ON THE JOB TRAINING REPORT ON

To Studying the Effect of Capital Structure on

Profitability Ratio
OF
Alfa Net

SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE

AWARD OF THE DEGREE OF

MASTERS OF BUSINESS ADMINISTRATION

(SESSION 2022-2024)

SUPERVISED BY:- SUBMITTED BY:-

Ms. Ishpreet Rohit kumar
2203104084

UNIVERSITY SCHOOL OF MANAGEMENT STUDIES

RAYAT BAHRA UNIVERSITY, MOHALI

1
2
 ACKNOWLEDGEMENT

It is difficult to acknowledge so precious a debt as that of learning, as it is the only debt that
is difficult to repay, except through gratitude. It is my proud privilege and pleasure to express
deep sense of gratitude to Ms. Anshu Gauba (HOD) to placing complete faith and
confidence in my ability to carry out this study and for providing me her inspiration,
encouragement, helps valuable guidance, constructive criticism and constant interest. She
took personnel interest in spite of her numerous commitment and busy schedule to help me
complete this project would not have seen the light of the day without her masterly guidance
and overwhelming help.
Any accomplishment requires the effort of many people, and this work is not different.
Firstly, I would like to extend my sincere thanks to Ms. Anshu Gauba (HOD) for their kind
co-operation and Ms. Ishpreet (Assistant Professor) whose guidance help me for the
accomplish this task.
I would like to thank Ms. Ishpreet for her immense cooperation and provision of every
possible required resource during project work.

Above all, I am grateful to GOD who showed me rays of light to do this project and I am also
thankful to all my family members and friends for their constant support and inspiration to
complete this project.

Rohit Kumar

3
 DECLARATION

I, Rohit Kumar, hereby declare that the work presented herein is genuine work done
originally by me and has not been published or submitted elsewhere for the requirement of
a degree programme. Any literature, data or works done by others and cited within this
Training Report has been given due acknowledgement and is listed in the reference section.
I further declare that this project report has not been submitted to any other university/
institution/ board for award of any degree.

Rohit Kumar

4
 FACULTY DECLARATION

I hereby declare that the student Mr. Rohit Kumar of MBA (II) has undergone his/her
summer training under my periodic guidance on the Project titled “To Studying the Effect
of Capital Structure on Profitability Ratio of Alfa Net”
Further I hereby declare that the student was periodically in touch with me during his/her
training period.

(Signature of Supervisor)

5
 PREFACE

MBA summer Training Project Report is an integrated MBA course. The emphasis in the
course is providing the student an insight into Indian business scenario. The summer Training
project is designed to provide fresher on-the-job experience. The Education of future
manager would be incomplete without exposure to working in an organization. Therefore, a
summer Training Project assignment is an essential academic requirement for all the students.
Only gaining theoretical knowledge is use not sufficient for sure success in life, practical
training is a must and I have been given an opportunity to gain Practical experience in
This Report entitled “To Studying the Effect of Capital Structure on Profitability Ratio
of Alfa Net” a summary of work done by me on the project is being given in this summer
Training Project report.

6
 CONTENTS

Chapter No. Title Page No.

1. Introduction 8-30

2. Literature Review 31-34

3. Objectives of the Study 35-36

4. Research Methodology 37-48

5. Data Analysis and Interpretation 49-61

6. Result & finding 62-63

7. Suggestion 64-65

8. Conclusion 66-67

9. Bibliography 68-70

10. Annexure 71-74

7
 CHAPTER-1
INTRODUCTION

8
 CHAPTER 1
1.1. Introduction of Alpha net

Alpha Net is an IT services company offering solutions to complex business problems

through the use of technology, outsourced product development, web applications
competencies along with project management services using a global delivery model. They
deliver a broad portfolio of services to clients with a team committed to providing innovation.
Alpha Net is a global technology and business services company. They provide IT staffing,
managed services, project development, and DevOps services. With operations in California,
India, Singapore, China, United Arab Emirates, and Ireland, we provide the
people and teams for onsite, offshore, and a hybrid model to meet the needs of our
customers.
“The quality of the Alpha Net resources is outstanding,
Their exceptional capabilities in Java technology are awesome. They do the work extremely
well and
with concern. The Company also has very good grip on this technology from Back end to
Front End.”
Formulating targeted, proactive business strategies, advising global clients on IT concerns
and enabling organizations to confront complex business challenges head-on. Alpha Net
provides integrated, end-to-end.
IT enabled business-consulting services to help organizations optimize their technology and
enhance profitability using innovative technology solutions and services.
Alpha Net leverages global delivery model, industry expertise and rich experience to deliver
the full
range of consulting services – IT strategy consulting, architecture assessment and definition,
capacity planning, business solution implementation, technology consulting and integration,
infrastructure consulting and supporting services.
No matter how complex your business processes are, no matter how diverse IT processes and
information architectures you have, we will align your business and IT 7 strategies and
prioritize them to meet your business objectives.
On the Alpha Net team, their consultants come first. They are the reason Alpha Net is in
business. Their consultants come from all over the world and have all kinds of skills. With
over 250 consultants, and dedicated teams of recruiters, account and project managers and

9
HR specialists, Alpha Net has the talent to meet any technical challenge.
Delivery Models of Alpha Net
Alpha Net follows an integrated approach to service delivery and management that offers
resilience to implement, integrate and manage key projects as part of ongoing operations. As
a result, enterprises benefit from the ease of adoption of new business processes, increased
levels of support and network availability, more stable and predictable IT budgets, and easy
access to latest technology and enhanced

skills base. They offer a perfect blend of standardized processes, leading-edge technologies
and industry expertise to implement enterprise-wide applications. They work as a trusted IT
partner and collaborate with internal staff or the chosen service provider to integrate the latest
technologies to your existing business processes. Their implementation services are focused
at delivering value to business solutions implementations.
1.2 Services of Alpha Net
➢ Strategic Staffing
At Alpha Net, we excel at weaving our people into effective teams using the most innovative
processes to deliver software applications collaboratively. When you choose Alpha Net, you
gain access to deep technical expertise and best practices while reducing development costs.
➢ Managed Services
Managed Services is a defined set of services as agreed between a service provider and its
customer and offload routine operations to be managed efficiently and yet retain
accountability. This is largely.
applicable in the IT Operations space and includes managing a team of resources to perform.
uninterrupted
operational services supported by periodic reporting to measure productivity.
➢ Project Development
Alpha Net has a range of solutions and services to address enterprise-wide requirements 8
and challenges.
to help organizations identify key business issues and appropriate IT and consulting services
to mitigate them. From the development of strategy through the deployment of application
and maintenance, Alpha
Net offers a full range of services and solutions with capabilities to support client globally
with end-to-

10
end
full lifecycle solution spanning across verticals.
➢ DevOps Services
DevOps complements the Agile Methodology by promoting communication and
collaboration between Development, Quality Assurance, and Operations. Improved
collaboration improves the organization’s ability to accommodate rapid changes to
production and remediate issues as they occur. Alpha Net Consulting’s DevOps Services help
global IT organizations bridge organizational gaps, by

seamlessly integrating and automating Build, Test, Deploy, Monitor, and Remediate
processes, resulting in faster releases with much higher quality levels.
➢ Alpha Net Oracle Cloud
Leading the way in delivering predictable value with Oracle Cloud solutions. With good
Oracle Cloud Solution, supply chain, planning, budgeting, and financial reporting can be
improved and streamlined
with greater precision and reduced budgeting and financial closure cycles.
1.3 Customers of Alpha Net
Alpha Net consultants have helped many leading companies accomplish more with less.
Below are the customers of Alpha Net.
Alpha Net is specialized in tackling the most complex business problems through the use of
technology, maximizing investment performance across the portfolio of business-critical
applications, while reducing time and risk. We believe the key to effective software
development is creating the very best software teams, combining technical skills with the
ability to collaborate. At Alpha Net, they excel at weaving our people into effective teams
using the most innovative processes to deliver software applications collaboratively. When
someone choose Alpha Net, they gain access to deep technical expertise and best practices
while reducing development costs.

