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IMPACT OF CAPITAL STRUCTURE ON PROFITABILITY: WITH REFERENCE TO

SELECT COMPANIES FROM OIL AND NATURAL GAS INDUSTRY OF INDIA

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Inspira- Journal of Modern Management & Entrepreneurship (JMME) 129
p-ISSN : 2231–167X, Impact Factor : 2.3982, Volume 07, No. 03, July, 2017, pp. 129-137

IMPACT OF CAPITAL STRUCTURE ON PROFITABILITY:

WITH REFERENCE TO SELECT COMPANIES FROM OIL AND NATURAL GAS INDUSTRY OF INDIA

Dr. Sushil Kalyani∗

Dr. Neeti Mathur∗∗

ABSTRACT

The relationship between capital structure and profitability is an important matter of discussion as
regular improvement in profitability is important for growth and survival of firm. An attempt has been
made in this paper to find out impact of capital structure on overall profitability of a firm. The Corporate
financial performance, which is represented by dependent variables ROA (Return on Assets) and Net
Profit Ratio, is taken into consideration and the effect of independent variables which are Sales of a firm,
Total Assets of a firm, Debt Service Capacity, Dividend Pay-Outs, Degree of Financial Leverage, Degree
of Operating Leverage of the firms belonging to the Oil and Natural Gas Industry of India were chosen for
study. A sample of seven firms listed in NSE and BSE were selected and the financial data of these
companies during the period 2005 and 2015 is used for this study. The Judgement Sampling which is
non-random sampling technique is chosen for sample selection in this study. The correlations and
regression analyses were used to estimate the functions relating to profitability measured by Return on
Assets and Net Profit Ratio with measures of capital structure. The study witness that Log sales, degree
of operating leverage and growth of asset are significant variables in determining the profitability when
dependent variables are ROA and log assets, degree of financial leverage, Log sales, degree of
operating leverage and growth of asset have significant relationship with net profit ratio of the select firms
from Oil and Natural Gas Industry of India.

KEYWORDS: Capital Structure, Debt, Equity, Financial Ratios, Net Profit Ratio, Return on Assets.
_______________
Introduction
“What will be an optimum capital structure for a firm?” has been one of the most difficult question
to answer as well as the most crucial decision for every firm. The finance managers often find it difficult to
conclude as to what will be the optimum capital structure for a firm which will reduce the cost of capital,
will reduce tax liability optimally, will increase profitability, will fulfil the shareholders’ expectations and will
also ensure growth in future. According to Gerestenberg, “Capital Structure of a company refers to the
composition or make up of its capitalization and it includes all long-term capital resources viz., loans,
reserves, shares and bonds. Keown et al. defined capital structure as, ‘balancing the array of funds
sources in a proper manner, i.e. in relative magnitude or in proportions’. In the words of P. Chandra,
‘capital structure is essentially concerned with how the firm decides to divide its cash flows into two broad
components, a fixed component that is earmarked to meet the obligations toward debt capital and a
residual component that belongs to equity shareholders”.

