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Abhinav

Abhinav International Monthly Refereed Journal of Research In Management & Technology I S S N –

International Monthly Refereed Journal of Research In Management & Technology

ISSN 2320-0073

Volume III, February’14

LEVERAGE ANALYSIS OF AMUL ANAND MILK UNION LIMITED, AHMEDABAD

Priyanka Sharma 1 , Ankit Saxena 2 and Karishma Choudhary 3

1 Research Associate, Pacific Institute of Management & Technology, Udaipur, Rajasthan, India Email: sharmapriyanka5389@gmail.com Student, Pacific Institute of Management & Technology, Udaipur, Rajasthan, India Email: 2 ankitaman91@gmail.com, 3 choudharykarishma3@gmail.com

ABSTRACT

The effect of financial leverage is studied both at a market and a firm level where the firm is exposed to both individual and market risk. Financial leverage measures firm’s exposure to the financial risk. A high level of financial leverage allows shareholders to obtain a high return on equity, but they are also exposed to a higher risk of significant loss, if the return on assets is lower. The financial leverage employed by a firm is intended to earn more on the fixed charges funds than their relative costs. Leverage is a business term that refers to borrowing .if a business is "leveraged" it means that the business has borrowed money to finance the purchase of assets .the other way to purchase assets is through use of owner funds or equity.

In this paper a comparative study and analysis of firms financial leverage, operating leverage and combined leverage has been done of five years i.e. from 2007-08 to 2011-12.

Risk;

Keywords: Financial

Leverage;

Operating

Leverage;

Combined

Leverage;

Shareholder’s Return

INTRODUCTION

Leverage refers to the debt or the borrowing of the funds to finance the purchase of a company’s assets. Leverage is a business term that refers to borrowing .If a business is "levered" it means that the business has borrowed money to finance the purchase of assets. Purpose of leverage is to raise profits; a high degree of leverage gives a big push upward to profits. If it properly used, it serves it purpose well and its effects are favorable.

Importance of leverage

It is acceleration of profits through changes in certain financial variables, which means in turn that leverage is tool of profit planning.

Purpose of leverage is to raise profits; a high degree of leverage gives a big push upward to profits. If it properly used, it serves it purpose well and its effects are favorable.

Types of leverage

Operating leverage:-Operating leverage refers to the percentage of fixed costs that a company has stated another. Way. Operating leverage is the ratio of fixed costs to variable

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Abhinav

Abhinav International Monthly Refereed Journal of Research In Management & Technology I S S N –

International Monthly Refereed Journal of Research In Management & Technology

ISSN 2320-0073

Volume III, February’14

costs. If a business firm has a lot of fixed costs as compared to variable cost then the firm is said to have high operating leverage. There are certain fixed expenses in business which do not change with the level of output or sales. They remain constant in the short run. Due to these expenses, operating profit increase more rapidly than the volume of sales. This knows as operating leverage.

Financial leverage:-Financial leverage refers to the inclusion of securities carrying a fixed financial burden such as debentures and preference share along with equity share Financial leverage refers to the amount of debt in the capital structure of the business firm. If we envision a balance sheet financial leverage refers to the right hand side of the balance sheet. Financial leverage Refers to how the firm will pay for it or how the operation will be financed.

Combined leverage: - the policy regarding capital structure should be framed keeping in view the combined effect of operating leverage and financial leverage both. We have stated the formulas to ascertain both leverages separately .combined or total leverage are the total amount of risk facing a business firm. It can also be looked at in another way. It is the total amount of leverage that we use magnifies the returns.

REVIEW OF LITERATURE

Asif and others (2011), investigated the impact of financial leverage output profit of share and profitable change on dividend policy the results of this research show the negative impact of financial leverage on dividend policy. In other words, dividend decreases increasing the debts of company and the profitable changes don't affect the dividend policy and profit output of shares affects dividend policy positively.

Alinaghyan (2010), investigated the confidence about cash flow stage of company age antagonism of delegacy opportunities of investment profitability of company size of company and company situation considering the cash flow as an influential factor on dividend policy results show that among all the factors, non confident about cash flow stage of company age opportunities of investment and company profitability are influential and other factors are not affective.

Khoshtinat and hajian (2009), investigated the reactions of investors in the time of declaring the increasing dividend by company. Because investor's reactions are reflected as the purchase, selling and keeping share decisions and finally as the size of stock exchange amount of stock exchange for the different temporal periods after declaring the increasing of dividend policy of accepted companies in Tehran stock exchange were investigated.

