“THE RELEVANCE OF THE IRRELEVANCE THEORY”

A STUDY ON THE IMPACT OF CAPITAL STRUCTURE ON

THE FINANCIAL PERFORMANCE OF OIL EXTRACTION
COMPANIES IN INDIAN STOCK MARKET
Project report submitted to
CHRIST COLLEGE (AUTONOMOUS), IRINJALAKUDA
In partial fulfillment of the requirements for the award of the degree of
MASTER OF COMMERCE

Submitted by
THOMAS LAL
(REG NO CCATMCM023)
Under the guidance of
Dr. JOSHEENA JOSE

POST GRADUATE DEPARTMENT OF COMMERCE

CHRIST COLLEGE (AUTONOMOUS), IRINJALAKUDA

UNIVERSITY OF CALICUT
MARCH 2021
 CERTIFICATE

This is to certify that the project entitled “THE RELEVANCE OF THE IRRELEVANCE
THEORY” - A STUDY ON THE IMPACT OF CAPITAL STRUCTURE ON THE
FINANCIAL PERFORMANCE OF OIL EXTRACTION COMPANIES IN INDIAN STOCK
MARKET by Mr. Thomas Lal is a bona-fide record of work done under my guidance and
supervision in partial fulfillment of the requirement for the award of the degree of Master of
Commerce.

Dr. Josheena Jose Dr. Josheena Jose

(Head of the Department) (Project Guide)
 DECLERATION

I, Thomas Lal, hereby declare that the bona-fide record of THE RELEVANCE OF THE
IRRELEVANCE THEORY” - A STUDY ON THE IMPACT OF CAPITAL STRUCTURE
ON THE FINANCIAL PERFORMANCE OF OIL EXTRACTION COMPANIES IN INDIAN
STOCK MARKET done in partial fulfillment of the M.Com degree program of Calicut
University under the guidance of Dr.Josheena Jose, Post Graduate Department of Commerce,
Christ College (Autonomous), Irinjalakuda.
I also declare that the project has not formed the basis of reward of any degree or any other
similar title to any other University.

Place: Irinjalakuda Thomas Lal

Date: 30-03-2021
 ACKNOWLEDGEMENT
First, I praise and thank God Almighty who showers his plentiful blessings upon
me, who guide, shield and strengthen me all the time.
I wish to express my profound gratitude and heart-felt thanks to our Principal Fr.
Dr. Jolly Andrews CMI for his encouragement and for giving me permission for the study.
I am thankful to Dr. Josheena Jose, our HOD and my Project Guide without whose
guidance and encouragement, I could not have completed my Project work. In spite of her busy
schedule, she spared some of her precious time to me for this work. Her moral support besides
the scholarly guidance in research is the foundation of this Project. Thank you, for all the help
and guidance. I’m also thankful to the other faculties of the department for their valuable
advices and co-operation, rendered for the successful completion of my project.
I put forward my thankfulness to the Librarian and Non-Teaching Staffs of Christ
College Irinjalakuda (Autonomous) for their co-operation. I also take this opportunity to thank
my parents, friends and classmates who have been a source of inspiration. Without their
encouragement, it would not have been possible for me to complete my project successfully.

Place: Irinjalakuda Thomas Lal

Date: 30-03-2021
 CONTENTS
SL TITLE PAGE
NO. NO.
1. LIST OF TABLES
2. LIST OF FIGURES
3. CHAPTER-1 INTRODUCTION 1-8
4. CHAPTER-2 REVIEW OF LITERATURE 9-28
5. CHAPTER-3 INDUSTRY AND COMPANY PROFILE 29-34
6. CHAPTER-4 DATA ANALYSIS AND INTERPRETATION 35-54
7. CHAPTER-5 FINDINGS, CONCLUSION AND SUGGESTIONS 55-57
8. BIBLIOGRAPHY 58-59
 LIST OF TABLES
TABLE TITLE PAGE
NO. NO.
4.1 List of variables for data analysis 36
4.2 EPS of selected companies 38
4.3 Trend Analysis of EPS 38
4.4 Net profit Margin of selected companies 39
4.5 Trend Analysis of Net profit Margin 39
4.6 Return on capital Employed of selected companies 41
4.7 Trend Analysis of Return on Capital Employed 41
4.8 Return on Assets of selected companies 42
4.9 Trend Analysis of Return on Assets 43
4.10 Total Debt/Equity of selected companies 44
4.11 Trend Analysis of Total Debt/Equity 44
4.12 Return on Equity of selected companies 46
4.13 Trend Analysis of Return on Equity 46
4.14 Interest coverage ratio of selected companies 47
4.15 Trend analysis of ICR 47
4.16 Debt ratio of selected companies 49
4.17 Trend analysis of debt ratio 49
4.18 Model summary (Reliance) 51
4.19 ANOVA (Reliance) 51
4.20 Coefficients (Reliance) 51
4.21 Model summary (Oil India ) 52
4.22 ANOVA (Oil India) 52
4.23 Coefficients (Oil India) 53
4.24 Model summary (Petronet LNG) 53
4.25 ANOVA (Petronet LNG) 54
4.26 Coefficients (Petronet LNG) 54
 LIST OF FIGURES
TABLE TITLE PAGE
NO. NO.
4.1 Net Income Approach 11
4.2 Net Operating Income Approach 12
4.3 Traditional Approach 13
4.4 Trend Analysis of EPS 38
4.5 Trend Analysis of Net profit Margin 40
4.6 Trend Analysis of Return on Capital Employed 41
4.7 Trend Analysis of Return on Assets 43
4.8 Trend Analysis of Total Debt/Equity 45
4.9 Trend Analysis of Return on Equity 46
4.10 Trend analysis of ICR 48
4.11 Trend analysis of debt ratio 49
 CHAPTER-1
INTRODUCTION

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1.1 INTRODUCTION

Capital structure simply refers to the make-up of capitalization of a firm. It is the

composition of debt and equity which the company utilizes in order to finance its long term
needs. Debt capital is long term borrowings of the company whereas equity can be termed
as the long term funds provided by the owners of the company (shareholders). R. H. Wessel
has defined capital structure as follows – “The term capital structure is frequently used to
indicate the long term sources of funds employed in a business.” Capital structure of a firm
as a direct effect on the financial risk assumed by the company and also the cost of capital.
It also affects the value of the firm and its financial performance. There are a plethora of
factors that affect the capital structure of a firm. They can be classified as internal and
external factors. Some of the internal factors include profitability, liquidity, flexibility, size
and nature of business, regularity of income, desire to retain control etc. the factors over
which the management of the company has no control over is termed as external factors.
Some of them are conditions in capital market, attitudes of investors, legal and taxation
policy, cost of financing and also attitude of management. Actually the decision regarding
the capital structure is extremely tricky as there are a number of quantitative and qualitative
factors involved in it. Most of the efforts of managers is to obtain an optimal capital
structure. Kochhar (2006) defines capital structure as a mixture of financial liabilities (debt
and equity) that is used to finance operations of a firm. Many number of theories have been
proposed by many to find out the optimal capital structure for a firm.

The basic purpose of capital structure decision is to maximize the value of the firm.
However, there is a difference of opinion regarding whether or not capital structure
decisions affects the value of the firm. Optimal capital structure is one which maximizes
the value of the firm. There are four major theories of capital structure:
1. Net operating income theory (David Durand)
2. Net income theory (David Durand)
3. Traditional approach (Solomon Ezra)
4. MM theory (Modigliani and Miller)

The origin of capital structure theory structures actually starts with the MM theory
in 1958, capital structure theories operates under perfect market. They argue that under
various assumptions of perfect capital markets, such as investors, homogenous
expectations, no taxes, no transaction cost and efficient market, capital structure is

2
 irrelevant in determining firm’s value. This means that the capital structure is independent
of financial performance. They conclude that the firms are encouraged to use debt in their
capital structure, as there are tax regulations allows firms to deduct debt interest payment
as an expense.

In this study we are trying to analysis the effect of capital structure on the financial
performance of the firms. Primary focus has been given to analyzing the NOI theory and
whether it holds true in this real life study. We have chosen to study five oil extraction
companies. Strength of financial position of a firm is called as financial performance of a
firm. Financial analysis can be defined as the process through which the financial strengths
and weakness of the firms can be identified by stating the relationship between items that
are stated in the balance sheet and profit and loss account. In this study profit margin,
return on capital employed, earnings per share, return on assets, quick ratio, asset turnover
ratio, inventory turnover ratio are used to find out the financial performance of the firm.

1.2 STATEMENT OF THE PROBLEM

The history of oil and gas industry in India dates back to 1867 from Digboi, Assam. Post-
independence the oil and gas industry were controlled by international companies. If we
refer to that particular period the oil production in India was lower than 250,000 tonnes
per annum which were contributed from Assam. There was a cloud of doubt among some
experts about India’s oil producing capabilities. Oil and gas sector is currently one among
the eight core sectors in India. This is the reason why this industry currently plays a crucial
role in making decisions regarding the economy. As of March 31, 2019 India has an
estimated crude oil reserve of 618.95 million tons. A major portion of these reserves are
now found in the western offshores and some in Assam. India is still heavily dependent on
importers to meet the domestic requirements of crude oil, LNG and natural gas. More than
80 percentage of the domestic need is satisfied with imported crude oil.

In this study we are not trying to study the import dependence for oil. Rather we are trying
to analyze the effect of capital structure on the financial performance of some selected oil
exploration and production companies. The focus has been given to the understanding the
Net Operating Income theory which was propounded by David Durand. This theory is also
known as the “Irrelevance theory of capital structure”. David Durand made the argument
that the degree of leverage of the firm cannot alter its market value. This is one of the
foremost theories of capital structure. Empirical verification is necessary in case of all

3
 theories and so identifying the truth behind this age old theory of relevance of capital
structure is of utmost importance.

1.3 SCOPE AND SIGNIFICANCE OF THE STUDY

Any company despite of its nature seeks to earn profits and reduce risk. The capital
structure of the firm according to theories like “net income approach” plays a pivotal role
in deciding the value of the firm. There are theorist who argue that the capital structure is
irrelevant as well. The relationship between the capital structure and the financial
performance continues to be an unsolved puzzle in the field of finance. This study intends
to find a suitable solution to this relevance irrelevance argument. The study also focuses
on understanding the interrelationship between capital structure and financial
performance.

The study helps to understand the relationship if any that exist between a company’s
capital structure and financial performance. It also tries to ascertain whether the NOI
theory propounded by David Durand holds true in case of the selected companies. This
study provides an opportunities for better understanding of these capital structure concepts
and also opens up paths for further research in the same.

1.3.1 RESEARCH QUESTIONS

1. Does capital structure have any impact on the financial performance?
2. Does the theory of irrelevance of capital structure hold true in this case?
1.4 OBJECTIVES OF THE STUDY
a. To analyze the impact of capital structure on financial performance of the top five
oil exploration and production companies which have been selected on the basis
of market capitalization.
b. To analyze the scope of the theory of irrelevance of capital structure
c. To evaluate the interrelationship between the capital structure and various
financial indicators of selected companies.

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1.5 HYPOTHESIS OF THE STUDY

H0: There is no significant positive relationship between Capital structure and financial
performance of selected Oil Companies in India
H1: There is a significant positive relationship between Capital structure and financial
performance of selected Oil Companies in India

1.6 RESEARCH METHODOLOGY

1.6.1 Research design

The research design indicates the method and procedure of conducting research study.
In pursuance of the objectives stated above, the following research design is used for
conducting this particular study.

