Ejefas 27 05

European Journal of Economics, Finance and Administrative Sciences
ISSN 1450-2275 Issue 27 (2010)

© EuroJournals, Inc. 2010
http://www.eurojournals.com
“Leverage” – An Analysis and its Impact on Profitability with

Reference to Selected Cement Companies in India
S. Chandrakumarmangalam
Assistant Professor, School of Management
Anna University of Technology, Coimbatore - 641 047
Tel: 98656 16158
E-mail: ckmaucbe@gmail.com
P. Govindasamy
Assistant Professor, Department of Management Studies
Sengunthar Engineering College, Tiruchengode - 637 205
Tel: 99425 55300
E-mail: govindkgm@gmail.com
Abstract
The major objective of this paper is to analyze and understand the impact of leverage on
the profitability of the firm. This paper investigates the relationship between the leverage
(financial leverage, operating leverage and combined leverage) and the earning per share.
And it aims to describe how the earning capacity of the firm is influenced by the fixed
operating costs and the fixed financial charges. This study also explains the relationship
between the Debt equity ratio and Earning per Share and how effectively the firm be able
debt financing. In this study, selected Cement companies are taken for analysis and
hypothesis are examined with the help of one way ANOVA and t-test. Apart from that,
other tools like skew ness and kurtosis are applied to examine “Lack of symmetry” used to
understand the distribution of data and ‘Flatness or peaked ness’. The results suggest that
the leverage and profitability and growth are related and the leverage is having impact on
the profitability of the firm.
Keywords: Leverage, Financial leverage, Debt-Equity ratio, Earnings per share, Cement
companies, Profitability
Introduction to the Indian Cement Industry

The Indian Cement Industry has a substantial growth and it has achieved an installed capacity of 242
million tonnes and it is expected to reach 300 million tonnes by 2011-12 and 600 million by 2020.
India has 97 per cent of the installed capacity through dry process; the Indian Cement Industry has
been adopting latest technologies in manufacturing which aims at energy conservation and control of
pollution, on-line process of quality control and laboratory automation. Despite having high demand
for cement in India, our per capita cement consumption is very low when compare to the world average
which is 396 kg. Whereas India’s per capita consumption is 156 kg. India being the country of young
population has a huge potential and its ushering social and economic base will improve the domestic
consumption. Indian cement industry is efficient and eco-friendly, when it comes to energy
conservation, the best level is achieved by the Industry as far as data goes of 687 kilo calories per kg of
clinker and 66 KWh per tonne cement are at par with the best achieved levels in the world. The
54 European Journal of Economics, Finance and Administrative Sciences - Issue 27 (2010)
Cement industry effort towards control of emissions, preservations of ecology and its Corporate Social
Responsibility for Environmental Protection are laudable. The sustainable and long- standing efforts
towards reduction of carbon footprint is commendable – CO2 emission of 0.82 tonnes per tonne of
cement produced in 2006, a sustainable drop from the level of 1.12 in 1996 and 0.94 in 2000. There are
a total number of 125 large cement plants and more than 300 small cement plants operating in India
presently.
Recent Development
Import of cement from Pakistan was to the tune of 100,000 tonnes during the month of January 2008.
This is expected to increase, as Pakistan is a surplus producer of cement. The price of cement from
Pakistan is around $70 a tonne FOB (about Rs 140 a bag). Also the country has a manufacturing
capacity of 38 million tonnes a year, which is in excess of its domestic consumption. Hence this
increased import is expected to drive the price rise in India. However the domestic players believe that
the import is not going to affect their pricing power as the quantity is very in-significant and there are
several infrastructure bottlenecks in India which prevents the imported cement being cheaper.
The worlds second largest cement manufacturer Holcim is planning to invest about Rs 10,000
crore in the next five years to set up plants and raise capacity by 25 million tons in India. The company
will add 4-5 million tons of capacity each year at an investment of 400-500 million dollars a year. The
company plans to add 25 million tonnes in the next 5 years. The company currently has a production
capacity of 45 million tons through Ambuja Cements and ACC Cements.
South based India Cements is purchasing two ships for catering to its captive requirements of
imported coal which will be taken delivery during end January / March 2008. This will help the
company in reducing the incidence of coal cost in the coming years. The company plans to set up 2
units with 2 million tones capacity each in Northern India in order to geographically diversify its
operation. A 40-mega watt captive power plant is also being set along with these plants in order to
reduce reliance on external source. The company has envisaged a capital expenditure of Rs 1,220 crore
for the same.
ACC Cements is expanding its Bargarh Plant to 2.24 million tonne together with a 30 MW
Captive Power Plant which is expected to be completed by the end of 2008. Similarly, the projects for
augmentation at Madukkarai by 0.22 million tonne is also expected to materialize by this year end. The
company is setting up a 9 MW Wind farm in Tamil Nadu & 25 MW TG set at Kymore plant. The
company would also set-up additional 7000 tonne per day clinker line along with a new additional 25
MW Captive Power Plant at Chanda at a total outlay of Rs.1451 crore.
Leverage
The employment of asset or source of funds for which the firm has to pay fixed cost or fixed return is
termed as leverage. The asset or source of fund is act as force to boost up the firms ability to increase
the profitability. The higher leverage obviously implies higher outside borrowings and hence it is
riskier if the firms earning capacity is reduced. In other words, only when the Return On Investment is
higher than the cost of outside borrowing, the effect of leverage will be favorable.
Operating Leverage
Operating leverage is caused due to fixed operating expenses in a firm. It is the firm’s ability to use
fixed operating costs to magnify the effects of changes in sales on its earnings before interest and taxes.
Operating leverage occurs at any time a firm has fixed costs that must be met regardless of volume.
Financial Leverage
Financial Leverage is caused due to fixed financial costs in firm. It is the ability of a firm to use fixed
financial charges to magnify the effects of changes in EBIT on the earning per share. It involves the
use of funds obtained at a fixed cost in the hope of increasing the return to the shareholders. The
financial leverage employed by a company is intended to earn more return on the fixed-charge funds
than their costs. The surplus (or deficit) will increase (or decrease) the return on the owner’s equity.
The rate of return on the owner’s equity is levered above or below the rate of return on total assets.
Combined Leverage
Operating and financial leverages together cause wide fluctuation in EPS for a given change in sales. It
can be done by multiplying the operating leverage and financial leverage. The operating leverage
affects the EBIT and the financial leverage affects the EPS. The management has to devise a right
combination of the operating and financial leverage. A company whose sales fluctuate widely and
erratically should avoid use of high leverage since it will be exposed to a very high degree of risk.
Leverage and Earning Per Share

