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 Structure
Capital 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 firms financial structure has impact on the firms 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. Firms 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 companys 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 companys 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.

Capital Structure and Profitability Relationship in Fertilizer sector

Rashtriya Chemicals and Fertilizers

1800 1600 1400 1,424.23 1,330.84 1,185.21 1,673.21

1200
1000 800 600 400 200 0 Mar '09 Mar '10 Total Share Capital Mar '11 Total Debt 210.36 234.44 551.69 551.69 551.69 481.62 245.39

551.69 248.83

551.69 272.67

Mar '12 Reported Net Profit

Mar '13

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 Banking 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

BANK OF BARODA
408444.1 6 327747.3 3 198033.0 4 254394.3 5

2227.2 MAR '09

3058.33 MAR '10

4241.68 MAR '11

5006.96 MAR '12

Total Debt

Reported Net Profit

Capital Structure and Profitability Relationship in Banking sector

DENA BANK
120000 100000 80000 60000 40000 20000 0 422.66 Dec '08 511.25 Dec '09 611.63 Dec '10 803.14 Dec '11 810.38 Dec '12 43102.74 65901.28 52906.2 81047.75 105620.81 450000 400000 350000 300000 250000 200000 150000 100000 50000 0 1741.07 Dec '09 2488.71 Dec '10 2677.52 Dec '11 2749.35 Dec '12 252161.84 320907.19 417207.17

BANK OF INDIA

350330.26

Total Debt

Reported Net Profit

Total Debt

Reported Net Profit

Capital Structure and Profitability Relationship in Banking sector

Union Bank of India
350000 300000 250000
200000 150000 100000 50000 0 1726.55 Mar '09 2074.92 Mar '10 2081.95 Mar '11 1787.14 Mar '12 Total Debt 2157.93 Mar '13 142587.73 215777.26 240778.44 287558.84

179255.05

Total Share Capital

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%

Capital Structure and Profitability Relationship in Banking sector

SBI
16000 14000 12000 10000 8000 6000 4000 2000 0 634.88 Mar '09 634.88 Mar '10 635 Mar '11 671.04 Mar '12 684.03 Mar '13 9121.23 9166.05 7370.35 11686.01 14104.98

SBI
1600000 1400000 1200000 1000000 800000 600000 400000 200000 0 9121.23 Mar '09 9166.05 Mar '10 7370.35 Mar '11 11686.01 14104.98 Mar '12 Mar '13 Total Debt 795786.81 1371922.28 1170652.93 1053501.77 907127.83

Total Share Capital

Reported Net Profit

Reported Net Profit

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

Capital Structure and Profitability Relationship in IT sector

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

TechMahindra
30000 25000 20000 15000 10000 5000 5,062.97 6,696.42 6,865.69 959.41 Mar '11 Total Debt 6,696.42 5,062.97 25,911.51 23,693.82 28,301.14 23,693.82 25,911.51

971.41
Mar '09

971.41
Mar '10

971.41
Mar '12 Reported Net Profit

971.41
Mar '13

Total Share Capital

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

Capital Structure and Profitability Relationship in Manufacturing 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 Tata Steel

30,000.00 25,000.00 20,000.00 15,000.00 10,000.00 5,000.00 0.00 6,203.45 5,201.74 5,046.80 887.41 6,865.69 6,696.42 971.41 5,062.97 971.41 26,946.18 25,239.20 28,301.14 23,693.82 25,911.51

959.41 Mar '11

Total Debt

Mar '09

Mar '10

Mar '12
Reported Net Profit

Mar '13

Total Share Capital

Capital Structure and Profitability Relationship in Manufacturing Sector

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 Canadas 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 Pharmaceutical 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

Ranbaxy
6000 5000 4000 3000 3725.37 4260.72 3348.38 4333.53 4763.61

2000
1000 0 -1000 -2000 -3000 -4000 Total Share Capital Total Debt Reported Net Profit 210.19 Mar '09 -1044.8 571.98 210.21 Mar '10 1148.73

210.52
Mar '11

211 Mar '12

211.46 -162.34 Mar '13

-3052.05

Capital Structure and Profitability Relationship in Pharmaceutical Sector 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