∗
Assistant Professor, Management Area & Assistant Dean (Industry Linked Programmes), NIIT University,
Neemrana, Dist. Alwar, Rajasthan.
∗∗
Assistant Professor, Management Area, NIIT University, Neemrana, Dist. Alwar, Rajasthan.
130 Inspira- Journal of Modern Management & Entrepreneurship (JMME), July, 2017
Several theories have been propounded for capital structure. Modigliani–Miller theorem is one of
those theories in the perfect market situation with or without tax. Other real-world theories like trade off
theory, pecking order theory, capital structure substitution theory etc. were propounded, yet it is difficult to
determine an optimal capital structure for a given company. Thought there are several theories
propounded by various researchers, we also know that the capital structure is dependent on various
factors like business risk of the company, tax situation of the company, degree to which the company’s
assets are tangible, company’s corporate governance and transparency of the financial information.
On the other hand, profitability is one of the important criteria for the survival and growth of
companies. Profitability is a very important variable for a firm because, when a firm’s profitability is high
and regular, only then the lenders, shareholders and the investors will show interest in that firm. Hence
the point of discussion in this study is to determine impact of capital structure on profitability of the firm.
Corporate financial performance has been measured in this paper by the profitability ratios (i.e., Return
on Assets and Net Profit Ratio).
Literature Review
A thorough literature review has been done while conducting this study. Various variables used in
the study have been extracted after casting an eye over various literatures.
• Modigliani and Miller (1958 and 1963) demonstrate that in a frictionless world, financial leverage
is unrelated to firm value, but in a world with tax – deductible interest payments, firm value and
capital structure are positively related.
• Miller (1977) added personal taxes to the analysis and demonstrated that optimal debt usage
occurs on a macro – level, but it does not exist at the firm level. Interest deductibility at the firm
level is offset at the investor level.
• Raghuram G.Rajan and Luigi Zingales (1995) in research paper “what do we know about
capital structure, some evidence from international data”, investigate the determinants of capital
structure choice by analysing decisions of public firms in the major industrialized countries and
suggested that it is required to strengthen the relationship between theoretical models and
empirical specifications of those models and this can be done with the help of more detailed data
for deeper understanding.
• Fama and French (2002) agree that the negative effects of profitability on leverage is consistent
with the pecking order model, but also find that there is an offsetting response of leverage to
changes in earnings, implying that the profitability effects are in part due to transitory changes in
leverage rather than changes in the target.
• Baral (2004) has made an attempt to determine the factors determining the capital structure of
companies listed in the Nepal Stock Exchange. A cross-sectional analysis was done taking into
consideration industries from different sectors such as trading, commercial banks, hotels, etc. It
was found from the result that size, growth rate and earning rate have statistically significant
influence on capital structure decisions.
• Amidu (2007) has examined the determinants of the capital structure of banks in Ghana. The
research concludes that some of the factors that determine the capital structure of the banks in
Ghana are profitability, growth rate, corporate tax, asset structure and bank size. A multi-
regression model has been used so as to understand the significance of different factors
influencing the capital structure decisions of the banks of Ghana.
• Deari and Deari (2009) have tried to investigate into the factors determining the capital structure.
The study concludes that profitability, tangibility, size and growth affect capital structure decisions
while non-debt tax shield does not affect the capital structure decisions.
• Onaolapo and Kajola (2010) have concluded from their study that the debt ratio has a
significantly negative impact on the firm’s financial measures. They have employed ordinary least
squares as a measure of estimation. The variables used for financial measures in the paper were
ROA and return on equity.
• Sheikh and Wang (2011) have investigated into the factors determining the capital structure of
160 firms listed in the Karachi Stock Exchange during 2003–2007. The multi-regression model
was run and it was concluded from the study that profitability, tangibility, earning volatility and
liquidity are negatively related to leverage, while the firm size is positively related to leverage. It is
Dr. Sushil Kalyani & Dr. Neeti Mathur: Impact of Capital Structure on Profitability: With Reference to Select ...... 131
also observed that the non-debt tax shield and growth opportunity have no significant influence on
the capital structure.
• San and Heng (2011) have investigated into the relationship of the capital structure and financial
performances. ROA has been taken as one of the variables for financial performance. Their paper
concluded that there is a significant relationship between the capital structure and financial
performance.
• Chisti, Khursheed and Sangmi (2013) Impact of capital structure on profitability of listed
companies (Evidence from India), the findings of the study have put forth that capital structure do
have statistically significant impact on the profitability of firms.
• Arindam and Anoop (2014) Find in their study that, debt service capacity (interest), financial
leverage and size (Log assets)) are significant variable to determine profitability of the firms in the
Indian iron and steel industry.
Ramachandran Azhagaiah and Candasamy Gavoury in the research paper “The Impact of
Capital Structure on Profitability with Special Reference to IT Industry in India” proves that there
has been a strong one-to-one relationship between capital structure variables and profitability
variables, Return on Assets and Return on Capital Employed and the capital structure has
significant influence on profitability, and increase in use of debt fund minimize the net profit of the
IT firms listed in Bombay Stock Exchange in India.
• J. Aloy Niresh & T. Velnampy (2014) in the research paper “Firm Size and Profitability: A Study
of Listed Manufacturing Firms in Sri Lanka” found there is no significant relationship between firm
size and profitability of listed manufacturing firms and the results showed that firm size has no
deep impact on profitability of the listed manufacturing firms in Sri Lanka.
• Nilesh P. Movalia (2015) in the research paper “A Study on Capital Structure Analysis and
Profitability of Indian Tyres Industry” found that there is a significant relationship in the capital
structure and profitability of tyre companies.
• Amidu and Joushwa (2016) find the importance of operational earnings than operational cash
flow and suggests that in predicting future values from current ones, operational earnings gives a
better output in looking at the long-term sustainability aim of a firm, than operational cash flows.
Objective of Study
This study is basically undertaken to investigate impact of capital structure on profitability of firms.
The Corporate financial performance represented by dependent variables, ROA (Return on Assets) and
Net Profit Ratio, and the independent variables which are Total Sales of firm, Total Assets of firm, Debt
Service capacity, Dividend pay-out, Degree of financial leverage, Degree of operating leverage which are
related to capital structure of the firms belonging to the Indian oil and natural Gas Companies were
chosen for study.
Research Methodology
This study was conducted based on the secondary data of the selected companies of the Indian
Oil and Natural Gas Industry using Prowess database software. The list of all the Indian Oil and Natural
Gas companies which are listed and permitted to trade in the BSE and NSE was determined. Apart from
this, information was also obtained from the Centre for Monitoring Indian Economy (CMIE), Capitalineine
and annual financial statements were downloaded from the websites of respective companies while
conducting our research. Due to the Constraint of time and availability of data seven companies are
selected from 50 top oil and natural gas companies of India. The study was conducted for the period from
2002 to 2015. The Judgement Sampling which is a non-random sampling technique is chosen for sample
selection. Desecrate statistics, Correlation and Multiple-regression analysis techniques were used to
study the influence of independent variable which are Debt-Equity Ratio, Pay-out ratio, Log Asset, Log
Sales, Growth of assets, Degree of financial leverage and Operating leverage on dependent variables
representing the financial performance which are by ROA (Return on Assets) and Net Profit Ratio.
Limitations and Scope for Further Study
• Analysis of the study is based on financial data collected from the CMIE Prowess Package and
Capitoline. The quality of the study depends purely upon the accuracy, reliability and quality of
secondary data.
132 Inspira- Journal of Modern Management & Entrepreneurship (JMME), July, 2017
• Due to the influence of some extraneous variables the intercept is very high in a few regression model
analysis. Hence, for future studies, it is better to include those independent variables to find the true
impact of those variables on the financial decision in respect of capital structure and profitability.
• Several dependent and independent variables can be used to determine impact of capital
structure on profitability of firm while ROA and Net Profit Ratio as dependent variable and Debt-
Equity Ratio, Pay-out ratio, Log Asset, Log Sales, Growth of assets, degree of financial leverage
and operating leverage as independent variable has been chosen deliberately.
Hypothesis Framed
The following null hypotheses were framed and tested.
H01 : There is no significant relation between the degree of financial leverage and ROA
H02 : There is no significant relation between the degree of financial leverage and Net profit ratio
H03 : There is no significant relation between degree of operating leverage and ROA.
H04 : There is no significant relation between the degree of operating leverage and Net profit ratio.
Tools Used for Analysis
The Statistical Techniques used for analysis are Pearson’s Coefficient of Correlation and
Regression Analysis Model to analyse the unique impact of Capital Structure on Profitability. In addition
to above tools, descriptive statistics such as Mean, Mode, Standard Deviation, etc. are also used. The
various variables taken for this research study are discussed as follows:

