capital structure and its impact on profitability

Relationship Between Capital Structure and

Profitability

Flow of Presentation

Introduction

Importance of capital structure

Factors considering while framing Capital

Structure

Capital structure and profitability

Data Analysis

Limitation of Study

Conclusion

Introduction

A mix of a company's long-term debt, specific short-

term debt, common equity and preferred equity. The

capital structure is how a firm finances its overall

operations and growth by using different sources of

funds.

Debt comes in the form of bond issues or long-term

notes payable, while equity is classified as common

stock, preferred stock or retained earnings. Short-term

debt such as working capital requirements is also

considered to be part of the capital structure.

Capital StructureCapital structure consists of short term debt, Long term debt and equity financing. It tells how company uses different sources of finances to finance its operations.

Debt financing.Debt financing means when a company wants to borrow money it takes debt from the banks, or other sources of finance and after a specified interval of time this debt have to be paid back. The lender in this case is not the owner of the company. He receives fixed interest payments till the maturity of debt and receives back the principal amount at maturity.

Equity financing.In equity financing companies issue shares to get financing. In this case the person who buy share becomes owner of company. There are no interest payments in this case, and no return of principal amount.

Profitability.Profitability is the ability of a company to generate net income consistently.

Importance of Capital Structure

Profitability is the primary goal of all businesses.

Without profitability the business will not survive in

the long run.

Profitability is measured with income and expenses.

Profitability is measured with an “income

statement” because income statement is measure

of income and expenses during a given time period.

Factors that Influence a Company's Capital - Structure Decision

Business Risk

Company's Tax Exposure

Financial Flexibility

Management Style

Growth Rate

Market Conditions

Capital Structure and Profitability

A firm’s financial structure has impact on the firm’s profitability. Firms can use this financial structure that is debt to equity ratio to increase profitability of a company.

Firms that are using internal financing i.e. retained earnings are found to be more profitable then those using external financing.

Relationship between debt financing and profits has been misinterpreted. Firm’s size matter, large firms issue more debt then smaller firms where as smaller firms mostly go for equity financing. Firms which are more profitable tend to repurchase equity and issue debt.

The objective of the capital structure is the source of the funds used by a firm in the way that will increase the company’s common stock price.

Capital structure management is the objective by which firm seeks the mix of funds that will minimize its cost of capital.

The decision about capital structure is very important especially when the economic environment is not stable. So this decision can impact on company’s profitability.

Data Analysis

Capital Structure and Profitability Relationship in Fertilizer Sector

By Analyzing it was found that there is no relationship

between capital structure and profitability.

As due to equilibrium in perfect capital markets, the

capital structure has no impact on profitability of

companies.

In agriculture sector companies use conservative

financing to run their operations which do not affect

the cost of financing in the fertilizer sector, so it have

no impact on companies value.

Mar '09 Mar '10 Mar '11 Mar '12 Mar '130

200

400

600

800

1000

1200

1400

1600

1800

551.69 551.69 551.69 551.69 551.69

1,424.231,330.84

481.62

1,185.21

1,673.21

210.36 234.44 245.39 248.83 272.67

Rashtriya Chemicals and Fertilizers

Total Share Capital Total Debt Reported Net Profit

Capital Structure and Profitability Relationship in Fertilizer sector

In 2010, reported a 11% jump in its net profit to

233.44 from 210.60 in previous year due to lower

input costs and realization of government subsidies.

Results also shows a significant relationship between

current liabilities and profitability of company in

fertilizer sector.

Capital Structure and Profitability Relationship in Fertilizer sector

• By doing Research of banking sector with 5 public sector bank in India we come to know that there is a positive relationship between the capital structure and profitability.

• Increase in debt lead to increase in profit

Capital Structure and Profitability Relationship in Banking sector

Mar '09 Mar '10 Mar '11 Mar '12

198033.04

254394.35

327747.33

408444.16

2227.2 3058.33 4241.68 5006.96

BANK OF BARODA

Total Debt Reported Net Profit


Dec '08 Dec '09 Dec '10 Dec '11 Dec '120

20000

40000

60000

80000

100000

120000

43102.74

52906.2

65901.28

81047.75

105620.81

422.66 511.25 611.63 803.14 810.38

DENA BANK


Dec '09 Dec '10 Dec '11 Dec '120

50000

100000

150000

200000

250000

300000

350000

400000

450000

252161.84

320907.19350330.26

417207.17

1741.07 2488.71 2677.52 2749.35

BANK OF INDIA




50000

100000

150000

200000

250000

300000

350000

142587.73179255.05

215777.26240778.44

287558.84

1726.55 2074.92 2081.95 1787.14 2157.93

Union Bank of India

Total Share Capital Total Debt

• Union Bank of India fund infusion of about Rs 1,000 crore as part of recapitalization plan of the government in 2011-12.Net non-performing assets (NPAs) sequentially rose 13 basis points to 1.32% while gross NPAs by 20 basis points to 2.57%