There is a close relationship between the financial leverage and Earning Per Share of the company. If
degree of financial leverage is high and the return on investment is greater than the cost of debt capital,
then the impact of leverage on EPS will be favourable. The impact of financial leverage is
unfavourable when the earning capacity of the firm is less than what is expected by the lenders (i.e.)
the cost of debt.
Need and Objectives of the Study

An investor who would like to be rational and scientific in his investment activity has to evaluate a lot
of information about past performance and the expected future performance of the companies,
industries and the economy as a whole before taking the investment decision and hence, the present
study attempts to analyze the impact of leverage on profitability of selected cement companies in India.
The following are the objectives of the study
• To understand and analyze the leverage effects of the selected cement companies.
• To analyze the impact of leverage on profitability
• To assess the relationship between the financing mix and earning per share.
Hypothesis of the Study

For better understanding of the effect of leverage on the profitability, the following hypothesis can be
framed.
1. There is no significant relationship between DFL and EPS.
2. There is no significant relationship between DOL and EPS.
3. There is no significant relationship between DCL and EPS.
4. There is no significant relationship between Debt Equity Ratio and EPS.
Methodology
The present study adopts an analytical and descriptive research design. The data of the sample
companies has been collected from the annual reports and the balance sheet published by the
companies and the websites of the companies.
A finite a sample size of seven companies’ listed on the Bombay stock exchange has been
selected for the purpose of the study. They are ACC cements, Chettinad cement, India cements, Dalmia
cement, Ambuja cement, Birla cement and Prism cement.
The variables used in the analysis are earning per share (EPS) Degree of Operating
leverage(DOL) Degree of Financial Leverage(DFL) Earnings Before Interest and Taxes (EBIT)
Earnings Before Taxes(EBT) , Debt Equity Ratio (DER) and Contribution Margin.
While interpreting the results, the statistical tool of one way Analysis of Variance (ANOVA)
has been used.
Sample Design
Sampling Techniques: the study is done with special reference to public limited companies. The
reason being that the data or financial statements are readily available for them. The technique of
Convenient Sampling is being adopted for the study. The election of sample companies is made on the
basis of market capitalization and they are selected among the top gainers during the last year.
Sample size: Seven Indian Public Limited companies are chosen as sample size for the study
on account of having the highest market capitalization.
Data Collection
Financial statements are the raw data collected from various websites like www.capitaline.com and
other company websites
Time Period of the Study