1.6.2 Nature of the study

The present study makes use of a descriptive research design. It uses secondary data.

1.6.3 Source of data

Secondary data has been used for the analysis. Data was obtained from annual reports,
journals, reference books and the internet.

1.6.4 Period of the study

The present study utilizes the secondary sources of information from the past five
financial years. This means data from the years 2015 – 16 to 2019 – 20 has been used
in this study.

1.7 SAMPLING DESIGN

1.7.1 Population of the study

The population of the study consists of oil exploration and production companies in
India.

1.7.2 Sample size

Out of all the oil exploration and production companies in India, for the purpose of
this study five oil companies have been chosen.

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 The following are the oil exploration companies chosen:

a. Reliance
b. Petronet LNG
c. Oil India

1.7.3 Sampling method

Within the list of all oil exploration and production companies in India, the above
listed five companies have been chosen on the basis of market capitalization. These
samples will help in fulfilling the objectives stated above.

1.8 CONCEPTUALISATION

VARIABLE MEASUREMENT
Earnings Per ShareEPS = (Net income – preference dividend)/ No. of
1. shares
Net Profit Margin Net profit margin = (Revenue – COGS –Operating
expenses –Interest –Tax)/Revenue *100
Return on Capital Return on capital employed = Net Operating profit/
Employed Capital Employed
Return on Asset Return on asset = Net Income/ Total Assets

Total Debt to Equity Total Debt to Equity = (STD +LTD + Other Fixed
Payments)/ Shareholders Equity
Return on Equity
Interest Coverage
Ratio
Debt Ratio Total Liabilities/ Total Asset
1.9 TOOLS FOR ANALYSIS
Descriptive analysis was firstly applied to describe relevant aspects of financial
performance and provided detailed information about each relevant variable. Correlation
models, specifically Pearson correlation were applied to measure the degree of association
between different variables under consideration while regression analysis was applied to
examine the relationship of independent variables with dependent variable and to know
the effect of selected independent variables on financial performance. This method is used
to identify the significant of each explanatory variable to the model and also the
significance of the overall model. The model used was multiple regressions (more than
one independent variables). The researcher also used Ordinary Least Squares (OLS)
method for analysis of hypotheses stated in a multiple form. For this purpose of analysis

6
 the MS Excel Software was used to analyse financial data and SSPS Software used to run
the regression.

Regression analysis
Regression analysis is used to predict the value of one variable on the basis of other variables.
In this study the researcher has analysed the impact of capital structure on the financial
performance.

The ordinary least squares (OLS) used for its computation. Its procedure is simple and
the estimates obtained from this procedure have optimal properties which include: linearity,
Unbiasedness, Minivariance and Mean square error estimation (Koutsoyianis, 2003).

Here an attempt is made to analyse the effect of financial leverage on financial performance,
the researcher developed a compact form of our model as follows:

Y = bo + b1x1 + b2x2 + b3x3 + …… + ɛi

Where: Y = Dependent variable of company

X = Independent variable of company

b0 = Intercept for X variable of i company

b1 – b3 = Coefficient for the independent variables X of companies, denoting the nature of the
relationship with dependent variable Y (or parameters)

ɛi = the error term specially, when researcher converts the above general least squares model
into our specified variables, it becomes:

(ROE)yt = bo + b1(DR)yt + b2(DER)yt + b3(ICR)yt + ɛi

Where: ROE = Return on Equity

DR = Debt Ratio

DER = Debt-Equity-Ratio

ICR = Interest Coverage Ratio

ɛi = Error term

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1.10 LIMITATIONS OF THE STUDY
 The study focuses only on five of the oil exploration companies in India and hence the
findings of the study might not be applicable to the whole industry.
 The study is based on secondary data pertaining to the past five years only.
1.11 SCHEME OF STUDY
Chapter I – Introduction
Chapter II – Review of Literature
Chapter III- Industry and Company Profile
Chapter IV- Data Analysis and Interpretation
Chapter V-Findings and Conclusion

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 CHAPTER-2
REVIEW OF LITERATURE

9
 2.1 CONCEPTUAL LITERATURE

CAPITAL STRUCTURE AND RELATED THEORIES

According to Gerstenberg, “Capital Structure of a company refers to the composition or make-

up of its capitalization and it includes all long-term capital resources via: loans, reserves, shares
and bonds.” The term ‘Capital Structure’ refers to the relationship between the various long-
term forms of financing such as debentures, preference shares capital and equity share capital.
Financing the firm’s assets is a very crucial problem in every business and as a general rule,
there should be a proper mix of debt and equity capital in financing the firm’s assets. The use
of long-term fixed interest bearing debt and preference share capital along with equity shares
is called financial leverage or trading in equity. The long-term fixed interest bearing debt is
employed by a firm to earn more from the use of these sources than their cost so as to increase
the return on owner’s equity.

A company's capital structure is the specific combination of debt and equity used to fund its
overall operations and growth. Equity capital is derived from a company's ownership shares as
well as claims on its future cash flows and profits. Debt is represented by bond issues or loans,
whereas equity is represented by common stock, preferred stock, or retained earnings. The
balance sheet includes both debt and equity. This debt and equity are used to purchase company
assets, which are also listed on the balance sheet. A company's capital structure can include a
mix of long-term debt, short-term debt, common stock, and preferred stock. When analysing a
company's capital structure, the proportion of short-term debt versus long-term debt is taken
into account. When analysts talk about capital structure, they're usually referring to a
company's debt-to-equity (D/E) ratio, which indicates how risky a company's borrowing
practises are. A company that is heavily financed by debt typically has a more aggressive
capital structure and thus poses a higher risk to investors. This risk, on the other hand, could
be the primary source of the firm's growth. Debt is one of the two primary ways for a company
to raise capital in the capital markets. Debt benefits businesses because of tax benefits; interest
payments made as a result of borrowing funds may be tax-deductible. Unlike equity, debt
allows a company or business to retain ownership. Furthermore, in times of low interest rates,
debt is plentiful and easy to obtain. Outside investors can buy a stake in a company through
equity. When interest rates are low, equity is more expensive than debt. Unlike debt, however,
equity does not have to be repaid. In the event of declining earnings, this is advantageous to
the company. Equity, on the other hand, represents the owner's claim on the company's future

10
earnings. Firms can fund their operations by issuing more debt or equity. Firms that issue equity
give up some ownership in the company without having to repay investors; firms that issue
debt increase their leverage by having to repay investors. For investors, the debt-to-equity ratio
of a company is a risk indicator.

As mentioned earlier there are four major theories in capital structure:

1. Net income approach

2. Net operating income approach
3. Traditional theory
4. MM theory

Net Income Approach

This theory was developed by David Durand. This theory is also known as the “Fixed Ke
Theory”. According to this theory a company can increase the value of the firm and reduce the
overall cost of capital by increasing the proportion of debt in its capital structure to maximum
possible extend. Debt is the cheaper source of fund and so when proportion of debt increases
overall cost of capital decreases. The optimal capital structure is the point where overall cost
of capital is minimum and value of the firm is maximum. This theory propounds that the capital
structure decision is relevant.

Assumptions

1. The cost of debt is lower than the cost of equity.

2. There is no tax.
3. The cost of debt and cost of equity remain constant.
4. Use of debt in capital structure does not affect the perception of investors.

Figure 4.1

11
Net Operating Income Approach

This theory was also propounded by David Durand. It is the opposite of NI approach.
According to NOI theory any change in capital structure does not affect the market value of
the company and the overall cost of capital. Every capital structure is optimum capital structure.
The main argument of this approach is that an increase in the use of debt would lead to increase
in financial risk of the shareholders. Because of the increase in the risk, the equity shareholders
would start expecting higher returns. This would result in an increase in the cost of equity
capital or equity capitalisation rate. On the other hand, the cost of debt remains fixed because
of an increase in financial risk of lenders. Thus the benefit of the use of debt is exactly offset
by the increase in cost of equity or capitalisation rate of equity. Thus there is no optimal capital
structure. Every capital structure is an optimal capital structure. This is also known as the
‘Irrelevance theory’ of capital structure.

Assumptions

1. The increase in proportion of debt in the capital structure leads to change in risk
perception of the shareholders.
2. The equity shareholders and other investors capitalise the value of the firm as a whole.
3. There is no corporate tax.
4. Cost of debt is lower than cost of equity.
5. Cost of debt is constant.
6. The overall cost of capital also remains constant.

Figure 4.2

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Traditional Approach

This method was suggested by Solomon Ezra. This approach lies in between the NI approach
and NOI approach. This approach is also known as intermediate approach. The use of debt up
to a certain point is advantageous. Beyond that point the advantage of cheaper debt is offset by
increased cost of equity.

Figure 4.3

Modigliani – Miller Approach

This theory was propounded by Franco Modigliani and Merton Miller in 1958. This theory is
identical to the NOI theory when corporate tax is not applicable and similar to NI theory when
corporate tax exist.

FINANCIAL PERFORMANCE MEASURES

Earnings per share (EPS)

Earnings per share (EPS) is calculated as a company's profit divided by the outstanding shares
of its common stock. The resulting number serves as an indicator of a company's profitability.
It is common for a company to report EPS that is adjusted for extraordinary items and potential
share dilution. The higher a company's EPS, the more profitable it is considered to be. The
earnings per share value is calculated as the net income (also known as profits or earnings)
divided by the available shares. A more refined calculation adjusts the numerator and
denominator for shares that could be created through options, convertible debt, or warrants.
The numerator of the equation is also more relevant if it is adjusted for continuing operations.
To calculate a company's EPS, the balance sheet and income statement are used to find the

13
period-end number of common shares, dividends paid on preferred stock (if any), and the net
income or earnings. It is more accurate to use a weighted average number of common shares
over the reporting term because the number of shares can change over time. The earnings per
share metric are one of the most important variables in determining a share's price. It is also a
major component used to calculate the price-to-earnings (P/E) valuation ratio, where the E in
P/E refers to EPS. By dividing a company's share price by its earnings per share, an investor
can see the value of a stock in terms of how much the market is willing to pay for each dollar
of earnings. EPS is one of the many indicators you could use to pick stocks. If you have an
interest in stock trading or investing, your next step is to choose a broker that works for your
investment style. Comparing EPS in absolute terms may not have much meaning to investors
because ordinary shareholders do not have direct access to the earnings. Instead, investors will
compare EPS with the share price of the stock to determine the value of earnings and how
investors feel about future growth.

EPS = (Net income – preference dividend)/ No. of shares

While EPS is widely used as a way to track a company’s performance, shareholders do not
have direct access to those profits. A portion of the earnings may be distributed as a dividend,
but all or a portion of the EPS can be retained by the company. Shareholders, through their
representatives on the board of directors, would have to change the portion of EPS that is
distributed through dividends in order to access more of those profits.

