Analysis of Capital Structure in Different Industries in India

Abstract

The capital structure of a company is made up of debt and equity securities that comprise a firm’s financing of its assets. It is the permanent financing of a firm represented by long-term debt, preferred stock, and net worth. So it relates to the arrangement of capital and excludes short-term borrowings. It denotes some degree of permanency as it excludes short-term sources of financing. The D/E ratio is a key metric used to examine a company's overall financial soundness. An increasing ratio over time indicates that a company is financing its operation increasingly through creditors rather than through employing its own resources and that it has a relatively higher fixed interest rate charges burden on its assets.

Some of the major reasons why the debt/equity (D/E) ratio varies significantly from one industry to another, and even between companies within an industry, include different capital intensity levels between industries and whether the nature of the business makes carrying a high level of debt relatively easier to manage.

The objectives of the study are to analyze the capital structure of different industries in India, to analyze the average debt – equity value of large cap, mid cap and small cap industries in India and identify the differences in financial statements especially in the balance sheet of a manufacturing company and a service industry. This study mainly depends on the secondary data available on the internet. For the analysis of capital structure, 132 companies from 20 different industries which belong to 5 sectors were taken. To determine the nature of the capital structure of the sample companies’ debt-equity ratio is calculated. Thereafter, average of debt equity ratio was calculated by considering the weighted average based on their market capitalization.

The debt-equity ratios of the industry sectors covered in the study lie within the range of 0.004607- 8.237996. The lowest ratio observed in the case of Computer Software industry and the highest in the banking sector. The common understanding and theoretical studies show that the debt equity value of large cap companies should be more since they are more known to the public, especially the money lenders, it is easy for them to get more debt amount. But in this study what was found is that the average debt equity value of small cap companies is higher than that of mid cap and large cap.

It is therefore argued that the financial manager must identify factors and carefully analyze sector specific attributes before attempting to achieve the so-called optimal capital structure. The appropriate capital structure of the firm is warranted to sustain the value of the firm in the hyper-competitive corporate environment.