The study has been conducted during Nov 2009 to Dec 2009.
Tools Used for Analysis

• Leverage analysis.
• Mean,
• Standard Deviation,
• Skewness: “Lack of symmetry” used to understand the distribution of data
• Kurtosis: ‘Flatness or peaked ness’ of the frequency curve. It is the convexity of frequency
curve.
• Correlation analysis and test of significance.
• Analysis of variance (ANOVA): The statistical tool that is used for testing hypothesis is one-
way Analysis of Variance.
Limitations of the Study

• The study is based on secondary data and only the period of 7 years is taken for analysis.
• The pertaining to the analysis is collected from Capitaline and corporate databases.
• Some of the external factors affecting the leverage were not taken into account.
Results and Discussions

Degree of Financial Leverage
The degree of financial leverage is defined as the percentage change in earning per share (EPS) that
results from a given percentage change in earning before interest and taxes (EBIT).
DFL = EBIT/EBT
Table 1: Degree of Financial Leverage (DFL)
DFL ACC Chettinad India Dalmia Ambuja Birla Prism

1997 1.70 1.49 1.38 1.47 1.39 2.26 -
1998 2.18 1.91 1.75 1.60 1.52 (1.15) 0.17
1999 1.97 2.01 1.97 1.75 1.47 (1.56) (11.58)
2000 3.46 1.77 2.41 1.72 1.22 (7.49) 0
2001 1.88 1.89 2.42 1.58 1.43 2.99 4.58
2002 1.47 2.95 3.57 1.54 1.32 2.05 3.59
2003 1.47 12.60 (0.14) 1.60 1.30 1.81 (4.68)
2004 1.26 1.59 (4.18) 1.53 1.21 1.33 1.69
2005 1.15 1.29 2.60 1.40 1.13 1.18 1.30
2006 1.04 1.19 2.16 1.17 1.05 1.08 1.16
2007 1.03 1.08 1.25 1.15 1.03 1.04 1.02
Mean 1.6918 2.7064 1.3809 1.5009 1.2791 0.3218 -0.3056
Std. Deviation 0.70135 3.32087 2.06788 0.19547 0.16634 2.92665 4.94955
Skewness 1.716 3.178 -2.215 -0.851 -0.146 -2.191 -1.754
Kurtosis 3.666 10.309 5.755 0.059 -1.173 5.384 3.174
Source: computed from the data available in annual reports of the company concerned (capitaline plus)
From Table No-1 it is clear that the DFL shows a fluctuating trend and the calculated mean and
standard deviation values of Chettinad was maximum when compare to other sample companies while
Prism has higher standard deviation of 4.94 which is due to the firm’s inability to make profit during
the year 1991, 1999, 2000 and 2003.The standard deviation of ACC is comparatively low which
indicates that the company less risky in terms the financial risk. The skewness value of ACC and
Chettinad shows that they were positively skewed while the skewness of other companies are negative.
Kurtosis values indicates that financial leverage of all the sample companies except Dalmia and
Ambuja are leptokurtic as they are more peaked than the normal curve. The kurtosis values of Dalmia
and Ambuja are flatter than the normal curve so that they are platykurtic.
HYPOTHESIS TESTING
Ho: The DFL position of the Cement companies does not differ significantly.
Ha: The DFL position of the Cement companies differs significantly.
ANOVA
Table 2: Degree of Financial Leverage
Sum of Squares df Mean Square F Sig.