Net profit margin

The net profit margin, or simply net margin, measures how much net income or profit is
generated as a percentage of revenue. It is the ratio of net profits to revenues for a company or
business segment. Net profit margin is typically expressed as a percentage but can also be
represented in decimal form. The net profit margin illustrates how much of each dollar in
revenue collected by a company translates into profit. Net profit margin is one of the most
important indicators of a company's financial health. By tracking increases and decreases in its
net profit margin, a company can assess whether current practices are working and forecast
profits based on revenues. Because companies express net profit margin as a percentage rather
than a dollar amount, it is possible to compare the profitability of two or more businesses
regardless of size. Investors can assess if a company's management is generating enough profit
from its sales and whether operating costs and overhead costs are being contained. For
example, a company can have growing revenue, but if it’s operating costs are increasing at a

14
faster rate than revenue, its net profit margin will shrink. Ideally, investors want to see a track
record of expanding margins, meaning that the net profit margin is rising over time. Most
publicly traded companies report their net profit margins both quarterly during earnings
releases and in their annual reports. Companies that can expand their net margins over time are
generally rewarded with share price growth, as share price growth is typically highly correlated
with earnings growth.

Net profit margin = (Revenue – COGS –Operating expenses –Interest –Tax)/Revenue *100

Return on capital employed

Return on capital employed or ROCE is a profitability ratio that measures how efficiently a
company can generate profits from its capital employed by comparing net operating profit to
capital employed. In other words, return on capital employed shows investors how many
dollars in profits each dollar of capital employed generates. ROCE is a long-term profitability
ratio because it shows how effectively assets are performing while taking into consideration
long-term financing. This is why ROCE is a more useful ratio than return on equity to evaluate
the longevity of a company. This ratio is based on two important calculations: operating profit
and capital employed. Net operating profit is often called EBIT or earnings before interest and
taxes. EBIT is often reported on the income statement because it shows the company profits
generated from operations. EBIT can be calculated by adding interest and taxes back into net
income if need be. Capital employed is a fairly convoluted term because it can be used to refer
to many different financial ratios. Most often capital employed refers to the total assets of a
company less all current liabilities.

Return on capital employed = Net Operating profit/ Capital Employed

Return on Assets

Return on assets (ROA) is an indicator of how profitable a company is relative to its total
assets. ROA gives a manager, investor, or analyst an idea as to how efficient a company's
management is at using its assets to generate earnings. Return on assets is displayed as a
percentage; the higher the ROA the better. Businesses (at least the ones that survive) are
ultimately about efficiency: squeezing the most out of limited resources. Comparing profits to
revenue is a useful operational metric, but comparing them to the resources a company used to
15
earn them cuts to the very feasibility of that company's existence. Return on assets (ROA) is
the simplest of such corporate bang-for-the-buck measures. . ROA for public companies can
vary substantially and will be highly dependent on the industry. This is why when using ROA
as a comparative measure, it is best to compare it against a company's previous ROA numbers
or a similar company's ROA. The ROA figure gives investors an idea of how effective the
company is in converting the money it invests into net income. The higher the ROA number,
the better, because the company is earning more money on less investment.

Return on asset = Net Income/ Total Assets

Higher the ROA the better is the asset efficiency.

Total Debt to equity

The debt-to-equity (D/E) ratio is calculated by dividing a company’s total liabilities by its
shareholder equity. These numbers are available on the balance sheet of a company’s financial
statements. The ratio is used to evaluate a company's financial leverage. The D/E ratio is an
important metric used in corporate finance. It is a measure of the degree to which a company
is financing its operations through debt versus wholly-owned funds. More specifically, it
reflects the ability of shareholder equity to cover all outstanding debts in the event of a business
downturn. The debt-to-equity ratio is a particular type of gearing ratio.

Given that the debt-to-equity ratio measures a company’s debt relative to the value of its net
assets, it is most often used to gauge the extent to which a company is taking on debt as a means
of leveraging its assets. A high debt/equity ratio is often associated with high risk; it means that
a company has been aggressive in financing its growth with debt. If a lot of debt is used to
finance growth, a company could potentially generate more earnings than it would have
without that financing. If leverage increases earnings by a greater amount than the debt’s cost
(interest), then shareholders should expect to benefit. However, if the cost of debt financing
outweighs the increased income generated, share values may decline. The cost of debt can vary
with market conditions. Thus, unprofitable borrowing may not be apparent at first. Changes in
long-term debt and assets tend to have the greatest impact on the D/E ratio because they tend
to be larger accounts compared to short-term debt and short-term assets. If investors want to
evaluate a company’s short-term leverage and its ability to meet debt obligations that must be
paid over a year or less, other ratios will be used.

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When using the debt/equity ratio, it is very important to consider the industry within which
the company exists. Because different industries have different capital needs and growth rates,
a relatively high D/E ratio may be common in one industry, meanwhile, a relatively low D/E
may be common in another. For example, capital-intensive industries such as auto
manufacturing tend to have a debt/equity ratio of over 1, while tech firms could have a typical
debt/equity ratio around 0.5. Utility stocks often have a very high D/E ratio compared to market
averages. A utility grows slowly but is usually able to maintain a steady income stream, which
allows these companies to borrow very cheaply. High leverage ratios in slow-growth industries
with stable income represent an efficient use of capital. The consumer staples or consumer non-
cyclical sector tends to also have a high debt to equity ratio because these companies can
borrow cheaply and have a relatively stable income. What counts as a “good” debt to equity
ratio will depend on the nature of the business and its industry. Generally speaking, a debt to
equity ratio below 1.0 would be seen as relatively safe, whereas ratios of 2.0 or higher would
be considered risky. Some industries, such as banking, are known for having much higher debt
to equity ratios than others.

Total Debt to Equity = (STD +LTD + Other Fixed Payments)/ Shareholders Equity

STD - Short Term Debt

LTD - Long Term Debt

Return on equity

Return on equity (ROE) is a proportion of monetary execution determined by isolating net gain
by investors' equity. Since investors' value is equivalent to an organization's assets less its
obligation, ROE is viewed as the profit from net resources. ROE is viewed as a proportion of
the productivity of an organization corresponding to investors' equity.

ROE is communicated as a rate and can be determined for any organization if overall gain and
value are both positive numbers. Overall gain is determined before dividends paid to regular
investors and after profits to favoured investors and premium to moneylenders. Net gain is the
measure of income, net of costs and charges that an organization creates for a given period.
Normal investors' value is determined by adding value toward the start of the period. The start
and end of the period ought to concur with the period during which the net income is acquired.

17
Regardless of whether ROE is considered positive or negative will rely upon what is typical
among a stock's peers. For instance, utilities have numerous resources and obligation on the
accounting report contrasted with a generally limited quantity of total compensation. A typical
ROE in the utility area could be 10% or less. An innovation or retail firm with more modest
asset report accounts comparative with total compensation may have typical ROE levels of
18% or more. Sustainable development rates and profit development rates can be assessed
utilizing ROE, accepting that the proportion is generally in line or simply over its peer group
mean. In spite of the fact that there might be a few difficulties, ROE can be a decent beginning
spot for creating future appraisals of a stock's development rate and the development pace of
its profits. These two computations are elements of one another and can be utilized to make a
simpler examination between comparative organizations.

ROA and ROE are comparable, in that they are both attempting to measure how proficiently
the organization creates its benefits. Nonetheless, though ROE thinks about total compensation
to the net resources of the organization, ROA analyses overall gain to the organization's
resources alone, without deducting its liabilities. In the two cases, organizations in ventures
where critical resources are required for activities will probably show a below return.

ROE= Net Income/ Shareholders equity

Interest coverage ratio

The interest coverage ratio is a debt and profitability ratio used to determine how easily a
company can pay interest on its outstanding debt. The interest coverage ratio may be calculated
by dividing a company's earnings before interest and taxes (EBIT) by its interest expense
during a given period. The interest coverage ratio is sometimes called the times interest earned
(TIE) ratio. Lenders, investors, and creditors often use this formula to determine a company's
riskiness relative to its current debt or for future borrowing. The ICR estimates how often an
organization can cover its present interest instalment with its accessible income. As such, it
estimates the margin of security an organization has for paying interest on its obligation during
a given period.

The ratio is calculated by dividing a company's EBIT by the company's interest expenses for
the same period. The lower the ratio, the more the company is burdened by debt expense. When

18
a company's interest coverage ratio is only 1.5 or lower, its ability to meet interest expenses
may be questionable.

Interpretation is key with regards to utilizing proportions in organization investigation. While

taking a gander at a solitary ICR may uncover a decent arrangement about an organization's
present monetary position, breaking down ICR after some time will regularly give a much
clearer image of an organization's position and direction. By investigating ICR on a quarterly
reason for as long as five years, for instance, patterns may arise and give a financial backer a
greatly improved thought of whether a low current ICR is improving or deteriorating, or if a
high ICR proportion is steady. The proportion may likewise be utilized to contrast the capacity
of various organizations with take care of their premium, which can help when settling on a
venture choice. By and large, security in ICR is quite possibly the main things to search for
while breaking down the interest inclusion proportion along these lines. A declining revenue
inclusion proportion is regularly something for financial backers to be careful about, as it
demonstrates that an organization might be not able to pay its obligations later on.

In general, the ICR is a decent evaluation of an organization's momentary monetary wellbeing.

While making future projections by dissecting an organization's premium inclusion proportion
history might be a decent method of evaluating a venture opportunity, it is hard to precisely
anticipate an organization's drawn out monetary wellbeing with any proportion or metric. In
addition, the attractive quality of a specific level of this proportion is subjective depending on
each person's preferences to a degree. A few banks or potential security purchasers might be
OK with a less attractive proportion in return for charging the organization a higher loan fee
on their obligation.

ICR = EBIT/ Interest Expenses

Debt Ratio

DR is a monetary proportion that actions the degree of an organization's leverage. DR is

characterized as the proportion of all debts to assets, communicated as a decimal or rate. It very
well may be deciphered as the extent of an organization's resources that are financed by
obligation. A proportion more prominent than 1 shows that a significant part of obligation is
subsidized by resources. As such, the organization has a greater number of liabilities than
resources. A high proportion additionally demonstrates that an organization might be putting

19
itself in danger of default on its advances if loan costs were to rise abruptly. A proportion under
1 means the way that a more prominent bit of an organization's resources is financed by value.
While the total debt to total asset ratio incorporates all obligations, DR just considers long haul
obligations. The obligation proportion (all out obligation to resources) measure considers both
long haul obligations, like home loans and protections, and current or momentary obligations
like lease, utilities, and advances developing in under a year. The two proportions, nonetheless,
incorporate the entirety of a business' resources, including substantial resources, for example,
gear and stock and theoretical resources, for example, accounts receivables. Since DR
incorporates to a greater extent an organization's liabilities, this number is quite often higher
than an organization's drawn out obligation to resources proportion. Ekwe and Duru (2012) say
it is assumed that when external funds are borrowed, example, from banks at a fixed rate, they
can be invested in the company and gain a higher invested paid to the bank. This is measured
by the total debt to total assets and is a proxy to leverage.

Debt Ratio = Total debt/ Total Assets

2.2EMPIRICAL LITERATURE

A review of literature related to studies in the field of capital structure and related theories has
been included in this chapter in order to discern the distinctiveness of the present study
conducted here. The researcher has referred numerous newspapers, magazines, annual reports,
journals dissertations and the work of a plethora of researcher scholars in the area of capital
structure. Based on a review of the literature, there is a large body of work that aims to shed
light on the relationship between capital structure and firm performance; however, empirical
evidence yields conflicting and inconsistent results. Empirical findings and claims have been
used in both directions. Some studies indicate a positive relationship between capital structure
and firm performance, while others disagree, suggesting that capital structure has a negative
influence on firm performance.