11
12
INTRODUCTION TO
TOPIC

13
 INTRODUCTION OF CAPITAL STRUCTURE

Finance is a important input for any type of business and is needed for working capital
and for permanent investment. The total funds employed in a business are obtained from
various sources. A part of the funds is brought in by the owners and the rest is borrowed from
other individuals and institutions. While some of the funds are permanently held in business,
such as share capital and reserves (owned funds), some others are held for a long period
such as long-term borrowings or debentures, and still some other funds are short-term
borrowings: The entire composition of these funds constitute the overall financial structure of
the firm. You are aware that short-term funds keep on shifting quite often. As such the
proportion of various sources for short-term funds cannot perhaps be rigidly laid down. The
firm must follow a flexible approach. A more definite policy is often laid down for the
composition of long-term funds, known as capital structure. More significant aspects of the
policy are the debt equity ratio and the dividend decision. The latter affects the building up
of retained earnings, which is an important component of long-term owned funds. Since the
permanent or long-term funds often occupy a large portion of total funds and involve
long-term policy decision, the term financial structure is often used to mean the capital
structure of the firm.
There are certain sources of long-term funds which are generally available to the corporate
enterprises. The main sources are share capital (owners' funds) and long-term debt including
debentures (creditors' funds). The profit earned from operations are owners' funds-which
may be retained in the business or distributed to the owners (shareholders) as dividends. The
portion of profits retained in the business is a rein- vestment of owners' funds. Hence, it is
also a source of long-term funds. All these sources together are the main constituents of the
capital of the business, that is, its capital structure.
Capital structure
The combination of a Bank's long-term debt, specific short-term debt, common equity, and
preferred equity; the capital structure is the firm's various sources of funds used to finance its
overall operations and growth. Debt comes in the form of bond issues or long- term notes
payable, whereas equity is classified as common stock, preferred stock, or retained earnings.
Short-term debt such as working capital requirements is also considered part of the capital
structure.

14
 This lecture will explore the determinants of the mix of debt and equity the firm uses to
finance its operations. We will first explore the situations under which capital structure is
irrelevant to a firm’s operations. Examining these situations will allow us to explore how the
following factors influence the mix of debt and equity a firm uses to finance its operations.
• TAXES
• RISK
• FINANCIAL SLACK
• ASSET CHARACTERISTICS
• COSTS OF FINANCIAL DISTRESS.

 Capital Structure is referred to as the ratio of different kinds of securities raised by a firm as
long-term finance. The capital structure involves two decisions-
 The type of securities to be issued are equity shares, preference shares and long-term
borrowings (Debentures).
 Relative ratio of securities can be determined by process of capital gearing. On this basis,
the companies are divided into two-
 Highly geared companies- Those companies whose proportion of equity capitalization is
small.
 Low geared companies- Those companies whose equity capital dominates total
capitalization.
For instance - There are two companies A and B. Total capitalization amounts to be Rs. 20
lakhs in each case. The ratio of equity capital to total capitalization in Bank A is Rs. 5 lakhs,
while in Bank B, the ratio of equity capital is Rs. 15 lakhs to total capitalization.

15
 QUESTIONS WHILE MAKING FINANCIAL DECISION

 How should the investment project be financed?

 Does the way in which the investment projects are financed matter?
 How does financing affect the shareholders risk return and value?
 Does the exits an optimum financing mix in terms of the maximum value to the firm’s
shareholders?
 Can the optimum financing mix be determined in practice for a Bank?
 What factors in practice should a Bank consider in designing its financing policy?

FORMS OF CAPITAL STRUCTURE

 Complete equity share capital.

 Different proportions of equity and preference share capital
 Different proportions of equity and debt capital
 Different proportions of equity, preference, and debt capital.

In Financial Management book, you would read the topic theories of capital structure.
Here, I have made these theories simplified. I hope you can study these theories here and use
these theories as references.

We all know that capital structure is a combination of sources of funds in which we can
include two main sources' proportion. One is share capital and other is Debt. All four theories
are just explaining the effect of changing the proportion of these sources on the overall cost
of capital and total value of firm.

If I must write theories of capital structure in very few lines, I will only say that it propounds
or presents the effect on overall cost of capital and market or total value of firm, if I change
my capital structure from 50: 50 to any other proportion. First 50 represent the share capital
and second 50 represent the Debt. Now, I am ready to explain these four theories of capital
structure in simple and clean words.

16
 THEORY OF CAPITAL STRUCTURE

1st Theory of Capital Structure

Name of Theory = Net Income Theory of Capital Structure
This theory gives the idea for increasing the market value of firm and decreasing overall cost
of capital. A firm can choose a degree of capital structure in which debt is more than equity
share capital. It will be helpful to increase the market value of the firm and decrease the
value of the overall cost of capital. Debt is a cheap source of finance because its interest is
deductible from net profit before taxes. After deduction of interest Bank must pay less tax
and thus,
it will decrease the weighted average cost of capital.
For example, if you have equity debt mix is 50:50 but if you increase it as 20: 80, it will
increase the market value of firm and its positive effect on the value of per share.

High debt content mixture of equity debt mix ratio is also called financial leverage.
Increasing financial leverage will be helpful to for maximize the firm's value.

2nd Theory of Capital Structure

Name of Theory = Net Operating income Theory of Capital Structure
Net operating income theory or approach does not accept the idea of increasing the financial
leverage under NI approach. It means changing the capital structure does not affect the
overall cost of capital and market value of a firm. At each level of capital structure, the
market value of a firm will be the same

17
3rd Theory of Capital Structure
Name of Theory = Traditional Theory of Capital Structure
This theory or approach of capital structure is mix of net income approach and net operating
income approach of capital structure. It has three stages which you should understand:

1st Stage
In the first stage which is also initial stage, Bank should increase debt contents in its
equity debt mix for increasing the market value of firm.

2nd Stage
In the second stage, after increasing debt in equity debt mix, the Bank gets the position of
optimum capital structure, where weighted cost of capital is minimum and market value of
firm is maximum. So, there is no need to further increase the debt in capital structure.

3rd Stage

A bank can gets a loss in its market value because increasing the amount of debt in capital
structure after its optimum level will definitely increase the cost of debt and overall cost of
capital.

4th Theory of Capital Structure

Name of theory = Modigliani and Miller
MM theory or approach is fully opposite of traditional approach. This approach says that
there is not any relationship between capital structure and the cost of capital. There will not
affect of increasing debt on cost of capital.
The value of the firm and cost of capital is fully affected by the investor’s expectations.
Investors' expectations may be further affected by large numbers of other factors which have
been ignored by the traditional theorem of capital structure.

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 CAPITAL STRUCTURE PLANNING
Decision regarding what type of capital structure a Bank should have is of critical importance
its because of its potential impact on profitability and solvency. The small companies often
do not plan their capital structure. The capital structure is allowed to develop without any
formal planning. These companies may do well in the short-run, however, sooner or later
they face considerable difficulties. The unplanned capital structure does not permit an
economical use of funds for the Bank. A Bank should therefore plan its capital structure in
such a way that it derives maximum advantage out of it and is able to adjust more easily to
the changing conditions.
Instead of following any scientific procedure to find an appropriate proportion of different
types of capital which will minimize the cost of capital and maximize the market value, a
Bank may just either follow what other comparable companies do regarding capital structure
or may consult some institutional lender and follow its advice.
Theoretically, a Bank should plan an optimum capital structure in such a way that the market
value of its shares is maximum. The value will be maximized when the marginal real cost of
each source of funds is the same. In general, the discussion on the issue of optimum capital
structure is highly theoretical. The determination of an optimum capital structure in practice
is a formidable task, and we must go beyond the theory. That is why, perhaps, significant
variations among industries and among' different companies within the same industry
regarding capital structure are found. Several factors influence the capital structure decision
of a Bank. The judgement of the person or group of persons making the capital structure
decision plays a crucial role. Two similar companies can have different capital structures if
the decision makers differ in their judgement about the significance of various factors. These
factors are highly psychological, complex, and qualitative and do not always follow the
accepted theory. Capital markets are not perfect, and the decision must be taken with
imperfect knowledge and consequent risk. You might have become interested in identifying
some of the important factors which influence the planning of the capital structure in
practice. However, before we discuss these factors let us examine the features of an
appropriate capital structure in the next section.

