Does capital structure affect profitability? Evidence from Indian IT Companies

Abstract

Background: In spite of many years of rigorous exploration and several papers after Modigliani and Millers' original work, surprisingly there is absence of agreement even today among the finance specialists on the fundamental issue of corporate finance, concerning why finance managers utilize various combinations of debt and equity. Most of the researchers opine differently as to what is the ideal debt and equity formation, which can maximize the profitability of the origination. The degree of collision of capital structure on profitability as well as to scrutinize the model debt and equity structure in the selected IT companies of India is the prime intent of the study. We have chosen the top five IT companies of India from the period 2014-2015 to 2018-19 based on market capitalisation. Different analysis such as Proportion Analysis, Correlation Analysis and Regression Analysis are taken into consideration to find out the noteworthy association between the debt-equity mix and profitability of companies. Findings: The after-effects of correlation examination show that, both DER and DTA have a negative relationship with NP, though not significantly, while both DER and DTA have a significant negative relationship with ROA. Nevertheless, all other profitability factors for example ROCE, RONW and RLTF have a strong and positive relationship with DER and DTA, which may be a result of the advantage of trading on equity dealt in by the organization. As the study based on the experimental variability's such as NP, ROCE, RONW, ROA and ROLF, with the predictor variable as Debt Equity Ratio (DER) and Debt to Total Assets Ratio (DTA), taken together to establish the association with capital structure. After the analysis, results shows that, the R 2 esteems as computed in the regression examination are 22.9%, 88.4%, 93.1%, 71.8% and 88.7%. It demonstrates that; expect Net Profit, which shows a moderate positive relationship but other variables show a strong positive relationship with capital structure.