Myers, Stewart (1984)1 in his paper titled “The Capital Structure Puzzle” compares the "static
trade-off" and "pecking order" hypotheses of corporate capital structure preference. According
to the static trade-off principle, optimum capital structure is achieved when the tax benefit of
borrowing is offset by the costs of financial distress at the margin. Firms prefer internal funds
to external funds, and debt to equity if external funds are needed, according to the pecking
order theory. As a result, the debt ratio represents the total amount of external funding required.

20
Simple asymmetric knowledge models predict pecking order behaviour. An analysis of
empirical evidence applicable to the two hypotheses concludes the article.

Fama and French (1998)2 concluded that the debt does not concede tax benefits after
examining the relationship between taxation, funding decisions, and the firm's valuation.
Furthermore, high leverage creates agency issues among shareholders and creditors, suggesting
that leverage and profitability have a negative relationship. As a result, negative facts about
debt and profitability obscures the debt's tax value.

Chiang Yat Hung, Chan Ping Chuen Albert, and Hui Chi Man Eddie (2002) 3 illustrated
the inter-relationship between profitability, cost of capital and capital structure. In Hong Kong,
there is a connection between capital structure and profitability among property developers and
contractors. The information for this study came from Data stream, an electronic financial
database. The findings of this study indicate that contractors have higher capital gearing than
developers, and capital gearing is positively linked to asset value but negatively related to profit
margins.

Frank, Murray Z. and Goyal, Vidhan K. (2003) 4 in their research paper entitled “Capital
Structure Decisions” examined the relative importance of the 39 factors in the leverage
decisions of publicly traded U.S firms. The pecking order and market timing theories do not
provide adequate descriptions of the data. The evidence is generally consistent with
tax/bankruptcy trade-off theory and stakeholder co-investment theory. The most reliable
factors are median industry leverage (+ effect on leverage), bankruptcy risk as measured by
Altman's Z-Score (- effect on leverage), firm size as measured by the log of sales (+ effect on
leverage), dividend-paying (-), intangibles (+), market-to-book ratio (-), and collateral
(+).Somewhat less reliable effects are the variance of own stock returns (-), net operating loss
carry forwards (-), financially constrained (-), profitability (-), change in total corporate assets
(+), the top corporate income tax rate (+), and the Treasury bill rate (+).It was discovered that
the effect of profits and net operating loss carry forwards is not robust when using Markov
Chain Monte Carlo multiple imputation to rectify for missing-data bias.

Velnampy and Niresh, Aloy (2012)5 in their research with the aim to look into the relationship
between capital structure and profitability of ten publicly traded Sri Lankan banks between
2002 and 2009. To determine the relationship between the variables, the data was analysed
using descriptive statistics and correlation analysis. Except for the relationship between debt to

21
equity and return on equity, the results indicate a negative relationship between capital structure
and profitability. Furthermore, the findings indicate that debt accounts for 89 percent of total
assets in Sri Lanka's banking sector, suggesting that banks are highly geared institutions.

Jaisawal, B., Srivastava, N. And Sushma (2013) 6 analysed the interrelationship between
capital structure and financial performance of the cement sector in India. The two determinants
of performance considered for the study was GPR and ROE. The conclusion drawn from the
thesis was that there was a weak positive correlation between the capital structure and the above
mentioned indicators of performance.

Mohammadzadeh, Mehdi; Rahimi, Farimah; Rahimi, Forough Mohammad and

Salamzadeha, Jamshid (2013)7 with their study looked into the relationship between capital
structure and profitability in Iranian pharmaceutical companies. For this study, the top 30
Iranian pharmaceutical companies were chosen as study samples, and their financial data was
collected from 2001 to 2010. Sales growth was used as a control variable, and net margin profit
and debts to asset ratio were used as measures of profitability and capital structure,
respectively. There was a substantial negative relationship between profitability and capital
structure, implying that pharmaceutical firms have developed a Pecking Order Theory and that
internal funding has resulted in increased profitability.

Manurung, Shinta D (2014)8 in their research, the capital structure is represented by three
indicators: Debt Ratio, Debt Equity Ratio, and Long Term Debt to Equity. Profitability is
examined by Return on Asset, Return on Equity and Net Profit Margin, while firm value is
proxy by Book Value, Price to Book Value, and Closing Price. Using Partial Least Square
Method, this study finds that all indicators are useful to measure the latent variables. While the
results of the structural model or inner model analysis support Hypothesis 1 that capital
structure has a negative significant impact on firm valuation, the results of the structural model
or inner model analysis support Hypothesis 2. The higher the loans a corporation takes on, the
lower its value. This research also backs up Hypothesis 2 that capital structure has a huge
impact on profitability. This means that companies with large capital structures would have
lower profits. The results of the study also endorse Hypothesis 3: profitability has a positive
effect on firm values. It means that when a company's performance improves, so does its
valuation.

Mokoteli, T. and Leonard N. (2014)9 investigated the relationship between leverage and the
financial performance of listed firm in Kenya by using annual data for the period 2002 – 2011.

22
Using various panel procedures the study found reasonably strong evidence that leverage
significantly, and negatively, affects the profitability of listed firms in Kenya. The findings
suggested that asset tangibility, sales growth and firm size are important determinants of
profitability and asset tangibility consistently had a negative relationship with profitability.

Khalifa, M. (2014)10 targeted to analyse the effect of capital structure on the financial
performance. For this purpose thirty Energy American firms were chosen. Secondary data was
collected from the financial statements. The data was collected for a nine year period from
2005 to 2013. For profitability, return on assets (ROA) as the ratio of net income to total assets,
and return on equity (ROE) as the ratio of net income to total shareholders’ equity were adopted
as a proxy for financial performance; and to indicate capital structure, short-term debt, long-
term debt, total debt, debt to equity ratio, and the firm’s size were used The data were analysed
by using Smart Partial Least Square. Multiple regressions indicated that 10% of ROE and 34%
of ROA were predicted by the independent variables. Findings presented that the total debt has
a significant negative impact on ROE and ROA, while size in terms of sales has significantly
negative effect only on ROE of the American firms.

Younus et.al (2014)11 tried to identify the impact of capital structure and performance in which
core area is the financial performance of sugar companies listed in the Karachi Stock Exchange,
Pakistan. The data were utilized from company’s financial reports, annual reports and state
bank of Pakistan (SBP) Financial review for the period of six years (2006-2011). There was
weak positive correlations in gross profit and capital structure (. 059) and also had a weak
positive correlation in net profit and capital structure variables (. 033) and also showed the low
financial cost in the companies. The results showed that there was a weak positive correlation
between capital structure and financial performance in 0.354. Coefficient of determination
was.125. F and T values were 28.060 and -5.297 respectively, which showed insignificant
levels of the sugar companies listed in KSE Pakistan.

Muhammad, H., Shah, B and Islam, Z. (2014)12 inquired into the relationship between
financial performance and the capital structure after analysing financial data from cement
companies listed in the Karachi Stock Exchange. The secondary data was analysed using
statistical tools namely Pearson correlation and multiple regression. Results revealed a strong
negative relationship between debt to asset and firm performance variables (GPM, NPM, ROA,
and ROE), a positive relationship between debt to equity and firm performance variables (GPM
and NPM), and a negative relationship between debt to equity and firm performance variables

23
(ROA and ROE). Moreover, capital structure variables significantly impact firm performance.
In order to achieve the targeted efficiency of production the business should give importance
to identifying the optimal level of capital structure. This was the conclusion from this study.

Sekar, M., Gowri, M. and Ramya, G. (2014) 13 examined the influence of capital structure
on the performance of the corporate measured by using EBIT-EPS analysis. The study
attempted to research the capital structure of Tata Motors Limited during 2003-04 to 2012-
2013, so as to understand the factors that influenced the capital structure decisions of the
corporate and to understand the impact of capital structure decisions on profitability and
performance of the corporate. It also found that ROE and the value of the firm is positively
correlated and there's also a direct correlation between the worth of equity and value of the
firm. Value of debt and therefore the firm is additionally positively correlated.

Khanam, F., Nasreen, S., and Pirzada, S. (2014) 14 discovered the effect of capital structure
on financial efficiency in the food industry. The five contingent variables used to assess the
firm's profitability were return on assets, earnings per share, net profit margin, return on equity,
and return on capital employed. Over the six years from 2007 to 2012, quantitative data was
gathered from annual reports of 49 food companies listed on the Karachi stock exchange in
Pakistan. The level of capital structure used in Pakistan's food sector, as well as the output of
firms, were calculated using descriptive statistical analysis. The effect of capital structure on
firm financial results was investigated using linear regression analysis. According to the
findings of the correlation study, there is a major negative relationship between capital structure
and financial output of firms in Pakistan's food market. As a result, it is concluded that a firm's
capital structure had a substantial negative effect on its financial results in Pakistan's food
market.

Rani, Kavita (2015)15 investigated the impact of debt equity ratio with the financial
performance which was indicated using the EPS, ROI, Capital turnover, debt to net worth, net
profit ratio, return on capital employed and return on equity. The study used the samples from
automobile sector, electronic sector and metal industries. With the data available, the researcher
made a conclusion that the capital structure of the selected automobile companies has not
affected the financial performance, whereas the metal and electronic segment was significantly
affected by the capital structure.

Mwangi, M. and Birundu, E. (2015) 16 investigated the impact of capital structure on SMEs'
financial success in Kenya's Thika sub-county. Using multiple linear regression, the analysis

24
was performed on 40 SMEs that were in service from 2009 to 2013. The research discovered
that capital structure, asset turnover, and asset tangibility had no substantial impact on financial
performance. The lack of a significant relationship between ROA and capital structure in SMEs
in Thika sub-county, Kenya, will appear to support the pecking order theory of capital structure,
which suggests that there is no optimum leverage for firms.

Githire, C. and Muturi, W. (2015) 17 studied the impact of capital structure on the
performance of firms listed on the Nairobi Securities Exchange. The data used in the analysis
came from firms listed on the Nairobi Securities Exchange, and the sample was a census of all
firms listed on the Nairobi Securities Exchange from 2008 to 2013. The information was
gathered from published annual reports and financial statements of NSE-listed companies from
2008 to 2013. The results of the multiple regression analysis approach indicated that equity and
long-term debt had a positive and significant impact on financial efficiency, whereas short-
term debt had a negative and significant impact.

Julius et al. (2015)18 wanted to see how post-consolidation capital structures affected the
financial performance of Nigeria's publicly traded banks. Benefit before taxes was used as a
dependent variable, and two capital structure variables (equity and debt) were used as
independent variables in the analysis. The study's sample includes ten (10) Nigerian banks that
are listed on the Nigerian Stock Exchange (NSE) and spans eight (8) years, from 2005 to 2012.
Capital structure has a substantial positive relationship with the financial performance of
Nigerian quoted banks, according to a least square regression study of secondary results. This
indicates that the management of Nigeria's publicly traded banks regularly uses debt and equity
resources to raise earnings. The study's results revealed that the correlation between bank
financial performance and equity is strong and positive at 0.894 (89.4%), while the correlation
between bank financial performance and debt is strong and positive at 0.638. (63.8 percent).
The overall result revealed that capital structure clarified 87.5 percent of the difference in bank
financial results (equity and debt).