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 FEATURES OF AN APPROPRIATE CAPITAL STRUCTURE

Capital structure is usually planned to keep in view the interests of the ordinary shareholders.
The ordinary shareholders are the ultimate owners of the Bank and have the right to elect the
directors. While developing an appropriate capital structure for his Bank, the financial
manager should aim at maximizing the long-term market price of equity shares. In practice,
for most companies within an industry, there would be a range of appropriate capital
structures within which there are not many differences in the market values of shares. A
capital structure in this context can be determined empirically. For example, a Bank may be
in an industry that has an average debt to total capital ratio of 60 per cent. It may be
empirically found that the shareholders in general do not mind the Bank operating within a
15 per cent range of the industry's average capital structure. Thus, the appropriate capital
structure for the Bank ranges between 45 per cent to 75 per cent debt to total capital ratio.
The management of the Bank should try to seek the capital structure near the top of this range
in order to make maximum use of favorable leverage, subject to other requirements such as
flexibility, solvency, etc.
A sound appropriate capital structure should have the following features:

Profitability: The capital structure of the Bank should be most advantageous, within the
constraints. Maximum use of leverage at a minimum cost should be made.
Solvency: The use of excessive debt threatens the solvency of the Bank. Debt should be used
judiciously.
Flexibility: The capital structure should be flexible to meet the changing conditions. It should
be possible for a Bank to adapt its capital structure with minimum cost and delay if
warranted by a changed situation. It should also be possible for the Bank to provide funds
whenever needed to finance its profitable activities.
In other words, from the solvency point of view we need to approach capital structuring with
due conservation. The debt capacity of the Bank which depends on its ability to generate
future cash flows should not be exceeded. It should have enough cash to pay periodic fixed
charges to creditors and the principal sum on maturity. Financial Decisions
The above are the general features of an appropriate capital structure. The particular
characteristics of a Bank may reflect some additional specific features. Further, the emphasis
given to each of these features may differ from Bank to Bank. For example, a Bank may give
more importance to flexibility than to retaining the control which could be

20
 another desired feature, while another Bank may be more concerned about solvency than
about any other requirement. Furthermore, the relative importance of these requirements may
change with changing conditions.
FACTORS DETERMINING CAPITAL STRUCTURE

 Trading on Equity- The word “equity” denotes the ownership of the Bank. Trading on
equity means taking advantage of equity share capital to borrowed funds on reasonable basis.
It refers to additional profits that equity shareholders earn because of issuance of debentures
and preference shares. It is based on the thought that if the rate of dividend on preference
capital and the rate of interest on borrowed capital is lower than the general rate of Bank’s
earnings, equity shareholders are at advantage which means a Bank should go for a judicious
blend of preference shares, equity shares as well as debentures. Trading on equity becomes
more important when the expectations of shareholders are high.
 Degree of control- In a Bank, it is the directors who are so-called elected representatives of
equity shareholders. These members have got maximum voting rights in a concern as
compared to the preference shareholders and debenture holders. Preference shareholders have
reasonably fewer voting rights while debenture holders have no voting rights. If the Bank’s
management policies are such that they want to retain their voting rights in their hands, the
capital structure consists of debenture holders and loans rather than equity shares.
 Flexibility of financial plan- In an enterprise, the capital structure should be such that there
are both contractions as well as relaxation in plans. Debentures and loans can be refunded as
the time requires. While equity capital cannot be refunded at any point which provides
rigidity to plans. Therefore, in order to make the capital structure possible, the Bank should
go for the issue of debentures and other loans.
 Choice of investors- The Bank’s policy generally is to have different categories of
investors for securities. Therefore, a capital structure should give enough choice to all kinds
of investors to invest. Bold and adventurous investors generally go for equity shares and
loans and debentures are generally raised keeping into mind conscious investors.
 Capital market condition- In the lifetime of the Bank, the market price of the shares has
had an important influence. During the depression period, the Bank’s

21
 capital structure generally consists of debentures and loans. While in a period of boons and
inflation, the Bank’s capital should consist of share capital generally equity shares.
 Period of financing- When a Bank wants to raise finance for a short period, it goes for loans
from banks and other institutions, while for long period it goes for issue of shares and
debentures.
 Cost of financing- In a capital structure, the Bank must look to the factor of cost when
securities are raised. It is seen that debentures at the time of profit earning of Bank prove to
be a cheaper source of finance as compared to equity shares where equity shareholders
demand an extra share in profits.
 Stability of sales- An established business which has a growing market and high sales
turnover, the Bank is in a position to meet fixed commitments. Interest on debentures must be
paid regardless of profit. Therefore, when sales are high, the profits are high and Bank is in
better position to meet such fixed commitments like interest on debentures and dividends on
preference shares. If Bank is having unstable sales, then the Bank is not in position to meet
fixed obligations. So, equity capital proves to be safe in such cases.
 Sizes of a Bank- Small size business firms capital structure generally consists of loans from
banks and retained profits. While on the other hand, big companies having goodwill, stability
and an established profit can easily go for issuance of shares and debentures as well as loans
and borrowings from financial institutions. The bigger the size, the wider is total
capitalization.

22
 BASIC CONCEPT
Leverage:
Up to a certain point, the use of debt (such as bonds or bank loans) in a company's capital
structure is beneficial. When debt is a portion of a firm's capital structure, it permits the
company to achieve greater earnings per share than would be possible by issuing equity. This
is because the interest paid by the firm on the debt is tax-deductible. The reduction in taxes
permits more of the company's operating income to flow through to investors. The related
increase in earnings per share is called financial leverage or gearing in the United Kingdom
and Australia. Financial leverage can be beneficial when the business is expanding and
profitable, but it is detrimental when the business enters a contraction phase. The interest on
the debt must be paid regardless of the level of the company's operating income, or
bankruptcy may be the result. If the firm does not prosper and profits do not meet
management's expectations, too much debt (i.e., too much leverage) increases the risk that the
firm may not be able to pay its creditors. At some point this makes investors apprehensive
and increases the firm's cost of borrowing or issuing new equity.
Optimal capital structure:

It is important that a company's management recognizes the risk inherent in taking on debt
and maintains an optimal capital structure with an appropriate balance between debt and
equity. An optimal capital structure is one that is consistent with minimizing the cost of debt
and equity financing and maximizing the value of the firm. Internal policy decisions with
respect to capital structure and debt ratios must be tempered by a recognition of how
outsiders view the strength of the firm's financial position. Key considerations include
maintaining the firm's credit rating at a level where it can attract new external funds on
reasonable terms and maintaining a stable dividend policy and good earnings record.
Term structure of debt in capital structure
Once management has decided how much debt should be used in the capital structure,
decisions must be made as to the appropriate mix of short-term debt and long-term debt.
Increasing the percentage of short-term debt can enhance a firm's financial flexibility, since
the borrower's commitment to pay interest is for a shorter period. But short- term debt also
exposes the firm to greater refinancing risk. Therefore, as the percentage of

23
 short-term debt in a firm's capital structure increases, equity holders will expect greater
returns on equity to compensate for the increased risk, according to a 2022 article in The
Journal of Finance.
Seniority

In the event of bankruptcy, the seniority of the capital structure comes into play. A typical
company has the following seniority structure listed from most senior to least:

 senior debt, including mortgage bonds secured by specifically pledged property,

 subordinated (or junior) debt, including debenture bonds which are dependent upon the
general credit and financial strength of the company for their security,
 preferred stock, whose holders are entitled to have their claims met before those of
common stockholders, and
 equity, which includes common stock and retained earnings.

In practice, the capital structure may be complex and include other sources of capital.

Leverage or capital gearing ratios

Financial analysts use some form of leverage ratio to quantify the proportion of debt and
equity in a company's capital structure, and to make comparisons between companies. Using
figures from the balance sheet, the debt-to-capitalization ratio can be calculated as shown
below.

debt-to-capitalization ratio = dollar amount of debt/ dollar amount of total

capitalization

The debt-to-equity ratio and capital gearing ratio are widely used for the same purpose.

capital gearing ratio = dollar amount of capital bearing risk/ dollar amount of
capital not bearing risk

Capital bearing risk includes debentures (risk is to pay interest) and preference capital (risk to
pay dividend at fixed rate). Capital not bearing risk includes equity.

24
Therefore, one can also say, Capital gearing ratio = (Debentures + Preference share
capital): (shareholders' funds)

In public utility regulation

Capital structure is an important issue in setting rates charged to customers by regulated

utilities in the United States. Ratemaking practice in the U.S. holds that rates paid by a
utility's customers should be set at a level which assures that the company can provide
reliable service at reasonable cost. The cost of capital is among the costs a utility must be
allowed to recover from customers and depends on the company's capital structure. The
utility company may choose whatever capital structure it deems appropriate, but regulators
determine an appropriate capital structure and cost of capital for ratemaking purposes.