Between Groups 57.604 6 9.601 1.483 .197
Within Groups 440.258 68 6.474
Total 497.862 74
Note: One-way ANOVA has been performed in SPSS
Inference: Since the calculated significance level 0.197, which is greater than 0.05, the null
hypothesis is accepted. Hence, it is concluded that the DFL position of ACC, Chettinad, India cement,
Dalmia, Ambuja, Birla, and Prismm does not differ significantly
The degree of Operating leverage is defined as the percentage change in earning before interest
and taxes (EBIT) that results from a given percentage change in sales. Operating leverage occurs at any
time a firm has fixed costs that must be met regardless of volume.
DOL = Contribution/EBIT
Table 3: Degree of Operating Leverage (DOL)
DOL ACC Chettinad India Dalmia Ambuja Birla Prism

1997 2.41 1.39 1.72 1.44 1.44 2.81 0
1998 2.86 1.40 1.62 1.45 1.43 7.17 (13.64)
1999 2.32 1.42 1.60 1.59 1.48 5.09 4.48
2000 2.92 1.38 1.68 1.64 1.28 4.12 4.91
2001 2.34 1.52 1.62 1.59 1.47 3.26 4.02
2002 2.17 1.54 1.63 1.57 1.49 3.26 5.16
2003 2.36 1.63 5.53 1.66 1.61 3.29 9.14
2004 2.16 1.45 2.33 1.69 1.60 2.87 5.23
2005 1.98 1.69 1.86 1.86 1.61 2.38 3.95
2006 1.52 1.63 1.91 1.48 1.50 2.11 3.11
2007 1.54 1.44 1.42 1.34 1.34 1.46 1.84
Mean 2.2345 1.4991 2.0836 1.5736 1.4773 3.4382 2.82
Std. Deviation 0.44648 0.10995 1.1672 0.14299 0.10603 1.57225 6.08315
Skewness -0.194 0.62 3.084 0.341 -0.398 1.418 -2.569
Kurtosis -0.14 -1.137 9.811 0.479 -0.215 2.48 7.63
Analysis in table 3 shows that the mean DOL of Birla was high as 3.43and which is followed
by ACC with mean DOL of 2.23. The standard deviation value of Chettinad was lower with 0.109 and
is followed by Ambuja and Dalmia with the standard deviation of 0.106 and 0.142 respectively. The
standard deviation of Prism was comparatively high whci indicates that it has high variations in its
fixed cost expenditures.The DOl is positively skewed in Chettinad, India,Dalmia, and Birla while it is
negatively skewed for ACC, Ambuja and Prism. Kurtosis values indicate that operating leverage of all
the sample companies except India cement and Prism are platykurtic as they are flatter than the normal
curve. The kurtosis values of India cement and Prism are more peaked than the normal curve, it is
called leptokurtic.
ANOVA
Ho: The DOL position of the Cement companies does not differ significantly.
Ha: The DOL position of the Cement companies differs significantly.
Table 4: Degree of Combined Leverage

Between Groups 36.162 6 6.027 1.112 .364
Within Groups 373.817 69 5.418
Total 409.979 75
Inference: Since the calculated significance level 0.364, which is greater than 0.05, the null
hypothesis is accepted. Hence, it is concluded that the DOL position of ACC, Chettinad, India cement,
Dalmia, Ambuja, Birla, and Prismm does not differ significantly
The combined leverage is simply expressed as financial leverage multiplied by operating
leverage. The operating leverage has its effect on operating risk and is measured by the percentage
change in sales. The financial leverage has its effects on financial risk and is measured by the
percentage change in EPS due to percentage change in EBIT. The risk associated with the combined
leverage is known as total risk.
Table 5: Degree of Combined Leverage (DCL)
DCL ACC Chettinad India Dalmia Ambuja Birla Prism