Dependent Variable

Return on Assets (ROA) is measured as the ratio between Earnings before Interest and
Taxes (EBIT) and Total Assets. Profitability is a very vital variable for a firm. A firm having
a high profitability and sales turnover would not rely on Debt Capital, but if it goes for
external financing, it would face no difficulty in bearing the fixed charges associated with it.
Corporate Financial Performance (Profitability) or ROA = Avg. EBIT/Avg. Total Assets

Net Profit Ratio (NP Ratio) expresses the relationship between Net Profit after Taxes and
Sales. This ratio is a measure of the overall profitability. Net profit is arrived at after
considering both the operating and non-operating items of incomes and expenses. The
ratio indicates what portion of the net sales is left for the owners after all expenses have
been met. Higher the net profit ratio, higher is the profitability of the business.
Net profit ratio = (Net profit after tax / Net sales) × 100

Independent Variables

Size of the Firm: It is the most important variable for every firm because a firm’s sustainability
mostly depends on its size and also the income part which is directly proportional to its sales
turnover. It can also be said that if a firm’s sales turnover increases, then there is a probability
that its profit will increase which would result in an increase in debt service capacity (interest).
As a result, the firm would become capable of affording more debt. The financial institutions and
banks would easily provide loan if a firm’s sales turnover is sound and the amount of fixed
charges can be predicted to be serviced effectively.
Size of the Firm = Log (Average Sales)

Degree of Financial Leverage: Financial leverage is measured as the ratio between total
debt and total asset. The total debt includes current liabilities, provisions and borrowings.
Borrowings consist of both the short-term and long-term borrowings. It is given by:
DFL= EBIT/EBIT-Interest, where DFL is the Degree of Financial Leverage.