Modigliani–Miller theorem
The Modigliani–Miller theorem, proposed by Franco Modigliani and Merton Miller in 1958,
forms the basis for modern academic thinking on capital structure. It is generally viewed as a
purely theoretical result since it disregards many important factors in the capital structure
process, factors like fluctuations and uncertain situations that may occur while financing a
firm. The theorem states that, in a perfect market, how a firm is financed is irrelevant to its
value. This result provides the base with which to examine real world reasons why capital
structure is relevant, that is, a company's value is affected by the capital structure it employs.
Some other reasons include bankruptcy costs, agency costs, taxes, and information
asymmetry. This analysis can then be extended to look at whether there is in fact an optimal
capital structure: the one which maximizes the value of the firm.
Consider a perfect capital market (no transaction or bankruptcy costs; perfect information);
firms and individuals can borrow at the same interest rate; no taxes; and investment returns
are not affected by financial uncertainty. Assuming perfections in the capital is a mirage and
unattainable as suggested by Modigliani and Miller.
Modigliani and Miller made two findings under these conditions. Their first 'proposition' was
that the value of a company is independent of its capital structure. Their second 'proposition'
stated that the cost of equity for a leveraged firm is equal to the cost of equity for an
unleveraged firm, plus an added premium for financial risk. That is, as

25
leverage increases, risk is shifted between different investor classes, while the total firm risk
is constant, and hence no extra value created.
Their analysis was extended to include the effect of taxes and risky debt. Under a
classical tax system, the tax-deductibility of interest makes debt financing valuable; that is,
the cost of capital decreases as the proportion of debt in the capital structure increases. The
optimal structure would be to have virtually no equity at all, i.e. a capital structure consisting
of 99.99% debt.

Variations on the Miller-Modigliani theorem

If capital structure is irrelevant in a perfect market, then imperfections which exist in the real
world must be the cause of its relevance. The theories below try to address some of these
imperfections, by relaxing assumptions made in the Modigliani–Miller theorem.
Trade-off theory

Trade-off theory of capital structure allows bankruptcy cost to exist as an offset to the benefit
of using debt as tax shield. It states that there is an advantage to financing with debt, namely,
the tax benefits of debt and that there is a cost of financing with debt the bankruptcy costs and
the financial distress costs of debt. This theory also refers to the idea that a company chooses
how much equity finance and how much debt finance to use by considering both costs and
benefits. The marginal benefit of further increases in debt declines as debt increases, while
the marginal cost increases, so that a firm optimizing its overall value will focus on this trade-
off when choosing how much debt and equity to use for financing. Empirically, this theory
may explain differences in debt-to-equity ratios between industries, but it doesn't explain
differences within the same industry.
Pecking order theory

Pecking order theory tries to capture the costs of asymmetric information. It states that
companies prioritize their sources of financing (from internal financing to equity) according
to the law of least effort, or of least resistance, preferring to raise equity as a financing means
"of last resort". Hence, internal financing is used first; when that is depleted, debt is issued;
and when it is no longer sensible to issue any more debt, equity is issued. This theory
maintains that businesses adhere to a hierarchy of financing sources and prefer internal
financing when available, and debt is preferred over equity if external financing is required
(equity would mean issuing shares which meant 'bringing external

26
ownership' into the company). Thus, the form of debt a firm chooses can act as a signal of its
need for external finance.
The pecking order theory has been popularized by Myers (1984) when he argued that equity
is a less preferred means to raise capital, because when managers (who are assumed to know
better about true condition of the firm than investors) issue new equity, investors believe that
managers think the firm is overvalued, and managers are taking advantage of the assumed
over-valuation. As a result, investors may place a lower value to the new equity issuance.
Capital structure substitution theory.

The capital structure substitution theory is based on the hypothesis that company
management may manipulate capital structure such that earnings per share (EPS) are
maximized. The model is not normative i.e. and does not state that management should
maximize EPS, it simply hypothesizes they do.
The 1982 SEC rule 10b-18 allowed public companies open-market repurchases of their own
stock and made it easier to manipulate capital structure. This hypothesis leads to a larger
number of testable predictions. First, it has been deducted [by whom?]
that market average
earnings yield will be in equilibrium with the market average interest rate on corporate bonds
after corporate taxes, which is a reformulation of the 'Fed model'. The second prediction has
been that companies with a high valuation ratio, or low earnings yield, will have little or no
debt, whereas companies with low valuation ratios will be more leveraged. When companies
have a dynamic debt-equity target, this explains why some companies use dividends and
others do not. A fourth prediction has been that there is a negative relationship in the market
between companies' relative price volatilities and their leverage. This contradicts Hamada
who used the work of Modigliani and Miller to derive a positive relationship between these
two variables.

27
 Agency costs

Three types of agency costs can help explain the relevance of capital structure.

 Asset substitution effect: As debt-to-equity ratio increases, management has an incentive to

undertake risky, even negative net present value (NPV) projects. This is because if the project
is successful, shareholders earn the benefit, whereas if it is unsuccessful, debtors experience
the downside.
 Underinvestment problem or debt overhang problem: If debt is risky e.g., in a growth
company, the gain from the project will accrue to debt holders rather than shareholders. Thus,
management has an incentive to reject positive NPV projects, even though they have the
potential to increase firm value.
 Free cash flow: unless free cash flow is given back to investors, management has an
incentive to destroy firm value through empire building and perks etc. Increasing leverage
imposes financial discipline on management.
Structural corporate finance

An active area of research in finance is[when?] that which tries to translate the models above as
well as others into a structured theoretical setup that is time-consistent and that has a dynamic
set up similar to one that can be observed in the real world. Managerial contracts, debt
contracts, equity contracts, investment returns all have long lived, multi- period implications.
Therefore, it is hard to think through what the implications of the basic models above are for
the real world if they are not embedded in a dynamic structure that approximates reality. A
similar type of research is performed under the guise of credit risk research in which the
modeling of the likelihood of default and its pricing is undertaken under different
assumptions about investors and about the incentives of management, shareholders and debt
holders. Examples of research in this area are Goldstein, Ju, Leland (1998) and Hennessy and
Whited (2004).
Capital structure and macroeconomic conditions.

In addition to firm-specific characteristics, researchers find macroeconomic conditions have a

material impact on capital structure choice. Korajczyk, Lucas, and McDonald (1990) provide
evidence of equity issues cluster following a run-up in the equity market. Korajczyk and
Levy (2003) find that target leverage is counter-cyclical for unconstrained firms, but pro-
cyclical for firms that are constrained; macroeconomic.

28
 Conditions are significant for issue choice for firms that can time their issue choice to
coincide with periods of favorable macroeconomic conditions, while constrained firms
cannot. Levy and Hennessy (2007) highlight that trade-offs between agency problems and
risk sharing vary over the business cycle and can result in the observed patterns. Others have
related these patterns with asset pricing puzzles.
Capital structure persistence.

Corporate leverage ratios are initially determined. Low relative to high leverage ratios is
largely persistent despite time variation. Variation in capital structures is primarily
determined by factors that remain stable for long periods of time. These stable factors are
unobservable.
Growth type compatibility

Firms rationally invest and seek financing in a manner compatible with their growth types.
As economic and market conditions improve, low growth type firms are keener to issue new
debt than equity, whereas high growth type firms are least likely to issue debt and keenest to
issue equity. Distinct growth types are persistent. Consistent with a generalized Myers–
Majluf framework, growth type compatibility enables distinct growth types and hence
specifications of market imperfection or informational environments to persist, generating
capital structure persistence.
Other
Capital supply — capital structure also depends on the relative supply of equity vs. debt
capital available to the firm.

 The neutral mutation hypothesis — firms fall into various financing habits that do not impact
value.
 Market timing hypothesis—capital structure is the outcome of the cumulative historical
timing of the market by managers.
 Accelerated investment effect—even in the absence of agency costs, levered firms invest
faster because of the existence of default risk.
 In transition economies, there has been evidence reported unveiling the significant impact of
capital structure on firm performance, especially short-term debt such as the case of
Vietnamese emerging market economy.

