Name - Yash Vanigotta

Course – SYBFM

Roll No – HSBFM151

Subject – Research Methodology

INTRODUCTION
What Is Capital Structure?

Capital structure is the particular combination of debt and equity used by a

company to finance its overall operations and growth.

Equity capital arises from ownership shares in a company and claims to its future
cash flows and profits. Debt comes in the form of bond issues or loans, while
equity may come in the form of common stock, preferred stock, or retained
earnings. Short-term debt is also considered to be part of the capital structure.

Dynamics of Debt and Equity

Both debt and equity can be found on the balance sheet. Company assets, also
listed on the balance sheet, are purchased with debt or equity. Capital structure
can be a mixture of a company's long-term debt, short-term debt, common stock,
and preferred stock. A company's proportion of short-term debt versus long-term
debt is considered when analyzing its capital structure.

When analysts refer to capital structure, they are most likely referring to a
firm's debt-to-equity (D/E) ratio, which provides insight into how risky a
company's borrowing practices are. Usually, a company that is heavily financed
by debt has a more aggressive capital structure and therefore poses a greater risk
to investors. This risk, however, may be the primary source of the firm's growth.

Debt is one of the two main ways a company can raise money in the capital
markets. Companies benefit from debt because of its tax
advantages; interest payments made as a result of borrowing funds may be tax-
deductible. Debt also allows a company or business to retain ownership, unlike
equity. Additionally, in times of low-interest rates, debt is abundant and easy to
access.

Equity allows outside investors to take partial ownership of the company. Equity
is more expensive than debt, especially when interest rates are low. However,
unlike debt, equity does not need to be paid back. This is a benefit to the company
in the case of declining earnings. On the other hand, equity represents a claim by
the owner on the future earnings of the company.
Optimal Capital Structure

Companies that use more debt than equity to finance their assets and fund
operating activities have a high leverage ratio and an aggressive capital structure.
A company that pays for assets with more equity than debt has a low leverage
ratio and a conservative capital structure. That said, a high leverage ratio and an
aggressive capital structure can also lead to higher growth rates, whereas a
conservative capital structure can lead to lower growth rates.

Analysts use the D/E ratio to compare capital structure. It is calculated by dividing
total liabilities by total equity. Savvy companies have learned to incorporate both
debt and equity into their corporate strategies. At times, however, companies may
rely too heavily on external funding and debt in particular. Investors can monitor a
firm's capital structure by tracking the D/E ratio and comparing it against the
company's industry peers.

Why Do Different Companies Have Different Capital Structure?

Firms in different industries will use capital structures better suited to their type of
business. Capital-intensive industries like auto manufacturing may utilize more
debt, while labor-intensive or service-oriented firms like software companies may
prioritize equity.

How Do Managers Decide on Capital Structure?

Assuming that a company has access to capital (e.g. investors and lenders), they
will want to minimize their cost of capital. This can be done using a weighted
average cost of capital (WACC) calculation. To calculate WACC the manager or
analyst will multiply the cost of each capital component by its proportional
weight.

How Do Analysts and Investors Use Capital Structure?

A company with too much debt can be seen as a credit risk. Too much equity,
however, could mean the company is underutilizing its growth opportunities or
paying too much for its cost of capital (as equity tends to be more costly than
debt). Unfortunately, there is no magic ratio of debt to equity to use as guidance to
achieve real-world optimal capital structure. What defines a healthy blend of debt
and equity varies depending on the industry the company operates in, its stage of
development, and can vary over time due to external changes in interest rates and
regulatory environment.

What Measures Do Analysts and Investors Use to Evaluate Capital Structure?

In addition to the weighted average cost of capital (WACC), several metrics can
be used to estimate the suitability of a company's capital structure. Leverage
ratios are one group of metrics that are used, such as the debt-to-equity (D/E) ratio
or debt ratio.

