A Study on Impact of Capital Structure on Profitability of Companies Listed in Indian Stock Exchange with respect to Automobile Industry

TL;DR

This study analyzes how different capital structure variables affect the profitability of Indian automobile companies, using data from 2010-2019 and fixed/random effect models.

Contribution

It provides empirical evidence on the significant impact of capital structure on profitability, highlighting the importance of optimal debt-equity mix for firms.

Findings

Profitability variables are significantly affected by capital structure.

Optimal debt-equity mix can enhance firm performance.

Strong relationship between capital structure and profitability variables.

Abstract

Current research helps in understanding both positive and negative impacts of capital structure on profits of Indian automobile companies by using variables like Return on Capital Employed, Return on Long Term Funds, Return on Net Worth, Gross Profit Margin, and Operating Profit, and Return on Asset. The study hypothesized that RoCE, RoLT, and RoNW have a positive effect and GP, OP and ROA have a negative impact on debt-equity and interest coverage ratios i.e capital structure of the companies. Also, the study proves that the relationship between profitability and capital structure variables is strongly significant. The hypothesis was tested by using fixed effect and random effect models by considering 10 years of data (from 2010-2019) from 17 automobile companies. The result of the study recommends that the firms can improve their performance by using an optimal capital structure. Also, a fair mix of debt and equity should be established to ensure that the firm maintains capital adequacy. Firms can thus be able to meet their financial compulsions and investments that can promise attractive returns.