29
ARBITRAGE
A capital structure arbitrageur seeks to profit from differential pricing of various instruments
issued by one corporation. Consider, for example, traditional bonds, and convertible
bonds. The latter are bonds that are, under contracted-for conditions, convertible into shares
of equity. The stock-option component of a convertible bond has a calculable value in itself.
The value of the whole instrument should be the value of the traditional bonds plus the extra
value of the option feature. If the spread (the difference between the convertible and the non-
convertible bonds) grows excessively, then the capital-structure arbitrageur will bet that it
will converge.

30
 CHAPTER- 2
LITERATURE REVIEW

31
 LITERATURE REVIEW
 Wiem Ben Jabra; Zouheir Mighri; Faysal Mansouri (2021) - This paper analyses the
relationship between bank capital, risk and profitability for the BRICS banking industry. A
dynamic panel data model based on two- step GMM estimation procedure was used. The
main empirical results are summarized.

 Changjun Zheng; Mohammed Rahman; Munni Begum; Badar Ashraf (2020)

- In response to the recent global financial crisis, the regulatory authorities in many countries
have imposed stringent capital requirements in the form of the BASEL III to ensure financial
stability. On the other hand, bankers have criticized new regulation on the ground that it
would enhance the cost of funds for bank borrowers and deteriorate the bank profitability. In
this study, the authors have examined the impact of capital requirements on the cost of
financial intermediation and bank profitability using a panel dataset of 32 Bangladeshi banks
over the period.

 S Sathyakala; N Shanmugapriya; T B Praveen (2017) - Banking sector is one of the

fastest growing sectors in India. Recently, the digital revolution made advancements in
banking sector like electronic payments, easier transactions make the bank to be more
efficient and productive. In this paper, the study has been attempted to analyze the
performance of top 5 public sector banks in India based on market capitalization for the
period 2011 to 2016. This paper examines the behavior of profitability, efficiency, soundness
of the banking system, and financial performance of public sector Indian banks for the
selected period. The empirical results show that competition in the Indian banking industry
has intensified, and it shows the development of banks over the years. The study also aims in
forecasting of deposits and advances of public sector banks. The parameters like capital
adequacy, asset turnover, management efficiency, earning quality, liquidity have been studied
by using trend analysis, correlation and camel analysis.

32
 Arun Tawar (2017) - This paper reflects on whether all the banks in the public sector are
growing at the same rate. It also focuses on year-wise variations in selected key ratios. The
author believes competition among public, private and foreign banks are increased by
virtue of Globalization. Every bank is trying to attract clients through excellent services.
There is no doubt that private bank such as ICICI and HDFC are the topmost banks in India.
However, SBI and its associate banks are also in a prominent position. There is total 27
public banks in India.

 Pinto & Quadra’s (2016) - Here the authors have examined the impact of capital structure
on financial performance of Indian banks. The study covered a sample of 21 banks from
both public sector and private sector. A period of five years was considered for the study.
Three variables, viz., Net Profit, Net Interest Margin and Return on Capital Employed were
considered as profitability control variables for the study. Debt to equity and debt to total
assets have been used as proxies for capital structure. It is observed that the financial risk
of the banking industry is reducing as their debt-to-equity ratio is decreasing year by year.

 Hawaldar et. al. (2016) - The author has evaluated the financial performance of retail and
wholesale Islamic banks in Bahrain from 2009 to 2013 and found that operating efficiency of
wholesale Islamic banks was better than retail Islamic banks for the period of 2009-2013
which was evident from asset utilization ratio.

 Pankaj Sinha: Sakshi Sharma (Dec 2016) - The paper examines the impact of bank-
specific, industry-specific and macroeconomic factors affecting the profitability of Indian
Banks in a dynamic model framework. The persistence of bank profits and endogeneity of the
factors had been accounted for using Generalized Method of Moments as suggested in
Arellano and Bond (Rev Econ Stud 58(2):277– 297, 1991).

 Barua Ratna; Roy Malabika; Raychaudhuri Ajitava (2016) - The market structure,
conducts and performance of the Indian banking sector have changed since the introduction
of banking sector reforms. Slower economic growth,

33
 coupled with asset quality problems in recent years, has taken a toll on the overall health of
the Indian banking sector. Higher statutory capital requirement under Basel III has posed
another major challenge to the Indian banks.

 Prakash Pinto: Jennifer Maria Quadra’s (2016) - This study attempts to analyze the
impact of capital structure on financial performance, of banks i.e. how the proportion of debt
and equity will have an impact on financial performance. The proportion of debt and equity is
determined by the corporate managers. The financial performance of a firm is directly
affected by the capital structure decision.

 Samaresh Bardhan; Vivekananda Mukherjee (2016) - The paper examines the role of
bank-specific variables in explaining the dynamics of non- performing assets (NPAs) of
Indian banks in a panel data framework over the post liberalization period, 1995–2011. The
results have been derived after controlling macroeconomic factors like real GDP, inflation,
exchange rate etc.

 Neha Goyal; Rajesh Mehrotra (2015) - The business of banking and insurance around the
globe is changing due to integration of global financial markets, development of new
technologies, universalization of banking operations and diversification in non-banking
activities This has given rise to a new form of business i.e. bancassurance business were
banks and insurance join hands together. Bancassurance simply means selling insurance
products by banks. By selling insurance policies, the bank earns revenue called fee-based
income.

 M Nagamani;K Abirami (2017) - The Banking Industry is the most important segment
among various industries for the economic growth of the country and every business is
expected to assure the shareholders maximum returns on their investments. Therefore, this
study was an effort made to analyze the performance and value creation to the shareholders
of the select public and private sector banks in India.

34
 CHAPTER-3
OBJECTIVES OF THE
STUDY

35
 RESEARCH OBJECTIVES

 To Identify Optimal Capital Structure i.e. Best Debt-Equity Ratio for the Firm.
 To Analyze Capital Structure of Alfa Net Based on Proportion of Debt Ratios.
 To study the impact of cost of equity on profitability
 To identify the financial position of the company through various ratio analysis.
 To identify impact on Profitability position of the Company.
 To study the impact of cost of debts on profitability.

36
CHAPTER- 4 RESEARCH
METHODOLOGY

37
 RESEARCH METHODOLOGY

Research methodology is a way to systematically solve the problem. In it we study the

various steps that are generally adopted by a researcher in studying his research problem
along with the logic believed in them.
This study of research gives the necessary - training in gathering materials and arranging,
participation in the field work when required, also training in techniques for collection of
data, use, of statistics, questionnaires.

THE RESEARCH PROCESS

1
OBSERVATION
Broad area of
research interest
identified

3
PROBLEM
DEFINITION 4 5 7
Research THEORETICAL GENERATION 6 DATA
Problem FRAMEWORK OF SCIENTIFI COLLECTION,
Delineated Variables clearly HYPOTHESES C ANALYSIS AND
identified and RESEARCH INTERPRETATION
labelled DESIGN

8
DEDUCTION
2 Hypotheses
PRELIMINARY substantiated?
DATA Research
GATHERING question
Interviewing answered?
Literature Survey
NO Yes

9 10 11
Report Report Managerial
writing Present decision
ation making

38
 RESEARCH DESIGN
Decision regarding what, where, when, how much, and by what means concerning an inquiry
or a research study constitutes a research design.
Research design includes many questions; -
 What is studying about?
 Why is the study being made?
 Where will the study be carried out?
 What type of data is required?
 Where can be required data be found?
 What period will the study include?
 What will be the sample design?
 What techniques of data collection will be used?
 How will the data be analyzed?
 In what style will the report be prepared?
At the outset may be noted that there are several ways of studying and tackling a problem.
The formidable problem that follows the task of defining the research problem is the
preparation of the design of research project popularly known as research design.

 EXPLORATORY RESEARCH DESIGN

Exploratory research design is termed as formulating research studies. The main purpose of
study is that of formulating a problem. The major emphasis in such study is on the discovery
of new ideas and insights. As such the research design

39
 appropriate for such studies must be flexible enough to provide opportunity for considering
different aspects of problem.
 DESCRIPTIVE AND DIAGNOSTIC RESEARCH DESIGN

Descriptive research designs are those designs which are concerned with describing the
characteristics of particular individual or of the group. Whereas diagnostic research
studies determine the frequency with which something occurs or its association with some
else. In descriptive and diagnostic study, the researcher must be able to define clearly what he
wants to measure and must find an adequate method for measuring it.
 EXPERIMENTAL RESEARCH DESIGN

These are those studies where the researcher tests the hypothesis of casual relationship
between variables. Such study requires a procedure that will not only reduce biasness and
increase reliability but will permit drawing influence about causality. Usually experiments
meet this requirement, hence these research designs are prepared for experiments.
 RESEARCH DESIGN IN STUDY

In the study the researcher will apply descriptive research design. As descriptive research
design is the description of situation, as it exists at present. In this type of research, the
researcher has no control over the variables; he can only report what has happened or what is
happening.