Al-kowari (2009), scrutinizes the impact of state possessions, cash free flow, company size growth ration. The results of his research show the positive relationship between state possession company size profitability and dividend policy and also a negative relationship between them and leverage ratio. He also said that companies pay profits for decreasing the costs of delegacies and legal supporting of foreign shareholders.

Ling and other (2008), in a research on 100 accepted companies in Malaysian stock exchange show that profitability of company's growth, leverage ratio, size of company dispersion of shares are the determining factors in dividend policy. They found that profitable and low-risk companies have more dividend policy than other companies.

Other researches in this field include Musa (2009),Aniland kapoor (2008), Nicholas Eriotis (2008), Almalkawi (2007), Amidu and Abor (2006), Kubo and saito (2006) and kawalwiki

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Abhinav

Abhinav International Monthly Refereed Journal of Research In Management & Technology I S S N –

International Monthly Refereed Journal of Research In Management & Technology

ISSN 2320-0073

Volume III, February’14

and other (2007). Olad hossein (2010) investigated the impact of the composition of the director board. Output of assets. Cash free flow of each share. Business risk, size of company growth opportunities and debt level on dividend proportion and probability of cash dividend payout. Statical method sused in this paper involve tubit regression model and Lagit regression model by synthetic data method. Other researches which are relevant to this subject in Iran involve hashemi and akhlaghi(2010), purheidary and khaksari (2008), etemadi and chalaki (2005), khajawi and nazemi (2005), bahram far and mehrani (2005), saghafi and kordestani (2004), khadem (2001), shahmoradi(2001).

DATA ANALYSIS AND INTERPRETATION

Particulars

 

Amount in Lakhs

Years

2007-08

2008-09

2009-10

2010-11

2011-12

NET SALES

107187.29

137212.35

168938.73

210642.68

246634.7

ADD:INCOME

1092.37

960.45

1179.54

1509.08

734.5

ADD:STOCK

         

ADJUSTMENT

6524.07

2857.64

-972.1

-2958.09

7560.82

TOTAL

114803.73

141030.44

169146.17

209193.67

254930.02

LESS:VC

109134.37

134579.41

160351.81

199801.56

244352.15

CONTRIBUTION

5669.36

6451.03

8794.36

9392.11

10577.87

LESS:FC

3820.26

3846.25

5429.62

5068.65

5191.53

EBDIT

1849.1

2604.78

3364.74

4323.46

5386.34

LESS:DEPRECIATION

573.78

802.18

1121.41

1614.63

1891.72

EBIT

1275.32

1802.6

2243.33

2708.83

3494.62

LESS:INTEREST

814.81

1122.07

1252.58

1569.38

1441.25

EBT

460.51

680.53

990.75

1139.45

2053.37

LESS:TAX

9

105

255

212.78

983.08

EAT/PAT

451.51

575.53

735.75

926.67

1070.29

EAT/PAT 451.51 575.53 735.75 926.67 1070.29 Available online on www.abhinavjournal.com Year 2007-08

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Year

2007-08

Operating Leverage

4.44

Financial Leverage

2.76

Combined Leverage

12.31

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Abhinav

Abhinav International Monthly Refereed Journal of Research In Management & Technology I S S N –

International Monthly Refereed Journal of Research In Management & Technology

ISSN 2320-0073

Technology I S S N – 2 3 2 0 - 0 0 7 3 Available
Technology I S S N – 2 3 2 0 - 0 0 7 3 Available
Technology I S S N – 2 3 2 0 - 0 0 7 3 Available
Technology I S S N – 2 3 2 0 - 0 0 7 3 Available

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Volume III, February’14

Year

2008-09

Operating Leverage

3.57

Financial Leverage

2.64

Combined Leverage

9.47

Year

2009-10

Operating Leverage

3.92

Financial Leverage

2.26

Combined Leverage

8.87

Year

2010-11

Operating Leverage

3.46

Financial Leverage

2.38

Combined Leverage

8.24

Year

2011-12

Operating Leverage

3.02

Financial Leverage

1.7

Combined Leverage

5.15

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Abhinav

Abhinav International Monthly Refereed Journal of Research In Management & Technology I S S N –

International Monthly Refereed Journal of Research In Management & Technology

ISSN 2320-0073

Volume III, February’14

   

Amount in Lakhs

Year

operating leverage (O.L)

Financial leverage (F.L)

Combined leverage (C.L)

2007-08

4.44

2.76

12.31

2008-09

3.57

2.64

9.47

2009-10

3.92

2.26

8.87

2010-11

3.46

2.38

8.24

2011-12

3.02

1.7

5.15

3.46 2.38 8.24 2011-12 3.02 1.7 5.15 Interpretation Operating Leverage Operating Leverage of AMUL

Interpretation

Operating Leverage

Operating Leverage of AMUL has decreased from 2007 to 2012. In the year 2007-08 it was 4.44 whereas is 2011-12 it has reduced and came down to 3.02.Since the ratio of fixed cost to variable cost is low, AMUL has a low degree of operating leverage. The advantage of this is that the company breakeven point will be quite low resulting in relatively low risk level for the company.

