The relationship between debt and profitability of stock companies in Montenegro

Abstract

Financial structure of the company refers to the structure of financing of business assets and concerns the relationship between their own and borrowed sources of financing. One of the company’s financial goals is to provide optimal financial structure that has the purpose of maximizing business performance in the sense of maximizing profitability and return on equity. The aim of this paper is to determine the degree of correlation between financial structure (debt) and profitability (measured by rates of return on equity). This paper seeks to answer the question of cause and effect in the context of financial structure and profitability of the company: whether a certain financial structure (higher or lower indebtedness) causes more or less profitability. The research used the methodology of simple linear regression between those variables. Empirical research is conducted in the case of joint stock companies in Montenegro, which according to the Law on Accounting and Auditing of Montenegro, have the obligation to draw up quarterly financial statements. It should also be noted that the legal form of companies is one of the factors of their financial structure, and consequently, this research can be the basis for further analysis in the case of other legal forms of enterprises.