Negasa, T (2016)19 “The Effect of Capital Structure on Firms’ Profitability (Evidenced from
Ethiopian)” was a paper with the aim to look into the impact of capital structure on company
profitability, with a focus on Ethiopian large private manufacturing firms. Secondary data was
gathered from thirty-three major private manufacturing firms in Ethiopia that were chosen at
random. The relationship between firm profitability and capital structure was explored using a

25
linear regression model. To empirically evaluate the literature-driven hypotheses, the Random-
effect Generalized Least Square of panel data regression model was chosen. Finally, the results
of this study showed that there is a strong positive relationship between company profitability
and total debt ratio, which indicates the capital structure of the firm.

Ogrean, Claudia and Herciu, Mihaela (2017) 20 paper's main goal was to examine the
balance sheet's structure and determine some optimum levels for increasing business
profitability. The business profitability was calculated using DuPont returns such as ROA
(return on assets) and ROE (return on equity), while the debt-to-equity ratio was used as a
measure (reflection) of capital structure. The samples consist on the most profitable non-
financial companies ranked in Fortune Global 500. Companies were divided into clusters
(based on sector or debt-to-equity ratio) in order to assess the importance of the profit-to-
balance-sheet structure link. The paper's key findings include business profitability, which can
be enhanced by using an efficient liability and equity arrangement.

2.5 REFERENCES

1. Myers, Stewart C. "Capital Structure Puzzle," Journal of Finance, Vol. 39, No. 3, July
1984, pp. 575-592.
2. Fama, Eugene and French, Kennath “Value Versus Growth, The International
Evidence”
3. Yat Hung, C., Ping Chuen Albert, C. and Chi Man Eddie, H. (2002), "Capital structure
and profitability of the property and construction sectors in Hong Kong", Journal of
Property Investment & Finance, Vol. 20 No. 6, pp. 434-453.
4. Frank, Murray Z. and Goyal, Vidhan K., Capital Structure Decisions (April 2003).
Available at SSRN: https://ssrn.com/abstract=396020 or
http://dx.doi.org/10.2139/ssrn.396020
5. J.ALOY NIRESH, Prof.T.Velnampy,. The Relationship between Capital Structure and
Profitability. Global Journal of Management and Business Research, [S.l.], v. 12, n.
13, july 2012. ISSN 2249-4588.
6. Jaisawal, B., Srivastava, N. and Sushma (2013), “Role of Capital Structure in Defining
Financial Performance: A Study with Respect to Cement Industry in India”,
International Journal of Applied Financial Management Perspectives, Vol. 2, No. 3,
pp. 537-547, July – September 2013, ISSN (P):2279-0896.

26
7. Mohammadzadeh, Mehdi; Rahimi, Farimah; Rahimi, Forough Mohammad and
Salamzadeha, Jamshid “The Effect of Capital Structure on the Profitability of
Pharmaceutical Companies The Case of Iran”
8. Manurung, Shinta D “The influence of capital structure on profitability and firm value
(a study on food and beverage companies listed in Indonesia stock exchange 2010-2012
period)”
9. Kodongo, O., Mokoteli, T. and Leonard, N. (2014), “Capital Structure, Profitability
and Firm Value: Panel Evidence of Listed Firms in Kenya”, MPRA, pp. 1-19,
http://mpra.ub.unimuenchen.de/57116.
10. Khalifa, M. (2014), “The Effect of Capital Structure on Profitability of Energy
American Firms:”, International Journal of Business and Management Invention, Vol.
3, Issue 12, December, 2014, pp. 54-61, ISSN (Print): 2319 – 801X.
11. Younus et. al. (2014), “Capital Structure and Financial Performance: Evidence from
Sugar Industry in Karachi Stock Exchange Pakistan”, International Journal of
Academic Research in Accounting, Finance and Management Sciences, Vol. 4, No.4,
October 2014, pp. 272–279, ISSN: 2308-0337.
12. Muhammad, H., Shah, B and Islam, Z. (2014), “The Impact of Capital Structure on
Firm Performance: Evidence from Pakistan”, Journal of Industrial Distribution &
Business, Vol. 5, No. 2, pp.13-20, May 7,2014, ISSN: 2233-4165.
13. Sekar, M., Gowri, M. and Ramya, G. (2014), “A Study on Capital Structure and
Leverage of Tata Motors Limited: Its Role and Future Prospects”, presented at the
Annual Research Conference of Symbiosis Institute of Management Studies, Procedia
Economics and Finance, Vol. 11 (2014), pp. 445 – 458.
14. Khanam, F., Nasreen, S. and Pizada, S. (2014), “Impact of Capital Structure on Firm‟s
Financial Performance: Evidence from Food Sector of Pakistan”, Research Journal of
Finance and Accounting, Vol.5, No.11, 2014, pp. 93-105, ISSN 2222-2847 (Online).
15. Rani, Kavita The impact of capital structure on financial performance of different
sectors in India, International Journal in Management and Social Science, Vol.03
Issue-06, (June, 2015) ISSN: 2321-1784
16. Mwangi, M. and Birundu, E. (2015), “The Effect of Capital Structure on the Financial
Performance of Small and Medium Enterprises in Thika Sub-County, Kenya”,
International Journal of Humanities and Social Science, Vol. 5, No. 1, pp. 151-156,
January 2015.

27
17. Githire, C. and Muturi, W (2015), “ Effects of Capital Structure on Financial
Performance of Firms in Kenya: Evidence from Firms Listed at The Nairobi Securities
Exchange”, International Journal of Economics, Commerce and Management, Vol. III,
Issue 4 , pp. 1-10, ISSN 2348 0386.
18. Julius et.al. (2015), “Capital Structure and Financial Performance in Nigeria”,
International Journal of Business and Social Research, Volume 05, Issue 02, 2015, pp.
21-31.
19. Negasa, T. The Effect of Capital Structure on Firms’ Profitability (Evidenced from
Ethiopian). Preprints 2016, 2016070013 (doi: 10.20944/preprints201607.0013.v1).
20. Mihaela, H., Claudia, O., (2017), “DOES CAPITAL STRUCTURE INFLUENCE
COMPANY PROFITABILITY?”, Studies in Business & Economics, Vol. 12, Issue 3,
p50-62. 13p. DOI: 10.1515/sbe-2017-0036

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 CHAPTER-3
INDUSTRY AND COMPANY
PROFILE

29
3.1 OIL AND GAS INDUSTRY IN INDIA – AN OVERVIEW

The Indian oil and gas industry dates back to 1889, when the country's first oil deposits were
discovered near the town of Digboi in the state of Assam. The discovery of gas fields in Assam
and Gujarat in the 1960s sparked India's natural gas industry. As of March 31, 2018, India had
estimated crude oil reserves of 594.49 million tonnes (MT) and natural gas reserves of 1339.57
billion cubic metres (BCM). India currently imports 82 percent of its oil needs and aims to
reduce that to 67 percent by 2022 by replacing it with domestic exploration, renewable energy,
and indigenous ethanol fuel. In 2019, India was the second-largest net crude oil (including
crude oil products) importer, with 205.3 Mt imported.

In 2017–18, India produced 35.68 MTs of crude petroleum. In 2016–18, India accounted for
0.92 percent of global oil production. Between 2008–09 and 2017–18, India's crude petroleum
production increased at a CAGR of 0.63 percent. India also produces petroleum products,
producing 254.40 MT in 2017–18, a 4.46 percent increase over the previous year. High speed
diesel oil accounted for 42.41 percent of all petroleum products, followed by motor gasoline
(14.85 percent). Natural gas production was 31.73 billion cubic metres in 2017–18, up 60.86
percent from the previous year. In 2016–17, India accounted for 0.77 percent of global natural
gas production. During 2017-18, India deployed 159 rigs and drilled 545 production wells,
ranking fifth globally, but oil and gas production has not kept pace with the number of wells
drilled.

As of March 31, 2018, India had 23 crude oil refineries, 18 of which were state-owned, three
of which were privately owned, and two of which were joint ventures. India's total oil refining
capacity was 248 MMT, up from 234 MT the previous year. In 2017-18, India's refineries
processed 251.935 MMT of oil, achieving a capacity utilisation of 106.6 percent. By installing
petroleum coker units, many refineries are using lower end residual oil with higher sulphur
content to produce lighter oils (petrol, diesel, etc.). This process produces Pet coke, a solid fuel
with a higher calorific value and sulphur content. Because developed countries have prohibited
the use of high sulphur pet coke and residual oils, these fuels are further converted into
synthetic natural gas and methanol in methanation plants to avoid disposal issues. The shipping
industry consumes nearly 38% of residual fuel oils. The International Convention for the
Prevention of Pollution from Ships (MARPOL), adopted by the IMO, requires marine vessels
to avoid using residual fuel oils with a sulphur content greater than 0.1 percent beginning in

30
2020. To avoid waste product disposal, complete use of residual oil or pet coke in gasification
units would be part of petroleum refining complexes/plants in the future.

After the United States and China, India is the world's third largest consumer of crude oil. In
2016–17, the country accounted for 4.81 percent of total global oil consumption. The estimated
total crude oil consumption in India increased by 4.59 percent from 160.77 MMT in 2008–09
to 251.93 MMT in 2017–18. In 2017–18, high-speed diesel oil accounted for 39.3 percent of
total consumption of all types of petroleum products, followed by petrol (12.7%), petroleum
coke (12.4%), liquefied petroleum gas (11.3%), and naphtha (6.1 percent). In 2016–17, the
country accounted for 1.41 percent of total global natural gas consumption. The fertiliser
industry (27.78 percent), power generation (22.77 percent), and transportation are the largest
consumers of natural gas (16.25 percent). Natural gas is consumed for both energy (60.68%)
and non-energy (39.32%) purposes.

Due to the Covid-19 pandemic, India's crude oil production fell 7.1 percent in May 2020
compared to May 2019. Domestic crude production, on the other hand, has been declining year
after year since fiscal year 2012. Annual crude oil production has fallen by 2.1 percent since
2012, to 32,169.3 thousand Metric Tonnes (TMT) in FY 2020 from 38,089.7 TMT in FY 2012.
As a result, the proportion of imports in domestic crude oil consumption has steadily increased
from 81.8 percent in 2012 to 87.6 percent in 2020. According to experts, the majority of India's
crude oil production is from ageing wells that have become less productive over time. A lack
of new oil discoveries in India, combined with a long lead time to begin production from
discovered wells, has resulted in a steady decline in crude oil production, increasing India's
reliance on imports. According to experts, the output of these ageing wells is declining faster
than new wells can be drilled. Domestic exploration firms are attempting to extend the life of
existing wells.

3.2 COMPANY PROFILE

3.2.1 Reliance Industries

Reliance Industries Limited's motto "Growth is Life" aptly captures the ever-evolving spirit of
Reliance. The company has evolved from being a textiles and polyester company to an
integrated player across energy, materials, retail, entertainment, and digital services. Reliance's
operations span from the exploration and production of oil and gas to the manufacture of
petroleum products, polyester products, polyester intermediates, plastics, polymer

31
intermediates, chemicals, synthetic textiles, and fabrics. Reliance's products and services
portfolio touches almost all Indians on a daily basis, across economic and social spectrums.
The company serves about 300 million customers and is India's largest private sector
corporation.