The Bottom Line

Capital structure is the specific mix of debt and equity that a company uses to
finance its operations and growth. Debt consists of borrowed money that must be
repaid, often with interest, while equity represents ownership stakes in the
company. The debt-to-equity (D/E) ratio is a commonly used measure of a
company's capital structure and can provide insight into its level of risk. A
company with a high proportion of debt in its capital structure may be considered
riskier for investors, but may also have greater potential for growth.

Capital structure refers to the composition or make up of long-term sources of

funds such as equity shares, preference shares, debentures and long-term loans.
The essence of capital structure problem is to decide the ratio of debt capital to
equity capital. Capital structure decision is one of the important decision the chief
financial officer of company should take. It should develop an appropriate or target
capital structure which is most advantageous to the company. This can be done
only when all those factors which are relevant to the company’s capital structure
decisions are properly analyzed and balanced. The optimum capital structure is one
that maximizes the market value of the firm. The capital structure may vary among
industries and among companies within an industry. Since a number of factors
influence the capital structure decision of a company the judgment of the person
making the capital structure decision plays a crucial part. These factors are highly
psychological, complex and qualitative
Scope of the Study: The study attempts to analyze the capital structure and
financial leverage of Reliance Industries .various ratios related to capital structure
is calculated and analyzed to study the efficiency of the organization in dividing its
proportion of long-term capital. Financial leverage is analyzed to see how effective
the organization has tries to achieve the wealth maximization objectives. From the
above analysis and findings, researcher has attempted to give use full suggestions
to improve the capital structure and financial leverage of Reliance industries.

Objectives of the Study:

To analyze the capital structure of the company.
To analyze profitability of the company.
To analyze the debt and equity position
To know the financial leverage of the company.

Research Methodology:
Research Design: The present study aims at analyzing the capital structure
and financial leverage at Reliance E Industries.

Period of the Study: The period of study covers five years 2013-2014 to
2017-2018.The data collected from the published annual reports of the selected
company for 5 years period have been suitably re-arranged, classified and
tabulated as per requirements of the study.

Source of the Data: The study is mainly based on secondary data, which
has been collected from the annual report of Reliance industries.

Tools Used for the Study: The tools used for the study were
accounting tool.
Accounting Tool:
Ratio Analysis: In financial analysis, a ratio is used as a benchmark for
evaluating the financial position and performance of firm.

Limitations of the Study: The study is based on secondary data viz,

published annual report of the companies. The reliability and accuracy of
calculations depend very much on the information. Found in the balance sheet.
The study period is for 5 years 2014-2018
The figures taken for the calculations are most approximate.
The time limit for conducting the study is very short

Capital Structure - Reliance Industries Ltd.

Period Instrument Authorized Capital Issued Capital -PAIDUP-
From To (Rs. cr) (Rs. cr) Shares (nos) Face Value Capital (Rs.
Cr)
2021 2022 Equity Share 14000.0 6766.0 6765994014 10.0 6766.0
2020 2021 Equity Share 14000.0 6762.1 6339441920 10.0 6339.4
2020 2021 Equity Share 14000.0 6762.1 422626894 2.5 105.7
2019 2020 Equity Share 14000.0 6339.3 6339267510 10.0 6339.3
2018 2019 Equity Share 14000.0 6338.7 6338693823 10.0 6338.7
2017 2018 Equity Share 14000.0 6334.7 6334651022 10.0 6334.7
2016 2017 Equity Share 5000.0 3251.3 3251278100 10.0 3251.3
2015 2016 Equity Share 5000.0 3240.4 3240376321 10.0 3240.4
2014 2015 Equity Share 5000.0 3235.7 3235688765 10.0 3235.7
2013 2014 Equity Share 5000.0 3231.9 3231901858 10.0 3231.9
2012 2013 Equity Share 5000.0 3228.7 3228663382 10.0 3228.7
2011 2012 Equity Share 5000.0 3271.1 3271059340 10.0 3271.1
2010 2011 Equity Share 5000.0 3273.4 3273374008 10.0 3273.4
2009 2010 Equity Share 5000.0 3270.4 3270374360 10.0 3270.4
2008 2009 Equity Share 2500.0 1573.8 1573798233 10.0 1573.8
2007 2008 Equity Share 2500.0 1453.6 1453648601 10.0 1453.6
2006 2007 Equity Share 2500.0 1393.5 1393508041 10.0 1393.5
2005 2006 Equity Share 2500.0 1393.5 1393508041 10.0 1393.5
2004 2005 Equity Share 2500.0 1393.5 1393508041 10.0 1393.5
2003 2004 Equity Share 2500.0 1396.4 1396377536 10.0 1396.4
2002 2003 Equity Share 2500.0 1396.4 1396377536 10.0 1396.4
2001 2002 Equity Share 1200.0 1053.8 1053757027 10.0 1053.8
2000 2001 Equity Share 1200.0 1053.8 1053757027 10.0 1053.8

