time frame 2011-2015 through respective annual reports and State Bank of Pakistan database. Debt to equity (DE) and debt to total funds (DTF) is used to represent the capital structure and return on capital employed (ROCE) shows the profitability of companies. Findings of the study show that DE positively influences ROCE of the companies. Furthermore, DTF also has a positive impact on ROCE. The relationship between capital structure and financial performance is significantly positive. Companies must undertake the optimal level of debt and equity ratio in their capital structure. This study is significant for the new and old textile companies operating under PSX to make optimal capital structure decision and to raise profitability.
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