2000

4000

6000

8000

10000

12000

14000

16000

634.88 634.88 635 671.04 684.03

9121.23 9166.05

7370.35

11686.01

14104.98

SBI

Total Share Capital Reported Net Profit

In 2011 SBI has issued the right share issue of Rs 20000 cr and that’s why the profit of the company is down in 2011.



200000

400000

600000

800000

1000000

1200000

1400000

1600000

9121.23 9166.05 7370.3511686.0114104.98

795786.81907127.83

1053501.771170652.93

1371922.28

SBI

Reported Net Profit Total Debt

By conducting the thorough research we come to know

that there is a positive relationship between the capital

structure and profitability.

If there is an increase in the debt then the profitibility

would increase.

And if there is a decline in the debt then the profitability

would also decline.

Capital Structure and Profitability Relationship in IT sector


5000

10000

15000

20000

25000

30000

971.41 971.41 959.41 971.41 971.41

25,911.5123,693.82

28,301.14

23,693.8225,911.51

5,062.976,696.42 6,865.69 6,696.42

5,062.97

TechMahindra


In 2011, SBI has issued the right share issue of Rs 20000 cr and that’s why the profit of the company is down in 2011. .

Capital Structure and Profitability Relationship in IT sector

The study results reveal significantly negative relation

between debt and profitability.

Our findings imply that an increase in debt position is

associated with a decrease in profitability; thus, the

higher the debt, the lower the profitability of the firm.

The results also show that profitability increases with

control variables; size and sales growth.

Capital Structure and Profitability Relationship in Manufacturing sector

Capital Structure and Profitability Relationship in Manufacturing sector

Mar '09 Mar '10 Mar '11 Mar '12 Mar '130.00

5,000.00

10,000.00

15,000.00

20,000.00

25,000.00

30,000.00

6203.45

887.41 959.41 971.41 971.41

26,946.1825,239.20

28,301.14

23,693.8225,911.51

5,201.74 5,046.806,865.69 6,696.42

5,062.97

Tata Steel


During FY 2013, Tata Steel Group raised debt from

various banks and financial markets .

An amount of Rs 15472 crore was incurred on capital

expenditure

And Rs 27099 crore was utilised towards repayment of

principal obligations.

It bought 51% stake in Canada’s Labrador mines project.

Capital Structure and Profitability Relationship in Manufacturing Sector

During FY 2012 : 6 million tonnes per annum plant in Odisha's Kalinganagar. Investment - Rs 35,000 crore. 65:35 debt equity ratio for spent Rs. 3700 crore in FY 2012. During FY 2011,FY 2010 and FY 2009: Eurozone crisis Current steel demand is almost 30% lower than the pre-2008

financial crisis level. Lower average selling prices compared with the all-time high

price levels .

Capital Structure and Profitability Relationship in Manufacturing Sector

The study results reveal no significant relation between debt and profitability.

Our findings imply that an increase in debt position is having no relevance with profitability; thus, the higher the debt, the lower the profitability of the firm.

Capital Structure and Profitability Relationship in Pharmaceutical Sector



-4000

-3000

-2000

-1000

0

1000

2000

3000

4000

5000

6000

210.19 210.21 210.52 211 211.46

3725.373348.38

4260.72 4333.534763.61

-1044.8

571.981148.73

-3052.05

-162.34

Ranbaxy


2008, loss on exceptional items stood at Rs 784.3 crore due to change in AS 30.

Increase in profit in 2009, due to savings on selling, general and administrative department. EBITDA stood double than 2008

Growth in domestic market to 16% compared to last year. In 2009-10, gain from forex reserve stood to 675 crore as

compared to 23.7 crore in 2008-09. In 2010, License fees generated was Rs 170 crore which was

milestone. In 2011, a sharp decline in sales outside india which was 68%

of 2010. Third time affected by forex effects, loss stood to 470 crores

from where it had gains in 2010.


Limitation of study

Conclusion

capital structure and its impact on profitability

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