1997 4.10 2.07 2.38 2.11 2.00 6.35 0
1998 6.23 2.68 2.84 2.32 2.17 (8.26) (2.33)
1999 4.56 2.85 3.15 2.77 2.18 (7.97) (51.87)
2000 10.10 2.44 4.04 2.82 1.56 (30.85) 0.00
2001 4.41 2.87 3.91 2.52 2.10 9.75 18.42
2002 3.19 4.54 5.83 2.41 1.97 6.68 18.52
2003 3.49 20.54 (0.80) 2.67 2.09 5.97 (42.78)
2004 2.72 2.30 (9.72) 2.59 1.93 3.83 8.86
2005 2.28 2.17 4.83 2.61 1.81 2.80 5.12
2006 1.58 1.95 4.11 1.74 1.57 2.27 3.60
2007 1.59 1.55 1.78 1.54 1.38 1.51 1.88
Mean 4.0227 4.1782 2.0318 2.3727 1.8873 -0.72 -4.058
Std. Deviation 2.44635 5.48141 4.27022 0.41694 0.27284 11.50373 23.95569
Skewness 1.655 3.201 -2.422 -1.085 -0.784 -2.07 -1.423
Kurtosis 3.364 10.417 6.561 0.229 -0.675 4.735 0.982
Source: computed from the data available in annual reports of the company concerned(capitaline plus)
Table 5 indicates that the DCL Chettinad and ACC were high as 4.17 and 4.02 respectively
while Birla and Prism do not have sufficient money during the year 1998, 11999 and 2000 even to
cover its fixed expenditure. The standard deviation shows that Ambuja and Dalmia has lesser risk as it
is indicated the standard deviation value of 0.27and 0.41 respectively and Birla and Prism have high
variation in its DOL. The ACC and Chettinad were positively skewed while other sample companies
are negatively skewed. Kurtosis values indicate that combined leverage of all the sample companies
except that of Dalmia, Ambuja and Prism are leptokurtic as it is more peaked than the normal curve.
The kurtosis values of Dalmia, Ambuja and Prism are flatter than the normal curve and is known as
platykurtic.
ANOVA
Ho: The DCL position of the Cement companies does not differ significantly.
Ha: The DCL position of the Cement companies differs significantly.
Table 6: Debt Equity Ratio

Between Groups 77.832 15 5.189 . .
Within Groups .000 0 .
Total 77.832 15
Inference: Since the calculated significance level nil, which must be less than 0.05, the null
hypothesis is rejected and alternative hypothesis is accepted. Hence, it is concluded that the DCL
position of ACC, Chettinad, India cement, Dalmia, Ambuja, Birla, and Prism differ significantly
among them.
The ratio between the borrowed funds and owner’s funds is called dent equity ratio. It indicates
the proportion of debt is used in the capitals structure. Higher debt equity ratio reveals that the financial
risk of the firm is higher and leads to increased cost of capital i.e higher return is required by both
owners and lenders.
DE Ratio = Borrowed funds/Shareholder’s Funds
Table 7: Debt Equity Ratio (DER)
DE Ratio ACC Chettinad India Dalmia Ambuja Birla Prism

1997 0.81 1.58 0.95 1.06 0.87 1.04 0.77
1998 1.22 1.85 1.6 1.24 0.98 1.41 1.39
1999 1.45 1.88 2.07 1.19 0.83 2.05 1.94
2000 1.35 1.69 2.03 1.16 0.74 2.03 2.36
2001 1.4 1.69 2.14 1.11 0.94 1.54 2.34
2002 1.52 2.45 2.52 1.16 1.1 1.32 1.84
2003 1.47 2.98 3.44 1.24 1.1 1.21 1.73
2004 1.21 2.34 4.76 1.17 0.83 1.01 1.8
2005 0.72 2.2 5.39 1.52 0.57 0.82 1.46
2006 0.4 1.96 2.81 1.95 0.35 0.76 0.77
2007 0.19 1.23 1.55 1.67 0.15 0.54 0.16
Mean 1.0673 1.9864 2.66 1.3155 0.7691 1.2482 1.5055
Std. Deviation 0.46364 0.4813 1.37144 0.27826 0.30161 0.48942 0.6908
Skewness -0.921 0.635 1.039 1.531 -1.027 0.469 -0.694
Kurtosis -0.521 0.648 0.344 1.572 0.403 -0.518 -0.191
It is found from the table 4 that the mean debt equity ratio of India Cement is highest as 2.66
during study period, which is followed by Chettinad ,Prism, Dalmia, Birla, ACC and Ambuja with a
debt equity ratio of 1.98, 1.50, 1.31, 1.24, 1.06,and 0.76 respectively. It is observed that the
profitability of Prism was poor but it has higher debt proportion in its capital structure which in turn
will endanger the financial soundness of the firm. The standard deviation value indicates that India
cements has highest standard deviation as it is modify its capital mix frequently. Among the sample
companies, ACC, Chettinad, India, and Ambuja are positively skewed while other companies are
negatively skewed. The kurtosis value of the entire sample is flatter than the normal curve and is
known as platykurtic.
ANOVA
Ho: The DER position of the Cement companies does not differ significantly.
Ha: The DER position of the Cement companies differs significantly.
Table 8: Earning Per Share (EPS)

