Debt Thresholds and Profitability: Evidence from Real Estate Companies Listed on Vietnamese Stock Market

Abstract

The paper aims to assess the nonlinear relationship between debt and profits of real estate enterprises listed on the Vietnamese stock exchange in 2016 - 2023. Based on the threshold regression method, the paper found the maximum debt threshold at which real estate enterprise profits will change. Specifically, the paper found a debt-to-equity threshold of 6.3243, corresponding to a debt-to-total-assets ratio of 86.34%. The estimated coefficient of debt on corporate profits is positive when the debt ratio is less than the threshold and negative when the debt ratio is greater than the threshold. The results imply that debt will increase profits if the enterprise has less than 86.34% financial leverage. Conversely, when financial leverage exceeds this threshold, debt will be a cost burden that reduces corporate profits. Policymakers warn that businesses may become more vulnerable when owning high debt levels during economic downturns. Therefore, determining an appropriate debt ratio is an essential financial strategy so that debt can maximize its benefits and help businesses maximize profits.