Dividend Pay-out Ratio: The dividend pay-out ratio is the amount of dividends paid to
stockholders from the amount of total net income earned by a company for its
shareholders. The amount that is not paid out in dividends to stockholders is held by the
company for growth. The amount that is kept by the company is called retained earnings.
Firms with a high dividend pay-out ratio appear to be attractive from the shareholders’ point
of view. Firms with a low dividend pay-out ratio, indicating that the firm’s retention ratio is
high and the retained amount of profit may be used for internal financing, rely less on debt
capital.
Dividend Pay-out = Average Dividend/Average Profit after Tax
Dr. Sushil Kalyani & Dr. Neeti Mathur: Impact of Capital Structure on Profitability: With Reference to Select ...... 133

Debt –Equity Ratio: Debt to Equity ratio is a long-term solvency ratio that indicates the
soundness of long-term financial policies of a company. It shows the relation between the
portion of assets financed by Liabilities and the portion of assets financed by stockholders.
As the debt to equity ratio expresses the relationship between external equity (liabilities)
and internal equity (stockholder’s equity), it is also known as “external-internal equity ratio”.
Debt –Equity Ratio =Total Debt/Shareholders Equity

Degree of operating Leverage: The Degree of Operating Leverage (DOL) is a leverage
ratio that summarizes the effect of operating leverage on a company's earnings before
interest and taxes (EBIT) over a period of time. Operating leverage involves using a large
proportion of fixed costs to variable costs in the operations of the company. The formula is
as follows:
Degree of Operating Leverage (DOL) = percentage change in EBIT/ percentage change in sale or
revenue.

Growth of Assets: Growth of Asset over the period of time is calculated.
Size of the Firm = Log (Average Total Assets)
Specification of the Model
The following multiple-regression model has been used to test the theoretical relation between the
financial performance and other independent variables of the firms of Oil and Natural Gas Industry of
India:
Y = a + b1 X1 + b2 X2 + b3 X3 + b4 X4 + b5 X5+ b6 X6 + b7X7 + e
where Y is the financial performance (profitability) i.e. Return on total Assets or Net Profit Ratio,
X1 is the Size of the firm (log of Average Sales), X2 is the log of Sales, X3 is the Growth Rate (Average
Total Assets), X4 is the Degree of Financial Leverage, X5 is the Dividend Pay-out, X6 is Debt Equity
Ratio, X7 is the Degree of Operating Leverage, a is the constant term of the model, b is the coefficient of
the model and e is the error term.
Data Analysis and Results
Table 1: Correlation Matrix Analysis Results for all Selected oil and Natural Gas Firms
Net Debt- Pay-
Log Log Growth Financial Operating
ROA Profit Equity out
Asset Sales of assets Leverage Leverage
Ratio Ratio ratio
ROA 1.0000
Net Profit Ratio 0.0580 1.0000
Debt-Equity Ratio -0.0363 -0.0055 1.0000
Pay-out ratio -0.3963 0.1908 -0.2432 1.0000
Log Asset -0.2860 0.4035 0.0302 0.5606 1.0000
Log Sales 0.4982 0.1627 -0.1153 0.1489 0.0687 1.0000
Growth of assets -0.1511 -0.1133 -0.1638 0.4161 -0.2587 0.2676 1.0000
Financial Leverage -0.5477 0.0473 0.2341 0.1281 0.2197 -0.1883 -0.0615 1.0000
Operating Leverage -0.1700 -0.3931 0.2360 0.4079 -0.3569 -0.1344 0.4745 -0.0837 1.0000