Between Groups 26.408 6 4.401 9.590 .000
Within Groups 32.126 70 .459
Total 58.534 76
Inference: Since the calculated significance level zero, which is less than 0.05, the null
hypothesis is rejected and alternative hypothesis is accepted. Hence, it is concluded that the DER
among them.
Earning per share measures the profit available to the equity shareholders on a per share basis,
that is, the amount that they can get on every share held. It is the rupee earnings available to each share
of the owners.
This can be calculated by the following formula which is expressed in rupee terms:
Net profit available to equity Shareholders
Number of Ordinary shares Outstanding
The earning per share position of the sample companies is summarized in Table 1 and
discussed below.
Table 9: Correlation Analysis
EPS ACC Chettinad India Dalmia Ambuja Birla Prism

1997 53.21 24.9 12.53 37.54 17.22 85.16 0
1998 8.32 13.78 8.76 33.74 16.26 67.13 0
1999 39.89 11.4 6.52 25.86 18.21 48.48 0
2000 0 7.09 2.92 27.14 27.74 34.18 0
2001 2.57 2.95 3.22 37.14 11.91 28.19 0
2002 7.63 0 0 33.28 12.02 28.26 0
2003 5.75 0 0 25.42 13.4 0.54 0
2004 10.78 4.47 0 32.52 17.75 5.27 0
2005 20.19 8.92 0.33 39.63 3.27 11.07 0.87
2006 63.6 12.88 2.38 21.9 6.32 16.01 2.08
2007 73.2 37.61 20.64 53.1 11.03 41.77 6.29
Mean 25.9218 11.2727 5.2091 33.38 14.10 33.27 0.84
Std. Deviation 26.6933 11.31797 6.54558 8.66546 6.53849 26.15416 1.92057
Skewness 0.827 1.431 1.539 1.002 0.395 0.746 2.744
Kurtosis -0.996 2.037 2.087 1.659 1.123 0.032 7.807
From the table it is inferred that the EPS of Dalmia and Birla is substantially higher than that of
ACC Chettinad, India, Ambuja, and Prism. On an average, Dalmia has generated the EPS of Rs.33.38,
highest amongst all, followed by Birla (33.27), ACC (25.92), Ambuja (14.10), Chettinad (11.27), India
(5.21), and then Prism (0.84), the lowest among the seven sample companies. The analysis reveals that
Dalmia is the most efficient company in terms of generating earning per share. The kurtosis value of
the entire sample is flatter than the normal curve and is known as platykurtic.
The relationship of EPS within and among the companies can be tested using the following
hypothesis. It is shown in table 10.
ANOVA
Ho: The EPS position of the Cement companies does not differ significantly.
Ha: The EPS position of the Cement companies differs significantly.
Table 10: Test of Significance