Reliance is one of the largest exploration and production players in India having a balanced
domestic conventional and unconventional hydrocarbon portfolio. Reliance entered the
Exploration and Production (E&P) business by becoming a 30% partner in an unincorporated
joint venture with Shell (erstwhile BG) and ONGC in the Panna Mukta and Mid and South
Tapti blocks. As of Jan 1st, 2020, their domestic portfolio comprises of conventional oil and
gas blocks in Krishna Godavari and Mahanadi basins and two Coal Bed Methane (CBM)
blocks, Sohagpur (East) and Sohagpur (West) in Madhya Pradesh.

Reliance and BP entered into transformational partnership with focus on delivering growth and
adding value to India’s energy sector. The partnership is a perfect blend of BP’s deep-water
and development expertise with Reliance’s project management skills. We have also forged
strategic partnerships with Chevron and Ensign Natural Resources for development of shale
gas resources in US. RIL and its partners in domestic and Shale Business work closely together
and channelize expertise to target high quality prospects and optimise existing and future
development plans.

3.2.2 Petronet LNG

Petronet LNG Ltd is an Indian oil and gas company formed by the government of India to
import liquefied natural gas (LNG) and set up LNG terminals in the country. It is a joint venture
company promoted by the Gas Authority of India Limited (GAIL), Oil and Natural Gas
Corporation Limited (ONGC), Indian Oil Corporation Limited (IOC) and Bharat Petroleum
Corporation Limited (BPCL). Petronet LNG Limited, one of the companies in the Indian
energy sector, has set up the country's first LNG receiving and regasification terminal in Dahej,
Gujarat, and another terminal in Kochi, Kerala. While the Dahej terminal has a nominal
capacity of 17.5 million tonnes per year (equivalent to 70 million cubic metre per day of natural
gas at standard conditions), the Kochi terminal has a capacity of 5 million tonnes per year
(equivalent to 20 million cubic metre per day of natural gas). Plans to build a third LNG
terminal in Gangavaram, Andhra Pradesh were dropped in October 2019. Formed as a joint
venture by the Government of India to import LNG and set up LNG terminals in the country,
it involves India's leading oil and natural gas industry players. Its promoters are GAIL (India)

32
Limited (GAIL), Oil & Natural Gas Corporation Limited (ONGC), Indian Oil Corporation
Limited (IOCL) and Bharat Petroleum Corporation Limited (BPCL). The authorized capital is
Rs. 3,000 crore ($420 million approx). The company selected Gaz de France as its strategic
partner. The company has also signed an LNG sale and purchase agreements with Ras Laffan
Liquefied Natural Gas Company Ltd, Qatar for the supply of 8.5 MTPA LNG to India. Petronet
LNG Ltd has set up its first LNG terminal in Dahej in Gujarat with the capacity of 15 million
metric tons per year. Capacity of Dahej Terminal will expand to 17.5 million tons per year till
2019. Another terminal with capacity 5 million tons per year is commissioned in Kochi
(Kerala) and started its operations in August 2013. Petronet LNG is planning to set up its third
LNG terminal with capacity 5 million tons per year probably in Andhra Pradesh. Kochi LNG
Terminal is situated in the Special Economic Zone (SEZ) of Puthuvypeen near the entrance to
Cochin Port, Kerala. The jetty facility at Kochi terminal is designed to receive LNG tankers of
capacity from 65,000 m3 up to 216,000 m3, with possibility of receiving suitable smaller ships.
There are various services offered by Petronet LNG Limited, like regasification, storage and
reloading, bunkering, gassing-up and cooling-down facilities and LNG truck loading facilities.
In September 2019, PetroNet signed a MoU with United States-based Tellurian Inc to purchase
a stake in the latter's Driftwood project in Louisiana and to import 5 million tonnes of LNG
annually. The deal was initially expected to be finalized by 31 March 2020, but the non-binding
agreement was instead terminated in November 2020 due to low LNG prices adversely
affecting the investment case.

3.2.3 Oil India

Oil India Limited (OIL) is the second largest hydrocarbon exploration and production entity
and a government enterprise owned by Ministry of Petroleum and Natural Gas, Government
of India with its operational headquarters in Duliajan, Assam, India. The company is a
government-owned Navratna under the administrative control of India's Ministry of Petroleum
and Natural Gas with its corporate offices in Noida in the New Delhi-NCR region. OIL is
engaged in the business of exploration, development and production of crude oil and natural
gas, transportation of crude oil and production of liquid petroleum gas. The company's history
spans the discovery of crude oil in the far east of India at Digboi and Baghjan, Assam in 1889
to its present status as a fully integrated upstream petroleum company. Oil India Limited was
formed by the Burmah Oil Company Limited as its subsidiary in India 1887 to explore in the
Assam Basin, India (Corley, T A B, 1983, The History of the Burmah Oil Company, 1886-
1983). Staff at the Burmah Oil Company Limited had heard from a geologist with the colonial

33
British Indian Geological Survey, Thomas Oldham, that oil was found on the feet of elephants
that were being used as beasts of burden in the vicinity of the Digboi village (Arun Metrie,
pers. comm., former Burmah Oil economist, 1988). The oil on the elephants' feet was traced to
the Digboi area, where a surface fold (anticline in geological parlance) had formed a broad hill.
A successful technique for exploration for hydrocarbons at the time was drilling beneath seeps
on anticlines so Oil India drilled beneath the Digboi seeps and found a giant oil field. Several
other oil fields were subsequently found by Oil India Limited in what became India's first oil
production.

As of 2014 the company produced 3.466 MMT of crude oil, 2625.81 million cubic metre at
standard conditions of natural gas and 46,640 tonnes of LPG. Most of this was produced from
its traditionally rich oil and gas fields concentrated in the North-eastern part of India and
contribute around 80% of total oil and gas produced in the region. The search for newer avenues
has seen OIL spreading out its operations in onshore / offshore Orissa and Andaman, Cauvery
offshore, Tamil Nadu, Arabian Sea, deserts of Rajasthan, onshore Andhra Pradesh, riverbeds
of Brahmaputra and logistically difficult hilly terrains of the Indian state Mizoram and
Arunachal Pradesh. In Rajasthan, OIL discovered gas in 1988, heavy oil / bitumen in 1991 and
started production of gas in 1996. The company has accumulated over a hundred years of
experience in the field of oil and gas production, since the discovery of Digboi oilfield in 1889.
The company has over 100,000 square kilometres (39,000 sq mi) of licensed areas for oil and
gas exploration. It has emerged as a consistently profitable International company and present
in Libya, Gabon, Nigeria, Sudan, Venezuela, Mozambique, Yemen, Iran, Bangladesh and
United States. OIL has recently emerged in the offshore giant gas-field project of Mozambique
and also made discovery of oil & gas in Gabon as an Operator and Libya as non-operator. OIL
acquired Shale oil asset in United States during 2012. In recent years, OIL has stepped up
exploration and production activities significantly in north-eastern India. OIL has set up its
NEF (North East Frontier) project to intensify its exploration activities in the frontier areas in
North East, which are logistically very difficult and geologically complex. Presently,
exploration activities are in progress along the Trust Belt areas of Arunachal, Assam including
Mizoram. The Company operates a crude oil pipeline from Duliajan to Barauni, in Bihar.

34
 CHAPTER-4
DATA ANALYSIS AND
INTERPRETATION

CHAPTER-4
DATA ANALYSIS AND
INTERPRETATION

35
4.1 DATA ANALYSIS

Descriptive analysis was firstly applied to describe relevant aspects of financial performance
and provided detailed information about each relevant variable. Correlation models,
specifically Pearson correlation were applied to measure the degree of association between
different variables under consideration while regression analysis was applied to examine the
relationship of independent variables with dependent variable and to know the effect of selected
independent variables on financial performance. This method is used to identify the significant
of each explanatory variable to the model and also the significance of the overall model. The
model used was multiple regressions (more than one independent variables). The researcher
also used Ordinary Least Squares (OLS) method for analysis of hypotheses stated in a multiple
form. For this purpose of analysis the MS Excel Software was used to analyze financial data
and SSPS Software used to run the regression.

Table 4.1

VARIABLE MEASUREMENT
Earnings Per Share EPS = (Net income – preference dividend)/ No. of shares

Net Profit Margin Net profit margin = (Revenue – COGS –Operating

expenses –Interest –Tax)/Revenue *100
Return on Capital Return on capital employed = Net Operating profit/
Employed Capital Employed
Return on Asset Return on asset = Net Income/ Total Assets

Total Debt to Equity Total Debt to Equity = (STD +LTD + Other Fixed
Payments)/ Shareholders Equity
Return on Equity
Interest Coverage
Ratio
Debt Ratio Total Liabilities/ Total Asset
List of variables for data analysis
The ordinary least squares (OLS) used for its computation. Its procedure is simple and
the estimates obtained from this procedure have optimal properties which include: linearity,
Unbiasedness, Minivariance and Mean square error estimation (Koutsoyianis, 2003).

Here an attempt is made to analyze the effect of financial leverage on financial performance,
the researcher developed a compact form of our model as follows:

36
Y = bo + b1x1 + b2x2 + b3x3 + …… + ɛi

Where: Y = Dependent variable of company

X = Independent variable of company

b0 = Intercept for X variable of i company

b1 – b3 = Coefficient for the independent variables X of companies, denoting the nature of the
relationship with dependent variable Y (or parameters)

ɛi = The error term Specially, when researcher converts the above general least squares model
into our specified variables, it becomes:

(ROE)yt = bo + b1(DR)yt + b2(DER)yt + b3(ICR)yt + ɛi

Where: ROE = Return on Equity

DR = Debt Ratio

DER = Debt-Equity-Ratio

ICR = Interest Coverage Ratio

ɛi = Error term

37
 Table 4.2
EPS of Selected Companies

Reliance
Oil India Petronet LNG
Industries LTD
Year

EPS (Rs.) EPS (Rs.) EPS (Rs.)

2016 84.66 28.72 12.18
2017 96.9 13.13 11.37
2018 53.08 23.32 13.85
2019 55.48 22.88 14.37
2020 48.75 23.83 17.98
CAGR -0.885 -0.834 -0.705
Mean 67.774 22.376 13.95
Standard Deviation 21.58 5.68 2.56
CV 31.84 25.38 18.35
Table 4.3

Trend Analysis of EPS

EPS
year 2016 2017 2018 2019 2020
Reliance 100 114.46 62.7 65.53 57.58
Oil India 100 45.71 81.2 79.67 82.97
Petronet 100 93.33 113.71 117.98 147.62

Figure 4.3

Trend Analysis of EPS

160

140

120

100

80

60

40

20

0
2015 2016 2017 2018 2019 2020 2021

Oil India Petronet Reliance

38
The EPS of Reliance Industries shows an average of 67.774 and standard deviation of 21.58
for 5 years. Its coefficient of variation is 25.38. This indicates that the EPS is slightly varied
during the period 2016-2020. The company’s compound annual growth rate is -0.885. No
growth can be seen in the EPS for 2016-2020.

The EPS of Oil India shows an average of 22.376 and standard deviation of 5.68 for 5 years.
Its coefficient of variation is 25.38. This indicates that the EPS is slightly varied during the
period 2016-2020. The company’s compound annual growth rate is -0.834. No growth can be
seen in the EPS for 2016-2020.

The EPS of Petronet LNG shows an average of 13.95 and standard deviation of 2.56 for 5
years. Its coefficient of variation is 18.35. This indicates that the EPS is slightly varied during
the period 2016-2020. The company’s compound annual growth rate is -0.705. No growth can
be seen in the EPS for 2016-2020.