KEY FINANCIAL MAR 22 MAR 21 MAR 20 MAR 19 MAR 18

RATIOS OF RELIANCE
INDUSTRIES (in Rs.
Cr.)

PER SHARE RATIOS

Basic EPS (Rs.) 59.24 49.66 48.42 55.48 53.08

Diluted EPS (Rs.) 58.49 48.90 48.72 55.47 53.04

Cash EPS (Rs.) 72.96 63.84 64.10 72.13 68.18

Book Value 697.01 736.20 617.15 639.41 496.66

[ExclRevalReserve]/Sha
re (Rs.)

Book Value 697.01 736.20 617.15 639.41 496.66

[InclRevalReserve]/Shar
e (Rs.)
Dividend / Share(Rs.) 8.00 7.00 6.50 6.50 6.00

Revenue from 626.32 381.17 531.56 586.24 457.84

Operations/Share (Rs.)

PBDIT/Share (Rs.) 97.83 74.97 104.74 106.76 94.65

PBIT/Share (Rs.) 82.64 60.70 89.39 90.11 79.53

PBT/Share (Rs.) 69.16 42.22 63.60 74.72 72.18

Net Profit/Share (Rs.) 57.77 49.56 48.75 55.47 53.06

PROFITABILITY
RATIOS

PBDIT Margin (%) 15.62 19.66 19.70 18.21 20.67

PBIT Margin (%) 13.19 15.92 16.81 15.37 17.37

PBT Margin (%) 11.04 11.07 11.96 12.74 15.76

Net Profit Margin (%) 9.22 13.00 9.17 9.46 11.58

Return on Net worth / 8.28 6.73 7.89 8.67 10.68

Equity (%)

Return on Capital 8.24 5.82 8.84 9.95 11.80

Employed (%)

Return on Assets (%) 4.44 3.65 3.18 4.53 5.44

Total Debt/Equity (X) 0.41 0.41 0.65 0.39 0.31

Asset Turnover Ratio 0.48 28.11 34.67 47.90 46.96

(%)

LIQUIDITY RATIOS

Current Ratio (X) 1.11 1.04 0.50 0.76 0.65

Quick Ratio (X) 0.88 0.86 0.39 0.54 0.44

Inventory Turnover Ratio 7.70 6.56 8.68 8.42 7.33
(X)

Dividend Payout Ratio 10.99 12.27 12.46 10.10 9.68

(NP) (%)

Dividend Payout Ratio 8.70 9.53 9.48 7.77 7.53

(CP) (%)

Earnings Retention 89.01 87.73 87.54 89.90 90.32

Ratio (%)

Cash Earnings 91.30 90.47 90.52 92.23 92.47

Retention Ratio (%)

VALUATION RATIOS

Enterprise Value (Cr.) 1,954,716.1 1,479,239.4 950,998.0 1,017,464.4 653,357.8

8 0 6 0 0

EV/Net Operating 4.61 6.02 2.82 2.74 2.25

Revenue (X)