40
Time Horizon

Cross-
sectional Longitudinal
study study

Cross- sectional study - A study in which data are gathered just once, perhaps over a period
of days or weeks or months in, in order to answer a research question. Such studies are called
Cross-sectional studies.
Longitudinal study- In some cases, however, the researcher might want to study phenomena
at more than one point in time in order to answer the research question. Such studies are
called longitudinal study.
Now as researcher has gathered data once in this study so it is Cross-sectional study.

41
 Study Setting

Contrived Non contrived

 Contrived
 Non-Contrived
Research which can be done in natural environment where work proceeds normally is called
non contrived studies, in contrast research which is done in artificial setting are called
contrived studies.
The study which researcher has conducted is in natural environment, so it is non contrived
study.

42
 SAMPLE AND SAMPLING DESIGN
A sample design is a definite plan for obtaining a sample from the sampling frame. It refers to
the technique or the procedure that is adopted in selecting the sampling units from which
inferences about the population is drawn. Sampling design is determined before the collection
of the data.
Several decisions have to be taken in context to the decision about the appropriate sample
selection so that accurate data is obtained, and efficient results are drawn.
Following questions have to be considered while sampling design:
 What is the relevant population?
 What is the parameter of interest?
 What is the sampling frame?

43
 SAMPLE DESIGN
A sample design is a definite plan for obtaining a sample from the sampling frame. It refers to
the technique or the procedure that is adopted in selecting the sampling units from which
inferences about the population is drawn. Sampling design is determined before the collection
of the data.
Several decisions have to be taken in context to the decision about the appropriate sample
selection so that accurate data is obtained and efficient results are drawn.

Following questions have to be considered while sampling design

1. What is the relevant population?

2. What is the parameter of interest?
3. What is the sampling frame?
4. What is the type of sample?
5. What sample size is needed?
6. How much will it cost?

44
DATA COLLECTION
After the research problem has been identified and selected the next step is to gather the
requisite data. While deciding about the method of data collection to be used for the
researcher should keep in mind two types of data i.e. primary and secondary.

PRIMARY DATA

SECOUNDARY
DATA

TYPES OF DATA

Primary Data
The primary data are those which are collected afresh and for the first time, and thus
happened to be original in character. We can obtain primary data either through observation
or through direct communication with respondent in one form or another or through personal
interview.

45
Secondary Data
The secondary data, on the other hand, are those which have already been collected by
someone else and which have already been passed through the statistical processes. When the
researcher utilizes secondary data then he has to look into various sources from where he can
obtain them. For example, Books, magazines, newspaper, Internet, publications, and reports.

46
 Methods Used In Study

BOOKS INTERNET

SECONDARY
SOURCES

MAGAZINES NEWSPAPERS

47
 LIMITATIONS OF THE STUDY

Inspire of best efforts of the investigator the study was subjected to following
limitations:
 Less Time Period: The time period given to the researcher for the completion of the
project was short in such a short span of time it is difficult to complete any project in
detail.
 Less Response from officers: Some officers were too busy to give a sincere response
to investigators & hence their response may not relate to the real picture.
 Difficulty to availability of primary data: Manager some time denied disclosing
some important financial matters, which could be helpful in this study.
 Secondary data: The data used for the analysis was secondary in nature as it was
taken from the annual reports of the Company.
 Limited Area of Study: Researcher has studied only a single firm of the industry. So,
Researcher got knowledge about just a minor player in the team.

48
 CHAPTER- 5
DATA ANALYSIS
& INTERPRETATION

49
 RATIO ANALYSIS
Meaning of Ratio analysis
Ratio: - A ratio is the mathematical relationship between two quantities in the form of a
fraction or percentage.
Ratio analysis: - Ratio analysis is essentially concerned with the calculation of relationships
which after proper identification and interpretation may provide information about the
operations and state of affairs of a business enterprise.
The analysis is used to provide indicators of past performance in terms of critical
success factors of a business. This assistance in decision-making reduces load on guesswork
and intuition and establishes a basis for sound judgment.
Note: A ratio on its own has little or no meaning at all.
Consider the current ratio of 2:1. This means that for every 1 monetary value of current
liabilities there are 2 assets. However, each business is different, and each has different
working capital requirements. From this ratio, we cannot make any comments about the
liquidity of the business, whether it carries too much or too little working capital.
Classification of Ratios:
In view of the financial management or according to the tests satisfied, various ratios have
been classified as below:
(a) Liquidity Ratios: These are the ratios which measure the short-term solvency or
financial position of a firm. These ratios are calculated to comment upon the short-term
paying capacity of a concern or the firm’s ability to meet its current obligations.

LIQUIDITY
RATIO

CURRENT QUICK
RATIO RATIO

(b) Long-term Solvency and Leverage Ratios: Long-term solvency ratios convey a
firm’s ability to meet the interest costs and repayments schedules of its long-term obligations
e.g. Debit Equity Ratio and Interest Coverage Ratio. Leverage Ratios.

50
 LONG TERM
SOLVENCY RATIO

FIXED ASSETS TO INTEREST

DEBT EQUITY DEBT TO
PROPRIETOR COVERAGE
RATIO TOTAL FUND
FUND RATIO RATIO
RATIO

(c) Activity Ratios: Activity ratios are calculated to measure the efficiency with which
the resources of a firm have been employed. These ratios are also called turnover ratios
because they indicate the speed with which assets are being turned over into sales i.e.
debtors’ turnover ratio.

ACTIVITY RATIO

FIXED ASSETS WORKING

DEBTORS TURN STOCK TURN
TURN OVER CAPITAL TURN
OVER RATIO OVER RATIO
RATIO OVER RATIO

(d) Profitability Ratios: These ratios measure the results of business operations or
overall performance and effective of the firm. E.g. gross profit ratio, operating ratio or capital
employed. Generally, two types of profitability ratios are calculated (I) in relation to sales,
and (ii) in relation to investment.

PROFITABILITY
RATIO

ON THE BASIS ON THE BASIS

OF SALES OF INVESTMENT

RETURN ON RETURN ON
GROSS PROFIT NET PROFIT
CAPITAL SHARE HOLDERS
RATIO RATIO
EMPLOYED FUND

OPERATING OPERATING
RATIO PROFIT RATIO
51
GROSS PROFIT RATIO:

gross profit or sales profit is the difference between revenue and the cost of making a product
or providing a service, before deducting overhead, payroll, taxation, and interest
payments. Gross profit ratio (GP ratio) is a profitability ratio that shows the relationship
between gross profit and total net sales revenue. It is a popular tool to evaluate the
operational performance of the business. The ratio is computed by dividing the gross profit
figure by net sales.

NET PROFIT RATIO:

Net profit, also referred to as the bottom line, net income, or net earnings, is a measure of the
profitability of a venture after accounting for all costs. Net profit ratio (NP ratio) is a
popular profitability ratio that shows relationship between net profit after tax and net sales. It
is computed by dividing the net profit (after tax) by net sales.

OPERATING PROFIT RATIO:

Operating margin ratio or return on sales ratio is the ratio of operating income of a business
to its revenue. It is the profitability ratio showing operating income as a percentage of
revenue.

Operating Margin = Operating Income

Revenue

52
 LEVERAGES RATIOS
Any ratio used to calculate the financial leverage of a Company to get an idea of the
Company methods of financing or to measure its ability to meet financial obligations. There
are several different ratios, but the main factors looked at include debt, equity, assets and
interest.
A ratio used to measure a Company mix of operating costs, giving an idea of how changes in
output will affect operating income. Fixed and variable costs are the two types of operating
costs; depending on the Company and the industry, the mix will differ.

DEBT EQUITY RATIO:

A measure of a Company financial leverage calculated by dividing its total liabilities by
stockholders' equity. It indicates what proportion of equity and debt the Company is using to
finance its assets.

53
 PROFITABILITY RATIOS:

 Operating Profit Margin

particular 2022 2021 2020 2019 2018

Operating 5.051472 6.38894 7.043148 11.46629 10.87991
profit(%.)