Table 4.4

Net profit Margin of Selected Companies

Reliance
Oil India Petronet LNG
Industries LTD
Year
Net Profit Margin Net Profit Net Profit
(%) Margin (%) Margin (%)
2016 11.75 23.57 3.36
2017 12.98 16.28 6.92
2018 11.58 25.03 6.79
2019 9.46 18.85 5.61
2020 9.19 21.3 7.6
CAGR -0.844 -0.819 -0.548
Mean 10.992 21.006 6.056
Standard Deviation 1.62 3.53 1.67
CV 14.72 16.80 27.55

Table 4.5

Trend Analysis of Net profit Margin

NP margin
year 2016 2017 2018 2019 2020
Reliance 100 110.47 98.55 80.51 78.21
Oil India 100 69.07 106.19 79.99 90.37
Petronet 100 205.95 202.08 166.96 226.19

39
 Figure 4.5

Trend Analysis of Net profit Margin

250

200

150

100

50

0
2015 2016 2017 2018 2019 2020 2021

Reliance Oil India Petronet

The Net Profit Margin of Reliance Industries shows an average of 10.992 and standard
deviation of 1.62 for 5 years. Its coefficient of variation is 14.72. This indicates that the Net
Profit Margin is slightly varied during the period 2016-2020. The company’s compound annual
growth rate is -0.844. No growth can be seen in the Net Profit Margin for 2016-2020.

The Net Profit Margin of Oil India shows an average of 21.006 and standard deviation of 3.53
for 5 years. Its coefficient of variation is 16.80. This indicates that the Net Profit Margin is
slightly varied during the period 2016-2020. The company’s compound annual growth rate is
-0.819. No growth can be seen in the Net Profit Margin for 2016-2020.

The Net Profit Margin of Petronet LNG shows an average of 6.056 and standard deviation of
1.67 for 5 years. Its coefficient of variation is 27.55. This indicates that the Net Profit Margin
is slightly varied during the period 2016-2020. The company’s compound annual growth rate
is -0.548. No growth can be seen in the Net Profit Margin for 2016-2020

40
 Table 4.6

Return on capital Employed of Selected Companies

Reliance
Oil India Petronet LNG
Industries LTD
Year Return on
Return on
Return on Capital Capital
Capital
Employed (%) Employed
Employed (%)
(%)
2016 8.24 6.23 8.42
2017 11.04 8.78 22.02
2018 11.8 10.4 25.15
2019 9.95 13.78 26.44
2020 8.6 7.03 22.03
CAGR -0.791 -0.774 -0.477
Mean 9.926 9.244 20.812
Standard Deviation 1.53 3.00 7.19
CV 15.41 32.50 34.57

Table 4.7

Trend Analysis of Return on Capital Employed

ROCE
year 2016 2017 2018 2019 2020
Reliance 100 133.98 143.2 120.75 104.37
Oil India 100 140.93 166.93 221.19 112.84
Petronet 100 261.52 298.69 314.01 261.64

Figure 4.6

Trend Analysis of Return on Capital Employed

350
300
250
200
150
100
50
0
2015 2016 2017 2018 2019 2020 2021

Reliance Oil India Petronet

41
The Return on Capital Employed of Reliance Industries shows an average of 9.926 and
standard deviation of 1.53 for 5 years. Its coefficient of variation is 15.41. This indicates that
the ROCE is slightly varied during the period 2016-2020. The company’s compound annual
growth rate is -0.791. No growth can be seen in the Return on Capital Employed for 2016-
2020.

The Return on Capital Employed of Oil India shows an average of 9.244 and standard deviation
of 3.00 for 5 years. Its coefficient of variation is 32.5. This indicates that the Return on Capital
Employed is slightly varied during the period 2016-2020. The company’s compound annual
growth rate is -0.774. No growth can be seen in the Return on Capital Employed for 2016-
2020.

The Return on Capital Employed of Petronet LNG shows an average of 20.812 and standard
deviation of 7.19 for 5 years. Its coefficient of variation is 34.57. This indicates that the Return
on Capital Employed is slightly varied during the period 2016-2020. The company’s compound
annual growth rate is -0.477. No growth can be seen in the Return on Capital Employed for
2016-2020.

Table 4.8

Return on Assets of Selected Companies

Reliance
Oil India Petronet LNG
Industries LTD
Year
Return on Assets Return on Return on
(%) Assets (%) Assets (%)
2016 5.98 5.87 7.34
2017 5.74 3.41 12.33
2018 5.44 6.05 13.27
2019 4.53 5.45 14.28
2020 3.18 6.03 14.42
CAGR -0.894 -0.795 -0.607
Mean 4.974 5.362 12.328
Standard Deviation 1.14 1.12 2.91
CV 22.99 20.84 23.63

42
 Table 4.9

Trend Analysis of Return on Assets

ROA
year 2016 2017 2018 2019 2020
Reliance 100 95.99 90.97 75.75 53.18
Oil India 100 58.09 103.07 92.84 102.72
Petronet 100 167.98 180.79 194.55 196.46

Figure 4.7

Trend Analysis of Return on Assets

Chart Title
250

200

150

100

50

0
2015 2016 2017 2018 2019 2020 2021

Reliance Oil India Petronet

The Return on Asset of Reliance Industries shows an average of 4.974 and standard deviation
of 1.14 for 5 years. Its coefficient of variation is 22.99. This indicates that the Return on Asset
is slightly varied during the period 2016-2020. The company’s compound annual growth rate
is -0.894. No growth can be seen in the Return on Asset for 2016-2020.

The Return on Asset of Oil India shows an average of 5.362 and standard deviation of 1.12 for
5 years. Its coefficient of variation is 20.84. This indicates that the Return on Asset is slightly
varied during the period 2016-2020. The company’s compound annual growth rate is -0.795.
No growth can be seen in the Return on Asset for 2016-2020.

The Return on Asset of Petronet LNG shows an average of 12.328 and standard deviation of
2.91 for 5 years. Its coefficient of variation is 23.63. This indicates that the Return on Asset is

43
slightly varied during the period 2016-2020. The company’s compound annual growth rate is
-0.607. No growth can be seen in the Return on Asset for 2016-2020.

Table 4.10

Total Debt/Equity of Selected Companies

Reliance
Oil India Petronet LNG
Industries LTD
Year
Total Total
Total Debt/Equity
Debt/Equity Debt/Equity
2016 0.38 0.37 0.34
2017 0.35 0.31 0.18
2018 0.31 0.26 0.08
2019 0.39 0.26 0.01
2020 0.54 0.36 0.01
CAGR -0.716 -0.805 -0.994
Mean 0.394 0.312 0.124
Standard Deviation 0.09 0.05 0.14
CV 22.17 16.87 112.41

Table 4.11

Trend Analysis of Total Debt/Equity

DE ratio
YEAR 2016 2017 2018 2019 2020
Reliance 100 92.1 81.58 102.63 142.1
Oil India 100 83.78 70.27 70.27 97.29
Petronet 100 52.94 23.53 2.94 2.94

44
 Figure 4.8

Trend Analysis of Total Debt/Equity

160
140
120
100
80
60
40
20
0
2015 2016 2017 2018 2019 2020 2021

Reliance Oil India Petronet

The Total debt/Equity of Reliance Industries shows an average of 0.394 and standard deviation
of 0.09 for 5 years. Its coefficient of variation is 22.17. This indicates that the Total debt/Equity
is slightly varied during the period 2016-2020. The company’s compound annual growth rate
is -0.716. No growth can be seen in the Total debt/Equity for 2016-2020.

The Total debt/Equity of Oil India shows an average of 0.312 and standard deviation of 0.05
for 5 years. Its coefficient of variation is 16.87. This indicates that the Total debt/Equity is
slightly varied during the period 2016-2020. The company’s compound annual growth rate is
-0.805. No growth can be seen in the Total debt/Equity for 2016-2020.

The Total debt/Equity of Petronet LNG shows an average of 0.124 and standard deviation of
0.14 for 5 years. Its coefficient of variation is 112.41. This indicates that the Total debt/Equity
is slightly varied during the period 2016-2020. The company’s compound annual growth rate
is -0.994. No growth can be seen in the Total debt/Equity for 2016-2020.

45
 Table 4.12

Return on Equity of Selected Companies

Reliance
Oil India Petronet LNG
Year Industries LTD
ROE ROE ROE
2016 11.41 9.23 13.8
2017 10.89 5.32 21.07
2018 10.68 9.55 21.37
2019 8.67 9.33 21.41
2020 7.27 10.59 24.62
CAGR -0.87 -0.77 -0.64
Mean 9.78 8.80 20.45
Standard Deviation 1.75 2.02 3.99
CV 17.87 22.96 19.52

Table 4.13

Trend Analysis of Return on Equity

ROE
YEAR 2016 2017 2018 2019 2020
Reliance 100 95.44 93.6 75.99 63.72
Oil India 100 57.64 103.47 101.08 114.73
Petronet 100 152.68 154.85 155.14 178.41

Figure 4.9

Trend Analysis of Return on Equity

Chart Title
200

150

100

50

0
2015 2016 2017 2018 2019 2020 2021

Reliance Oil India Petronet

46
The Return on Equity of Reliance Industries shows an average of 9.78 and standard deviation
of 1.75 for 5 years. Its coefficient of variation is 17.87. This indicates that the Return on Equity
is slightly varied during the period 2016-2020. The company’s compound annual growth rate
is -0.87. No growth can be seen in the Return on Equity for 2016-2020.

The Return on Equity of Oil India shows an average of 8.80 and standard deviation of 2.02 for
5 years. Its coefficient of variation is 22.96. This indicates that the Return on Equity is slightly
varied during the period 2016-2020. The company’s compound annual growth rate is -0.77. No
growth can be seen in the Return on Equity for 2016-2020.

The Return on Equity of Petronet LNG shows an average of 20.45 and standard deviation of
3.99 for 5 years. Its coefficient of variation is 19.52. This indicates that the Return on Equity
is slightly varied during the period 2016-2020. The company’s compound annual growth rate
is -0.64. No growth can be seen in the Return on Equity for 2016-2020

Table 4.14

ICR

Reliance
Oil India Petronet LNG
Year Industries LTD
ICR ICR ICR
2016 15.06 9.96 6.02
2017 15.98 9.31 12.26
2018 10.82 9.92 19.74
2019 5.86 11.31 33.69
2020 4.7 5.25 8.71
CAGR -0.94 -0.89 -0.71
Mean 10.48 9.15 16.08
Standard Deviation 5.15 2.30 11.11
CV 49.12 25.13 69.07

Table 4.15

Trend Analysis of ICR

ICR
YEAR 2016 2017 2018 2019 2020
Reliance 100 106.11 71.84 38.91 31.21
Oil India 100 93.47 99.6 113.55 52.72
Petronet 100 203.65 327.91 559.63 144.68

47
 Figure 4.10

Trend Analysis of ICR

Chart Title
600
500
400
300
200
100
0
2015 2016 2017 2018 2019 2020 2021
Reliance Oil India Petronet

The Interest Coverage Ratio of Reliance Industries shows an average of 10.48 and standard
deviation of 5.15 for 5 years. Its coefficient of variation is 49.12. This indicates that the Interest
Coverage Ratio is slightly varied during the period 2016-2020. The company’s compound
annual growth rate is -0.94. No growth can be seen in the Interest Coverage Ratio for 2016-
2020.

