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Impact of Leverage & Coverage Ratios on ITC Ltd

Author : Ayan Chakraborty

Pages : 896-902
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Finance is the main area for all developed & developing countries. A firm & fruitful financial structure reflects healthy economy. Finance may be defined as the art and science of managing money. Finance involves both Financial Planning and Financial Management. The foremost objective of financial management is to maximise shareholders wealth. Capital Structure Decision, which involves in determining the Debt- Equity Mix have an impact on the profitability of the firm. With the increase in proportion of Debt Capital increases, then the Equity Earnings falls as well the risk of insolvency (Bankruptcy cost) increase. The risk of shareholders increases because the borrowed funds carry a fixed interest, which has to be paid whether the company earns profits or not. Thus, the earnings and the risk of the shareholders increase when there is a high proportion of borrowed funds as compared to owned funds in the capital structure of a company. Leverage refers to debt or to the borrowing of funds to finance the purchase of a company’s assets. Business owners can use either Debt or Equity to finance or buy the company’s assets. Using debt, or Leverage, increases the company’s risk of bankruptcy. It also increases the company’s returns; specifically its return on equity. This is true because, if debt financing is used rather than equity financing, then the owner’s equity is not diluted by issuing more shares of stock. This paper concentrates on leverage and its relationship between profitability in ITC Ltd. In this paper, an attempt is made to performance an Analysis on: 1) Financial Performance of ITC Ltd, 2), Leverage of ITC Ltd and 3) Study the relationship between leverage and profitability. The financial statements of ITC have been collected over a period of 6 years (2011 to2016). The exploratory research design is adopted in this study which employs secondary data. The data collected is analysed by the percentages, averages, ratios and Correlation analysis tools reveals that the research evidence of the study indicates that, that degree of operating leverage is statistically significant positive correlation with the EPS. The financial performance of ITC is satisfactory. The analysis has shown that ITC has financed its activities mainly from its Reserve & Surplus and the amount of Debt has fallen over the years. It is suggested that ITC must increase its Debt funding to take the advantage of Tax Shield. Moreover, Cost of Debt is cheaper than Cost of Equity.

Keywords: Leverage, Profitability, Degree of Financial Leverage, Degree of Operating Leverage, Combined Leverage, Correlation, Net Wort, Interest Coverage, Dividend Coverage

Article published in International Journal of Current Engineering and Technology, Vol.7, No.3 (June-2017)

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