Between Groups 11560.207 6 1926.701 7.985 .000
Within Groups 16890.438 70 241.292
Total 28450.645 76
Inference: Since the calculated significance level zero, which is less than 0.05, the null
hypothesis is rejected and alternative hypothesis is accepted. Hence, it is concluded that the DER
among them.
Correlation Analysis
Correlation analysis is an important statistical tool which helps in determining the relationship between
two or more variables. The degree of relationship is measured by the correlation co-efficient which is
denoted by ‘r”.
Test of Significance
Table value of (n-1) i.e 10 degrees of freedom at 5% level of significance is 1.812 for two tailed test.
Hypothesis 1 (H0): There is no significant relationship between financial leverage and EPS.
Table 11: Correlelation and ‘t’ Test Results for Financial Leverage and Earning Per Share
Company Name ‘r’ value Correlation result ‘t’ value Hypothesis result
ACC -.493 Negative /3.010/ Rejected
Chettinad -.417 Negative /2.409/ Rejected
India .096 Positive /1.850/ Rejected
Dalmia -.449 Negative /12.201/ Rejected
Ambuja .398 Positive /6.503/ Rejected
Birla -.144 Negative /4.153/ Rejected
Prism .144 Positive /0.749/ Accepted
Table 11 shows that the correlation between the financial leverage and EPS is negative for
ACC, Chettinad, Dalmia and Birla and it is positive for the remaining sample companies. As per the‘t’
test results, it is clear that the table value is less than the calculated value for ACC, Chettinad, India
,Dalmia, Ambuja and Birla. Therefore, null hypothesis is rejected. Hence, there exists a relationship
between financial leverage and EPS. In case of Prism, the null hypothesis is accepted therefore, there is
no relationship between financial leverage and EPS.
Hypothesis 2 (H0): There is no significant relationship between operating leverage and EPS.
Table 12: Correlelation and ‘t’ Test Results for Operating Leverage and Earning Per Share
India -.375 Negative /1.559/ Accepted
Ambuja -.540 Negative /6.403/ Rejected
Birla .417 Positive /3.777/ Rejected
Prism -.020 Negative /0.931/ Accepted
Table 12 indicates that the correlation between the operating leverage and EPS is negative for
all the sample companies except Birla cement. As per the‘t’ test results, it is clear that the table value is
less than the calculated value for ACC, Chettinad, Dalmia, Ambuja and Birla. Therefore, null
hypothesis is rejected. Hence, there exists a relationship between operating leverage and EPS. In case
of India cement and Prism, the null hypothesis is accepted; therefore, there is no relationship between
operating leverage and EPS.
Hypothesis 3 (H0): There is no significant relationship between combined leverage and EPS.
Table 13: Correlation and ‘t’ Test Results for Combined Leverage and Earning Per Share
India .112 Positive /1.348/ Accepted
Birla -.191 Negative /3.946/ Rejected
Prism .132 Positive /0.658/ Accepted
Table 13 shows that the correlation between the financial leverage and EPS is negative for
ACC, Chettinad, Dalmia and Birla and it is positive for the remaining sample companies. As per the‘t’
test results, it is clear that the table value is less than the calculated value for ACC, Chettinad, Dalmia,
Ambuja and Birla. Therefore, null hypothesis is rejected. Hence, there exists a relationship between
combined leverage and EPS. In case of India cement and Prism cement, the null hypothesis is
accepted; therefore, there is no relationship between combined leverage and EPS.
Hypothesis 4 (H0): There is no significant relationship between debt equity ratio and EPS.
Table 14: Correlelation and ‘t’ Test results for debt equity ratio and earning per share
India -.665 Negative /1.264/ Accepted
Dalmia .074 Positive /12.269/ Rejected
Birla .200 Positive /4.061/ Rejected
Prism -.756 Negative /1.081/ Accepted
Table 14 reveals that the correlation between the debt equity ratio and EPS is negative for
ACC, Chettinad, India Cement, and Prism and it is positive for the remaining sample companies. As
per the‘t’ test results, it is clear that the table value is less than the calculated value for ACC, Chettinad,
Dalmia, Ambuja and Birla. Therefore, null hypothesis is rejected. Hence, there exists a relationship
between financial leverage and EPS. In case of India Cement and Prism, the null hypothesis is
accepted; therefore, there is no relationship between debt equity ratio and EPS.
Major Findings
Financial Leverage
• Mean and standard deviation of DFL of Chettinad Cement are highest among the sample
companies. It reveals that Chettinad cement is exposed with more risk of paying interest but at
the same time returns of owners can be maximized. India cements, during the period 2003 and
2004, Birla Cement during the year 1998, 1999, and 2000, Prism Cement during the year 1999
and 2003 did not have sufficient profit even to meet the interest expenses.
• The degree of financial leverage of most of the sample companies is negatively skewed and the
kurtosis value shows that the DFL of all the sample companies except Dalmia and Ambuja
Cement is Leptokurtic.
• One way ANOVA is adopted to find out the variability of data among the sample companies
and it is found that the DFL position of ACC, Chettinad, India cement, Dalmia, Ambuja, Birla,
and Prism does not differ significantly
Operating Leverage
• Mean and standard deviation of DOL of Birla and Prism are highest among the sample
companies and they are exposed with more risk of paying fixed operating expenses
• The degree of operating leverage of ACC Ambuja and Prism are negatively skewed while the
remaining sample companies are positively skewed. and a kurtosis value shows that the DOL of
India Cement and Prism are leptokurtic and the DOL of other sample companies are
platykurtic.
• From one way ANOVA it is found that the variability of data among the sample companies and
it is found that the DOL position of ACC, Chettinad, India cement, Dalmia, Ambuja, Birla, and
Prismm does not differ significantly
Combined Leverage
• It is found that the mean values of DCL of ACC and Chettinad are higher as it was 4.0227 and
4.1782 respectively. They are exposed with high risk of paying fixed operating expenses and
increased financial risk.
• The degree of combined leverage of ACC, and Ambuja are positively skewed while the
remaining sample companies are negatively skewed and the kurtosis value shows that the DOL
of ACC, Chettinad, India Cement and Birla are leptokurtic and the DOL of other sample
companies are platykurtic.
• One way ANOVA indicates the variability of data among the sample companies and it is found
that the DCL position of ACC, Chettinad, India cement, Dalmia, Ambuja, Birla, and Prism does
differ significantly.
Debt Equity Ratio