Operating profit(%.)
14

12

10

Operating profit (%.)

6

INTERPRETATION:
The operating Profit margin is reducing year by year due to operational inefficiency in
organization but the Company expects it to increase in 2021-22

54
Gross Profit Margin

particular 2022 2021 2020 2019 2018

Gross profit 3.56 4.76 5.28 9.8 9.22

margin (%)

Gross profit margin(%)

12

10

Gross profit margin (%)

INTERPRETATION:
The Gross Profit is Decreasing Year After Year but still the Company is still incurring Net
Profit and never been in Losses in the last 5 years.

55
NET Profit Ratio:

YEAR 2022 2021 2020 2019 2018

Net profit ratio (%) 2.62954 3.19362 4.69486 3.00775 2.11956

Net profit ratio (%)

5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
Net profit ratio (%)

INTERPRETATION:
The Company earned a good percentage of net profit margin in the year 2020-21 if
compared to 2019-20 but still is trying to improve the net profit margin

56
DEBT EQUITY RATIO:

YEAR 2022 2021 2020 2019 2018

DEBT EQUITY 0.35374 0.42703 0.43226 0.40507 0.7872
RATIO (%) 4

DEBT EQUITY RATIO

0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0 DEBT EQUITY RATIO

INTERPRETATION:
The Total Debt was 0.40 in 2019-20 but it increased in 2020-21 to 0.43 because the Long-
Term Loans Increased as the Total Debt includes both Short Term Debt and Long-Term
Debt.

57
Long Term Debt Ratio

YEAR 2022 2021 2020 2019 2018

Long Term debt 0.231 0.177 0.175 0.169 0.373
equity ratio

Long Term debt equity ratio

0.4
0.35

0.3

0.25

0.2

Long Term debt equity

ratio

0.15
0.1

0.05

INTERPRETATION:

The Long-Term Debt-Equity Ratio is Satisfactory as the Total Debt Equity Ratio is Less than
2:1 and which is treated as safe or Financially Sound. But in 2020-21 the Long-Term Debts
of the Company have increased more if compared to the previous year’s Long Term Debts
but still the Company is performing well due to efficient management of use of Debt and
Equity.

58
CURRENT RATIO:

This ratio is used to assess the firm’s ability to meet its current liabilities. The relationship of
current assets to current liabilities is known as current ratio. The ratio is calculated as:
Current Assets Current Ratio = ————————
Current Liabilities
CURRENT RATIO
2018 1.27
2019 1.19
2020 0.94
2021 0.8
2022 0.73

CURRENT RATIO
1.4

1.2

0.8
CURRENT RATIO
0.6

0.4

0.2

Interpretation: -
Current ratio of 2:1 is considered ideal, which means that the current liabilities would be paid
even if there is 50% fall in the prices of current assets which is less than ideal ratio so it can
be said that the short term financial position of the company is not satisfactory. So firm has to
maintain current assets so as to meet its current liabilities. The ratio is not satisfactory.

59
LIQUID RATIO:

This ratio is used to assess the firm’s short term liquidity. The relationship of liquid assets to
current liabilities is known as liquid ratio. It is otherwise called as Quick ratio or Acid Test
ratio. The ratio is calculated as:
Current Liabilities

YEAR Quick Ratio

2018 1.5532
2019 1.7391
2020 1.6737
2021 2.74764
2022 3.3689

Quick Ratio
4
3.5
3
2.5
2
1.5
1 Quick Ratio

0.5
0

Interpretation: -
It defines that quick ratio should be 1:1 of every company because if quick assets will be
equal to current liability so company can easily pay their short term loans (current
liability).In this company we can see that in previous year company had more quick assets to
its current liability and in 2019-20 quick assets of the company was high but, In 2020-21
company has controlled their excess of quick assets and in 2021-22.

60
Operating Cash Flow Ratio

YEAR Operating Cash Flow Ratio

2018 0.9995
2019 0.7306
2020 0.3741
2021 1.6661
2022 1.0414

Operating Cash Flow Ratio

1.8
1.6
1.4
1.2
1
0.8
Operating Cash Flow Ratio
0.6
0.4
0.2
0

Interpretation:
Higher the cash flow margin, better the position of the company. In 2019-20& 2020-21 this
ratio has immensely gone down. So after considering the position company took measures to
boost up this ratio by increasing their operations. So in 2021-22 this ratio is showing an
increasing trend. So it can be said that company is generating more cash from operating
Activities.

61
CHAPTER-6 RESULTS
AND FINDINGS

62
 RESULTS & FINDINGS
The researcher suggested various policies to organization which he thinks that if they
implemented in the right manner can increase the earnings of the firm which in turn increase
the goodwill of the firm.
Implementation of policy on the related issues depends upon the result of discussion among
the top executives of an organization for the flowing policies: -
The various policies that should be applied in an organization on the basis of the study of
Capital structure of organization are as follows:
 Firstly, the researcher suggested that the organization should invest more in the purchase of
current assets as compared to fixed assets because it is beneficial for Company to increase the
liquidity of firm.
 Secondly the organization should try to increase its profitability position. This will result in
maintaining a better position in the market.
 Maintaining optimum mix of Debt-Equity in their capital structure.
 Maintenance of Proper Records of those transactions wherever it has been shown as Old
Outstanding/Closed Outstanding.
 Control over all expenses by reducing wastage.

63
 CHAPTER- 7
SUGGESTIONS

64
 SUGGESTIONS
 A company should use debt in limited amounts to reduce the financial risk. As Researcher
have found that Company is much more dependent on the debt and equity is being constant
from last five years so at time of contingencies there will be more burdens on the shoulders of
the shareholders. So, Company should reduce its dependency on the debt.
 The Company should limit its debts to the extent that the liquidity position of the firm
cannot be impacted, and this does not create any hindrance.
 The Company should issue preference share capital also.
 The company should control all expenses so that profits will be more.
 The company should make more long-term investment so that in the times to come, it would
be more benefit able for the Company.
 The company should also try to increase its profitability.
 Company should try to use an optimal capital structure by which Company can
minimizes the cost of capital and maximize wealth of shareholders.
 A company’s ratio of short and long-term debt should also be considered when examining
its capital structure.
 The company should also utilize their all recourses very efficiently, which leads to an
increase in sales of the organization.

65
CHAPTER-8
CONCLUSION

66
 CONCLUSION
The Company has a liberal credit policy towards debtors. That is not in favorable but still it
has good reputation in the market and can take many loans from the Company. The
organization has a high level of inventory which affects its profitability and increases the cost
of holding the inventory. The inventory management handled by the Company is definitely
doing in better way. The principal location of each & every item is very good. There is a
moderate degree of relationship between inventory and profit. There is a high degree of
relationship between inventory and sales. In every year this ratio is lower than 2:1, which is
better for long-term lenders but long-term financial position is not much satisfactory because
external funds are more than the internal funds in all the three years.

67
BIBLIOGRAPHY

68
 BIBLIOGRAPHY

BOOKS:
1. Sekran Uma, (Edition 4th) “Research Methods for Business”, , Wiley India Editions
Page (54-70,126-140)
2. Nargundkar Rajendra, (Edition-3rd) “Marketing Research”, , Tata McGraw Hill
Publications, New Delhi. PP (95-98,)
3. Cooper R. Donald, (Edition-8th) “Business Research Methods”, , Tata McGraw
Hill Publications, New Delhi.(36-39)
4. Mittal R.K, (Edition-6th) “Management Accounting & Financial Management”,
N.K. Publishers. PP (18-20).
5. James C. Van Horne, (Edition 5th) “Financial Management Policy”, Tata McGraw
Hill Publications, New Delhi. PP (176-178,)
6. Gupta Shashi K. and Sharma R. K., (Edition-6th) “Management Accounting”,,
Kalyani Publications, New Delhi. PP (10.72-10.75).
7. Kothari C.R. (II Revised Edition), “Research Methodology Methods and
Techniques”, New Delhi, New Age International (P) Limited, 96-98
8. Chandra Prasanna, (7th Edition) “Financial Management”. Tata
McGraw Education Private Ltd. (72-73)
9. Goel D.K, Goel Rajesh (2008 Edition), ),“Management Accounting and Finance
Management)”.Avichal Publishing Company, (13.14-13.16)
10. Guruswamy S., (Edition-2nd) “Financial services & system”,Publications, New
(400-402)
11. Pandey I.M., (Edition-9th) “Financial Management”, V.K. Publications, New
Delhi.315-317)
12. Jain T.R. and Aggarwal S.C., (Edition-3rd) “Statistics for MBA”, V.K. Publications,
New Delhi. pp. (Part B 74-75)
13. Khan M.Y., “Financial Management”, (Edition-4th), Tata McGraw
Hill Publications, New Delhi. (6.10-6.12)
14. Bhalla V.K “Working capital management” (Edition-6th), Anmol Publications
Pvt.,NewDelhi.125-127.
15. Periasamy.P. “Financial Management”, (Edition-2nd), Tata McGraw Hill Publications,
New Delhi (2.7-2.9)