In the year 2007 operating leverage was quite high as compared to 2012 which implies a high fixed cost and low variable cost. Since the ratio of fixed cost and variable cost was high the company was having a high degree of operating leverage in comparison to 2012.

Financial Leverage

Financial leverage has also shown a downward trend in last five years. It was 2.76 in the year 2007-08 whereas in 2011-12 it has come down to 1.7.

Financial leverage increases as the fixed financial expenses increases. Fixed financial expenses refers to interest, as the financial leverage is decreasing in AMUL it shows that interest expenses has ultimately decreased .as the ratio of debt in AMUL financial structure has been decreased.

Combined Leverage

Degree of Combined leverage summarises the combined effect of degree of Operating leverage and degree of financial leverage on earning per share. A firm with relatively high degree level of combined leverage is seen more risky than the firm with less combined leverage as high leverage means more fixed cost to the firm.

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Abhinav

Abhinav International Monthly Refereed Journal of Research In Management & Technology I S S N –

International Monthly Refereed Journal of Research In Management & Technology

ISSN 2320-0073

Volume III, February’14

In above case the degree of combined leverage has reduced from 12.31 in 2007-08 to 5.15 in 2011-12.A low degree of combined leverage in AMUL shows the company is having low fixed cost and is also a less risky firm.

CONCLUSION

From the above study it could be concluded that AMUL is a less riskier firm as compared to its condition in 2007-08, as in 2007-08 its combined leverage was approx 12.31 which was too risky for the firm but later on with a decrease in firms operating leverage and financial leverage year by year it came down to 5.15 which is a good sign.

Low degree of leverage lead to a low risk level of the company. The operating leverage has come down from 4.44 in 2007-08 to 3.02 in 2011-12 which implies a low fixed cost. The financial leverage has also shown a decrement which shows that interest expenses has also decreased.

REFERENCES

1. Asif,Aasia.Rasool,Waqas.Kamal,Yasir(2010)”Impact of Financial Leverage on Dividend Policy:Empirical Evidence from Karachi Stock Exchange-Listed Companies” African Journal of Business Management Vol. 5(4), pp. 1312-1324.

2. Alinaghyan, Nasrin.(2010). " Recognizing The affective Factors on Dividend Pay out in Accepted Companies in Tehran Exchange Stock" .MA Thesis in Accounting. Economy faculty. Isfahan University.

3. Al-Kuwari Duha (2009). " Determinants of the Dividend Policy in Emerging Stock Exchanges:The Case of GCC Countries" Global Economy & Finance Journal Vol. 2 No. 2 PP. 38-63.

4. Figlewski, S., and X. Wang, 2000, “Is the “Leverage Effect” a Leverage Effect?” Working Paper New York University.

5. Fischer, E., R. Heinkel, and J. Zechner, 1989, “Dynamic Capital Structure Choice:

Theory andTests,” Journal of Finance, 44, 19–40.

6. Korajczk, R. A., and A. Levy, 2003, “Capital Structure Choice: Macroeconomic Conditions andFinancial Constraints,” Journal of Financial Economics, 68, 75–109.

7. Benjamin, M. Friedman (1985). Corporate Capital Structures in the United States:

Investment Patterns and Financial Leverage. University of Chicago Press. Volume ISBN: 0-226-26411-4. (p. 325 - 352). Chapter Author: Michael S. Long; Ileen B. Malitz

8. Pandey, I.M. (2007). Financial Management. New Delhi: Vikas Publishing.

9. Hashemi and Akhlaghi (2010). "Impact of Financial Leverage, dividend policy and profitability on Future Fitting of Company".Financial Accounting Journal. Second Year. Number 6.38-49

10. Nikolaos Eriotis (2008), The Effect of Corporate Leverage on Dividend Policy :

Evidence From Greek Panel Data, Journal of financial research.

11. Modigliani, Franco and Merton H. Miller. Finance and the Theory of Investment

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