EV/EBITDA (X) 29.53 30.61 14.32 15.03 10.90

Market Cap/Net 4.21 5.26 2.09 2.33 1.93

Operating Revenue (X)

Retention Ratios (%) 89.00 87.72 87.53 89.89 90.31

Price/BV (X) 3.78 2.72 1.80 2.13 1.78

Price/Net Operating 4.21 5.26 2.09 2.33 1.93

Revenue

Earnings Yield 0.02 0.02 0.04 0.04 0.06

FINDINGS
* Regarding debt–equity ratio it has been found that the capital structure of the
company is equally balanced by the outsiders and owners capital. In 2015 the share
of outsiders fund is 119467.51 and 1141002.98 is owners fund i.e., 0.85:1. In 2016,
2017 and 2018 the ratios are 1.00:1, 0.93:1 and 0.99:1 respectively. In 2019 the
company has increased the amount of external equity more than that of internal
equity and the ratio for that year is 1.16:1.
* With reference to shareholders fund ratio (Proprietary ratio) the figures have
remained quite consistent during the study period. The contribution of owners in
the total assets of the company from 2015- 2118 has been up to 50%.In this year
the amount of total assets has increased to large amount than that of investment
from the shareholders.
* While analyzing the solvency ratios, the trend has been increasing during the
study period which means that with the increase in total liabilities to outsiders the
amount of total assets has also increased .In 2019 this ratio has increased up to
53.67%.
* Regarding capital gearing ratio the company is found low geared during the
study period which shows that the amount of capital invested by shareholders is
more than that capital borrowed from outsiders. In 2019 a satisfactory increase in
the long-term debt has been observed.
* While analyzing interest coverage ratio figures in 2015 and 2016 has been 9.33
and 9.92 times respectively in 2017, 2018 and 2019 the ratio has dropped down to
7.64 , 6.30 and 6.15 times respectively. It means that the interest expenses of the
company are 7.4 times at an average for study period covered by its net operating
profit (profit before interest and tax).

SUGGESTIONS
* Generally speaking, a low ratio (Debt being low in comparison to shareholders
fund) is considered favorable form long term creditors point of view because a
high proportion of owner’s funds provide a larger margin of safety for them. While
considering this fact the company should maintain the balance as it has maintained
during the study period this will help in motivating more and more creditors to
finance the company and at the same time motivate its shareholders by increasing
the amount of low cost fund to magnify their earnings by adopting a sound
financial policy.
* Equity ratios of the company are found unsatisfactory during the study periods
because higher the share of shareholders in the total capital of the company better
is the long term solvency position of the company. In order to overcome this
problem company needs to increase the amount of shareholders found but at the
same time the amount of capital invested in assets should be maintained as well.
* Solvency ratio is the variant of Equity ratio the larger the equity ratio smaller is
the solvency ratio. Solvency ratio is inversely proportionate to equity ratio any
increase in equity ratio will result in the decrease in the solvency ratio and vice
versa ,because lower the ratio of total liabilities to total assets , more satisfactory or
stable is the long term solvency position of a firm.
* Regarding capital gearing ratio, the company is dealing with low capital gear
during the study period. Gearing must be kept in such a way so that the company is
able to maintain a steady rate of dividend.
* While analyzing the interest coverage ratio the figures has been found
satisfactory during 2010 and 2011 but afterwards this ratio has dropped down to
6.15 (times) in 2014 which is not a good sign from creditors point of view. The
recommendation in this regard for the company is to use the low interest debt that
will be helpful in increasing this ratio.

CONCLUSION
A properly conducted solvency analysis can provide positive assurance that after
giving consideration to the effect of the subject transactions, the company under
study meets the primary criteria for solvency. After analysis it can be concluded the
solvency analysis is one of the useful as well effective tool for identifying the long
run functioning of the company. This paper is an outcome of the efforts made by
the researcher in order to find out the financial policy of the company under study
as well as its implementation. The study suggests that the company should increase
the proportion of outsider’s equity in order avail the benefits of low cost debt.
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