69
JOURNALS:
 Raiyani R.Jagdish ,Vol.4 (11) (November 2011) “Advances in Management”: 17
BRAV OMAR,( February 2009)Vol. LXIV, No.1 “Journal of Finance”
 Gill Amarjit, (December 2011)”, Vol. 28 No.4 “International Journal of
Management”. -
 Pindado Julia And Chabela De La Torre ;(2010), “International Review of
Finance”.-
 Lemmon L.Michael and Zender F.Jaime, (2010),Vol. 45(5) “Journal of Financial
and Quantitative Analysis” .
 Varadi Kata , (2009), “International Journal Of Management Cases”.
 Dhankar S Raj and Boora S Ajit, (July-September 1996), “The Journal Of
Finance”.
 Muzir Erol, (August 2011). Vol. 11 No.2” Journal of Management Research”
Magazines: -
 Shah Rashesh, “Business World” (26April2010)
 Dubey Rajiv, “Business World” (20sept2010)
 Gajra Rajesh, “Business World (Sept. 2007)”
 Seth Meera, , “Business World “15 Mar 2010).
 28I CFAI Reader,( Oct 2005)”
 Dungore Parizad, “ICFAI (AUG 2008)”
 Grag Chand Mahesh, “Management Accountant”
 Oswal Motilal, “Business World” (April 2010)”

Websites
34 www.investopedia.com/terms/w//capital structure. This website explains the need
for capital structure and various factors affecting capital structure the of firm.
 https://www.htmedia.in/
 https://www.htmedia.in/about-us
 http://www.investorwords.com/733/capital structure from here, researcher has
taken meaning of capital structure.
 https://corporatefinanceinstitute.com/resources/knowledge/finance/capital-
structure-overview/
 https://www.investopedia.com/terms/c/capitalstructure.asp

70
ANNEXURE

71
 ANNEXURE

Alfa Net Previous Years »

Standalone Balance Sheet ------------------- in Rs. Cr. -------------------
Mar 22 Mar 21 Mar 20 Mar 19 Mar 18

12 Months 12 Months 12 Months 12 Months 12 Months

Sources Of Funds
Total Share Capital 7.35 7.35 7.35 7.35 7.35
Equity Share Capital 7.35 7.35 7.35 7.35 7.35
Reserves 1,667.23 1,463.16 1,339.82 1,215.49 1,118.15
Net worth 1,674.58 1,470.51 1,347.17 1,222.84 1,125.50
Secured Loans 173.56 340.96 74.71 82.27 109.56
Total Debt 173.56 340.96 74.71 82.27 109.56
Total Liabilities 1,848.14 1,811.47 1,421.88 1,305.11 1,235.06
Mar 22 Mar 21 Mar 20 Mar 19 Mar 18
12 months 12 Months 12 Months 12 Months 12 Months
Application Of Funds
Gross Block 814.03 793.22 1,052.78 951.94 913.67
Less: Accum. Depreciation 331.41 274.61 545.30 496.46 449.30
Net Block 482.62 518.61 507.48 455.48 464.37
Capital Work in Progress 8.63 7.66 11.23 29.28 15.36
Investments 212.62 251.29 324.70 508.82 831.27
Inventories 475.67 511.05 611.13 466.10 404.48
Sundry Debtors 2,359.36 1,990.44 1,803.81 1,107.73 1,071.09
Cash and Bank Balance 121.06 135.56 92.06 207.00 121.80
Total Current Assets 2,956.09 2,637.05 2,507.00 1,780.83 1,597.37
Loans and Advances 1,127.35 1,018.68 911.14 554.38 455.98
Total CA, Loans & Advances 4,083.44 3,655.73 3,418.14 2,335.21 2,053.35
Current Liabilities 2,735.24 2,445.89 2,682.78 1,842.68 1,921.46
Provisions 203.93 175.92 156.89 181.00 207.83
Total CL & Provisions 2,939.17 2,621.81 2,839.67 2,023.68 2,129.29
Net Current Assets 1,144.27 1,033.92 578.47 311.53 -75.94
Total Assets 1,848.14 1,811.48 1,421.88 1,305.11 1,235.06
Contingent Liabilities 570.25 444.98 818.34 815.82 500.96

Book Value (Rs) 227.74 199.99 183.22 1,663.06 1,530.68

72
Alfa Net Previous Years »
Standalone Profit & Loss ------------------- in Rs. Cr. -------------------
account
Mar 22 Mar 21 Mar 20 Mar 19 Mar 18

12 Months 12 Months 12 Months 12 Months 12 Months

INCOME
Revenue From Operations 4,192.16 4,741.21 4,021.17 2,461.23 2,986.48
[Gross]
Less: Excise/Service Tax/Other 0.00 0.00 0.00 15.55 79.45
Levies
Revenue From Operations 4,192.16 4,741.21 4,021.17 2,445.68 2,907.03
[Net]
Other Operating Revenues 117.44 152.49 107.75 154.13 124.51
Total Operating Revenues 4,309.61 4,893.71 4,128.92 2,599.82 3,031.54
Other Income 35.61 18.58 36.89 72.34 93.24
Total Revenue 4,345.22 4,912.29 4,165.81 2,672.16 3,124.77
EXPENSES
Cost Of Materials Consumed 513.44 631.95 717.70 534.99 427.21
Purchase Of Stock-In Trade 1,936.48 2,114.90 1,802.61 727.63 1,178.75
Operating And Direct Expenses 625.79 772.08 452.85 324.12 378.06
Changes In Inventories Of 90.78 43.28 -109.97 -26.80 -48.64
FG,WIP And Stock-In Trade
Employee Benefit Expenses 279.31 313.31 292.78 277.81 267.84
Finance Costs 22.75 15.87 15.31 7.12 20.80
Depreciation And Amortization 67.84 73.71 65.93 67.15 63.82
Expenses
Other Expenses 524.29 739.72 725.54 592.21 569.27
Total Expenses 4,060.68 4,704.82 3,962.74 2,504.22 2,857.11
Mar 22 Mar 21 Mar 20 Mar 19 Mar 18

12 Months 12 Months 12 Months 12 Months 12 Months

Profit/Loss Before
Exceptional, Extraordinary 284.54 207.47 203.08 167.93 267.66
Items And Tax
Profit/Loss Before Tax 284.54 207.47 203.08 167.93 267.66

73
Tax Expenses-Continued Operations
Current Tax 71.32 57.04 79.31 55.77 81.38
Deferred Tax -5.02 -2.67 -4.55 -6.82 -2.35
Total Tax Expenses 66.31 54.37 74.76 48.95 79.03
Profit/Loss After Tax and Before 218.23 153.10 128.32 118.98 188.63
Extraordinary Items

Profit/Loss From Continuing 218.23 153.10 128.32 118.98 188.63

Operations

Profit/Loss For The Period 218.23 153.10 128.32 118.98 188.63

Mar 22 Mar 21 Mar 20 Mar 19 Mar 18

12 12 Months 12 Months 12 Months 12 Months

Months

OTHER ADDITIONAL INFORMATION

EARNINGS PER SHARE

Basic EPS (Rs.) 29.68 20.82 17.45 161.81 256.54
Diluted EPS (Rs.) 29.68 20.82 17.45 161.81 256.54
VALUE OF IMPORTED AND INDIGENIOUS RAW MATERIALS

STORES, SPARES AND LOOSE TOOLS

DIVIDEND AND DIVIDEND

PERCENTAGE

Equity Share Dividend 14.71 25.74 4.17 11.76 11.03

Tax On Dividend 0.00 4.30 0.00 0.00 0.00
Equity Dividend Rate (%) 300.00 200.00 200.00 160.00 300.00

74