Relationship between profitability and debt: The case of the Slovak Energy and Mining sector

Research background: Knowing the financial situation of companies and the entire sector is very important in an increasingly competitive environment. Financial indicators are used to assess the financial situation, and it is important to examine the relationships between them. Managers can use this information for better decision-making and thus improve their position in the market. Purpose of the article: The paper deals with modelling the relationship between profitability and debt of companies in the Energy and Mining sector of the Slovak Republic. The aim of this paper is to examine the relationship between return on equity and total indebtedness of companies in the Energy and Mining sector of the Slovak Republic. Methods: A nonlinear regression model and a threshold regression model with one and two threshold values are used to model the relationship between profitability and debt. The models are used on the data of 1,219 companies from the Energy and Mining sector in the Slovak Republic for the year 2020. The analysis is focused on the year 2020, when the entire world was plagued by the COVID-19 pandemic and other negative events (price increases) appeared that had an impact on the sector. In the case of marginal models, total indebtedness is used as a threshold variable and total indebtedness, Debt/EBITDA, profit margin, EBITDA margin, Net Debt/EBITDA are used as mode variables. Findings & Value added: We have shown the nonlinear relationship between return on equity and total indebtedness. Knowing the relationship between financial indicators allows for more effective business management. It can be used to optimize the debt policy of the company in the industry.