• It is found that the mean values of DER of India Cement and Chettinad Cement are higher as
they are 2.66 and 1.9864 respectively. High debt equity ratio always impaired a firm with high
financial risk The standard deviation of DER of India Cement is highest among the sample
companies and it is indicated that there is a frequent change in its financing mix decisions.
• The Debt equity ratio of Chettinad, India cement, Dalmia, and Birla are positively skewed
while the remaining sample companies are negatively skewed and the kurtosis value shows that
the DER of all sample companies are platykurtic.
that the DER position of ACC, Chettinad, India cement, Dalmia, Ambuja, Birla, and Prism does
Earnings Per Share

• It is found that the mean values of EPS of Dalmia, Birla and ACC Cement are higher as they
are 33.38, 33.27 and 25.9218 respectively. It is an indication of higher earning per share of the
company. The standard deviation of EPS of ACC, Birla and Chettinad are higher that there is a
high variation in its EPS during the study period.
• The Earning Per Share of all sample companies are positively skewed and the kurtosis value
shows that the EPS of all sample companies except Prism (which is leptokurtic) are platykurtic.
that the EPS position of ACC, Chettinad, India cement, Dalmia, Ambuja, Birla, and Prism does
Correlation Analysis and Tests of Significance

• Correlation between DFL and EPS is positive for India Cement, Ambuja and Prism and‘t’ test
result reveals that there is a significant relationship between DFL and EPS except Prism.
• Correlation between DCL and EPS is positive only for Birla Cement and‘t’ test result reveals
that there is a significant relationship between DCL and EPS except India Cement and Prism.
• Correlation between DOL and EPS is positive for India Cement, Ambuja and Prism and‘t’ test
result reveals that there is a significant relationship between DOL and EPS except India Cement
and Prism.
• Correlation between DER and EPS is positive for India Cement, Ambuja and Dalmia and‘t’ test
result reveals that there is a significant relationship between DER and EPS except India Cement
and Prism.
Conclusions
From the study it is found that there is a significant relationship between DFL and EPS, DCL and EPS,
and DOL and EPS. Thus, fixed operating expenses and the financing mix decisions of the firm are
significantly influencing the earning capacity of the firm. The leverage effect is positive when the
earnings of the firm is higher than the fixed financial charges to be paid for the lenders. The leverage is
an important factor which is having impact on the profitability of the firm and the wealth of the
shareholders can be maximized when the firm is able to employ more debt.
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European Journal of Economics, Finance and Administrative Sciences

ISSN 1450-2275 Issue 27 (2010)

“Leverage” – An Analysis and its Impact on Profitability with

Introduction to the Indian Cement Industry

Leverage and Earning Per Share

Need and Objectives of the Study

Hypothesis of the Study

Time Period of the Study

Tools Used for Analysis

Limitations of the Study

Results and Discussions

Table 1: Degree of Financial Leverage (DFL)

DFL ACC Chettinad India Dalmia Ambuja Birla Prism

Table 2: Degree of Financial Leverage

Sum of Squares df Mean Square F Sig.

DOL ACC Chettinad India Dalmia Ambuja Birla Prism

Table 4: Degree of Combined Leverage

Sum of Squares df Mean Square F Sig.

Table 5: Degree of Combined Leverage (DCL)

DCL ACC Chettinad India Dalmia Ambuja Birla Prism

Table 6: Debt Equity Ratio

Sum of Squares df Mean Square F Sig.

Table 7: Debt Equity Ratio (DER)

DE Ratio ACC Chettinad India Dalmia Ambuja Birla Prism

Table 8: Earning Per Share (EPS)

Sum of Squares df Mean Square F Sig.

Table 9: Correlation Analysis

EPS ACC Chettinad India Dalmia Ambuja Birla Prism

Table 10: Test of Significance

Sum of Squares df Mean Square F Sig.

Debt Equity Ratio

Earnings Per Share

Correlation Analysis and Tests of Significance

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