The Interest Coverage Ratio of Oil India shows an average of 9.15 and standard deviation of
2.30 for 5 years. Its coefficient of variation is 25.13. This indicates that the Interest Coverage
Ratio is slightly varied during the period 2016-2020. The company’s compound annual growth
rate is -0.89. No growth can be seen in the Interest Coverage Ratio for 2016-2020.

The Interest Coverage Ratio of Petronet LNG shows an average of 16.08 and standard deviation
of 11.11 for 5 years. Its coefficient of variation is 69.07. This indicates that the Interest
Coverage Ratio is slightly varied during the period 2016-2020. The company’s compound
annual growth rate is -0.71. No growth can be seen in the Interest Coverage Ratio for 2016-
2020.

48
 Table 4.16

DR

Reliance
Oil India Petronet LNG
Year Industries LTD
DR DR DR
2016 0.47 0.21 0.003
2017 0.47 0.15 0.007
2018 0.49 0.17 0.0468
2019 0.46 0.2 0.104
2020 0.56 0.23 0.18
CAGR -0.76 -0.76 -0.82
Mean 0.49 0.39 0.40
Standard Deviation 0.03 0.03 0.05
CV 7.94 8.42 12.75

Table 4.17

Trend Analysis of DR

DR
YEAR 2016 2017 2018 2019 2020
Reliance 100 100 104.25 100 119.14
Oil India 100 100 102.78 113.88 119.44
Petronet 100 87.23 80.85 70.21 87.23

Figure 4.11

Trend Analysis of DR

140
120
100
80
60
40
20
0 Reliance Oil India Petronet
2015 2016 2017 2018 2019 2020 2021

49
The Debt Ratio of Reliance Industries shows an average of 0.49 and standard deviation of 0.03
for 5 years. Its coefficient of variation is 7.94. This indicates that the Debt Ratio is slightly
varied during the period 2016-2020. The company’s compound annual growth rate is -0.76. No
growth can be seen in the Debt Ratio for 2016-2020.

The Debt Ratio of Oil India shows an average of 0.39 and standard deviation of 0.03 for 5
years. Its coefficient of variation is 8.42. This indicates that the Debt Ratio is slightly varied
during the period 2016-2020. The company’s compound annual growth rate is -0.76. No
growth can be seen in the Debt Ratio for 2016-2020.

The Debt Ratio of Petronet LNG shows an average of 0.40 and standard deviation of 0.05 for
5 years. Its coefficient of variation is 12.75. This indicates that the Debt Ratio is slightly varied
during the period 2016-2020. The company’s compound annual growth rate is -.82. No growth
can be seen in the Debt Ratio for 2016-2020.

50
Inferential statistical analysis
H0: There is no significant positive relationship between Capital structure and financial
performance of selected Oil Companies in India
H1: There is a significant positive relationship between Capital structure and financial
performance of selected Oil Companies in India
Reliance

Table 4.18

Model Summary
Model R R Square Adjusted R Std. Error of the
Square Estimate
1 .979 a .959 .836 .70729
a. Predictors: (Constant), DR, ICR, Total Debt Equity X

Table 4.19

ANOVAa
Model Sum of Df Mean Square F Sig.
Squares
Regression 11.731 3 3.910 7.816 .256b
1 Residual .500 1 .500
Total 12.231 4
a. Dependent Variable: ROE
b. Predictors: (Constant), DER, DR, ICR

Table 4.20

Coefficients
Model Unstandardized Coefficients Standardized t Sig.
Coefficients
B Std. Error Beta
(Constant) 10.286 5.977 1.721 .335
ICR .229 .090 .673 2.537 .239
1
DR .735 14.905 .017 .049 .969
DER -8.272 7.519 -.413 -1.100 .470
a. Dependent Variable: ROE

51
The table above shows that coefficient of multiple determinations R-Square which explains the
extent to which the independent variables affect the dependent variable. In this Case, .836,
83.6% of the variations in the dependent variable were explained by the independent variables
while 16.4% were affected by other variables outside the independent variables. So this
indicates that debt ratio (DR); debt-equity ratio (DER) and interest coverage ratio (ICR) are the
major determining factors of Return on Equity (ROE) of the Reliance Company Ltd in India.
Moreover, this table also shows the results of F = 7.816 at Significance level of .256b with df
(3, 1). From the ANOVA test (Table 4.19) the significant level is at .05 which is greater so the
researcher concluded that the 83.6% of the impact is insignificant. So the H0 is accepted. The
coefficient test (Table: 4.20) reveals that ICR, DR, DER does not affect the financial
performance.

Oil India

Table 4.21

Model Summary
Model R R Square Adjusted R Std. Error of
Square the Estimate
a
1 .637 .406 -1.376. 3.11588
a. Predictors: (Constant), DR, ICR, DER

Table 4.22

ANOVAa
Model Sum of Df Mean Square F Sig.
Squares
Regression 6.634 3 2.211 .228 .873b
1 Residual 9.709 1 9.709
Total 16.343 4
a. Dependent Variable: ROE
b. Predictors: (Constant), DR, ICR, DER

52
 Table 4.23

Coefficientsa
Model Unstandardized Coefficients Standardized t Sig.
Coefficients
B Std. Error Beta
(Constant) -13.824 40.448 -.342 .790
Total Debt Equity 9.245 41.091 .241 .225 .859
1
ICR .212 1.111 .242 .191 ..880
DR 46.113 63.403 .732 .727 .600
a. Dependent Variable: ROE

The table above shows that coefficient of multiple determinations R-Square which explains the
extent to which the independent variables affect the dependent variable. In this Case,-1.376, so
it does not explain dependent variable. So this indicates that debt ratio (DR); debt-equity ratio
(DER) and interest coverage ratio (ICR) are not the major determining factors of Return on
Equity (ROE) of the Oil India Company in India. Moreover, this table also shows the results
of F = .228 at Significance level of .873b with df (3, 1). From the ANOVA test (Table 4.22) the
significant level is at .05 which is greater so the researcher concluded that the impact is
insignificant. So the H0 is accepted. The coefficient test (Table: 4.23) reveals that ICR, DR,
DER does not affect the financial performance.

Petronet LNG
Table 4.24

Model Summary
Model R R Square Adjusted R Std. Error of the
Square Estimate
a
1 .999 .998 .991 .38527
a. Predictors: (Constant), DR, ICR, DER

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 Table 4.25

ANOVAa
Model Sum of Squares Df Mean Square F Sig.
Regression 63.615 3 21.205 142.857 .061b
1 Residual .148 1 .148
Total 63.764 4
a. Dependent Variable: ROE
b. Predictors: (Constant), DR, ICR, DER

Table 4.26

Coefficientsa
Model Unstandardized Coefficients Standardized t Sig.
Coefficients
B Std. Error Beta
(Constant) 100.727 12.839 7.845 .081
Total Debt Equity -6.998 4.753 -.244 -1.472 .380
1
ICR -.679 .097 -1.890 -7.028 .090
DR -171.205 29.657 -2.186 -5.773 .109
a. Dependent Variable: ROE

The table above shows that coefficient of multiple determinations R-Square which explains the
extent to which the independent variables affect the dependent variable. In this Case, .991
99.1% of the variations in the dependent variable were explained by the independent variables
while 0.9% were affected by other variables outside the independent variables. So this indicates
that debt ratio (DR); debt-equity ratio (DER) and interest coverage ratio (ICR) are the major
determining factors of Return on Equity (ROE) of the Petronet LNG in India. Moreover, this
table also shows the results of F = 142.857 at Significance level of .061b with df (3, 1). From
the ANOVA test (Table 4.25) the significant level is at .05 which is greater so the researcher
concluded that 99.1% the impact is insignificant. So the H0 is accepted. The coefficient test
(Table: 4.26) reveals that ICR, DR, DER does not affect the financial performance.

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 CHAPTER-5
FINDINGS, SUGGESTIONS AND
CONCLUSIONS

55
In this chapter an attempt is made to summarize the major findings of the study based on major
objectives formulated. The findings is about the relationship and effect of the Total
Debt/Equity, Debt Ratio and Interest coverage ratio on Return on equity on the selected Oil
Exploration and Production companies in India. The analysis is done using Multiple Linear
Regression and ANOVA.

5.1 Findings

5.1.1. From table 4.18, the adjusted r square value is .83; the researcher can state that 83% of
the variations in the dependent variable can be explained with the use of independent variables
in case of Reliance.

5.1.2. From table 4.19, the p value .256 is more than .05 and so we accept the null hypothesis
in case of Reliance Ltd. There is no significant positive relationship between capital structure
and financial performance. So the researcher can conclude that the Irrelevance theory of Capital
Structure is applicable in case of Reliance.

5.1.3. From table 4.21, the researcher can conclude that the variations in the dependent variable
cannot be explained with the use of independent variables as the adjusted r square value is
negative in the case of Oil India Ltd.

5.1.4. From table 4.22, the p value .873 is greater than .05 and so we accept the null hypothesis
in case of Oil India Ltd. There is no significant positive relationship between capital structure
and financial performance. So the researcher can conclude that the Irrelevance theory of Capital
Structure is applicable in case of Oil India Ltd.

5.1.5 From table 4.24, the adjusted r square value is .99; the researcher can conclude that 99%
of the variations in the dependent variable can be explained with the use of independent
variables in case of Petronet LNG.

5.1.6 From table 4.25, the p value .061 is greater than .05 and so we accept the null hypothesis
in case of Petronet LNG. There is no significant positive relationship between capital structure
and financial performance. So the researcher can conclude that the Irrelevance theory of Capital
Structure is applicable in case of Petronet LNG.

56
5.2 Suggestions

5.2.1 The company’s management should ensure that the financial decisions made by them are
in consonance with shareholders wealth maximisation objectives which encompasses the profit
maximisation objective of the firm.

5.2.2 The acceptance of new investment proposals should be based on net operating income
and total value of the firm.

5.2.3 The firms must not take investment decisions solely based on source of finance and ROI.

5.3 Conclusion

From the above findings it is concluded that the three selected companies that is Reliance Ltd,
Oil India Ltd and Petronet LNG Ltd follow the theory of irrelevance of capital structure that
has been propounded by David Durand. Therefore whatever the mix of capital in these firms
we can conclude that this will not cause a significant difference in the financial performance
of these firms.

57
BIBLIOGRAPHY

58
Books

1) Shasi K Gupta and Anju Gupta, Financial Management, Kalyani Publishers, 2013

2) Nigam Sharma, Management Accounting Principles and Applications, Kalyani Publishers,

2008.

3) Maheshwari.S.N, Cost and Management Accounting, Chand Publications, Thirteenth

Edition, 2006.

4) S.C Kuchhal, Financial Management, Chaithanya Publishing House, 2005.

5) RV Kulkarni and B.G Sayaprasad, Financial Management, Himalaya Publishing House

Mumbai, 13th edition, 2005.

6) Ravi M.kishore, Financial Management, Taxman Allied Services Publishers 6th Edition,
2005.

7) LR Potti, Quantitative Techniques, Yamuna Publications, 2002.

8) Prasana Chandra, Financial management Theory and practice, First Revised Edition, Tata
McGraw Hill Publishing Company Ltd, 1998.

Websites

 www.moneycontrol.com
 www.googlescholar.com
 www.wikipedia.com
 www.financialexpress.com
 www.businessline.com
 www.business-standard.com
 www.ril.com
 www.oil-india.com
 www.petronetlng.com

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