*Correlation is significant at 0.05 levels

Pearson Correlation Analysis Shows the Following Results According to Table 1
Pearson correlation analysis establishes relationship between seven independent variables and
the two dependent variables. Correlation analyses provide early sign that there is positive correlation
between log sales which is independent variable and ROA which is dependent variable (corr. =.4982),
Pay-out ratio (corr.=0.1908), Log Assets (corr.=.4035), Log Sales (corr.=.1627) and financial leverage
(corr.=.0473) are significantly related to Net profit ratio.
The analysis also shows that there is significant correlation between several independent
variables such as Financial leverage and debt-equity ratio (corr.=.2341), operating leverage and debt
equity ratio (corr.=.2360), pay-out ratio (corr=.4079), ,Log asset and pay-out ratio(corr.=.5606), operating
leverage and growth of asset (corr.=.4745) indicating possible multicollinearity problem.
134 Inspira- Journal of Modern Management & Entrepreneurship (JMME), July, 2017
Table 2: Descriptive Statistics
Net [Debt- Pay-
Log Log Growth Financial Operating
ROA Profit Equity out
Asset Sales of assets Leverage Leverage
Ratio Ratio] ratio
Mean 0.10 0.08 1.80 30.47 4.28 3.35 0.20 1.14 0.63
Standard Error 0.05 0.03 0.32 1.42 0.06 0.07 0.01 0.07 0.11
Median 0.01 0.10 0.41 31.81 4.32 3.39 0.14 1.06 0.23
Standard Deviation 0.44 0.30 3.10 13.59 0.55 0.70 0.14 0.70 1.07
Kurtosis 34.57 7.89 7.13 1.14 -0.91 1.49 0.66 31.80 4.58
Skewness 5.80 -1.24 2.58 -1.37 -0.22 0.71 1.17 -2.16 2.37
Range 3.15 2.57 15.60 46.80 1.86 3.46 0.61 8.23 5.00
Minimum -0.11 -1.46 0.00 0.00 3.36 1.89 0.04 -3.71 -0.41
Maximum 3.03 1.11 15.60 46.80 5.22 5.35 0.64 4.52 4.59
Count 91.00 91.00 91.00 91.00 91.00 91.00 91.00 91.00 91.00

Table 2 above presents the descriptive statistics of the dependents and independent variables.
The mean of value of Return on Assets (ROA) of companies taken into consideration for study during the
research period amounted to .10. Net profit ratio is .08 during the same period. Standard Deviation is
.44 for ROA and .30 for Net Profit ratio. Mean of log of assets is 4.29 and log of sales is 3.35 which
indicates size of firm. It is observed from table that the minimum and maximum range for ROA and Net
Profit Ratio is not significant.
Results of Regression Analysis for Return on Asset (ROA) for Selected Companies from Oil and
Natural Gas Industry
Table 3: Regression Statistics
Multiple R 0.817
R Square 0.667
Adjusted R Square 0.644
Standard Error 0.263
Observations 91.000
Source: Computed by the authors.
Notes:a. Dependent variable: Return of asset (ROA).
b. Independent Variables: Debt-Equity Ratio, Pay-out ratio, Log Asset, Log Sales, Growth of assets, degree of
financial leverage and operating leverage.
Table 4: ANOVA
df Sum of Squares Mean of Squares F Significance F
Regression 6 11.625 1.938 28.097 0.000
Residual 84 5.793 0.069
Total 90 17.418
Source: Computed by the authors.
Notes: a. Dependent variable: Return of asset (ROA).
b. Independent Variables: Debt-Equity Ratio, Pay-out ratio, Log Asset, Log Sales, Growth of assets, degree of
financial leverage and operating leverage.
Table 5: Regression Results
Standard P- Lower Upper Lower Upper
Coefficients t Stat
Error value 95% 95% 95.0% 95.0%
Intercept 0.195 0.491 0.398 0.692 -0.781 1.172 -0.781 1.172
[Debt-Equity Ratio] 0.005 0.010 0.531 0.597 -0.014 0.025 -0.014 0.025
Dividend Pay-out
ratio -0.007 0.006 -1.236 0.220 -0.018 0.004 -0.018 0.004
Log Asset -0.145 0.127 -1.145 0.255 -0.396 0.107 -0.396 0.107
Log Sales 0.352 0.046 7.706 0.000 0.261 0.443 0.261 0.443
Growth of assets -0.920 0.305 -3.020 0.003 -1.526 -0.314 -1.526 -0.314
Financial Leverage 0.018 0.050 0.357 0.722 -0.081 0.116 -0.081 0.116
Operating Leverage -0.251 0.043 -5.818 0.000 -0.337 -0.165 -0.337 -0.165
Dr. Sushil Kalyani & Dr. Neeti Mathur: Impact of Capital Structure on Profitability: With Reference to Select ...... 135
Regression Analysis has been conducted on dependent variable as ROA and seven independent
variables. Independent Variables are: Debt-Equity Ratio, Pay-out ratio, Log Asset, Log Sales, Growth of
assets, degree of financial leverage and operating leverage. It was observed from Table 9.3 that the R-
square value is 0.667. It means that 66.7% of the dependent variable (ROA) is explained by independent
variables. When we analyze Table 4 (analysis of variance (ANOVA) table), it can be observed from it that
F statistics is 28.097 which is highly significant at 0.000. Hence, as the p-value is less than 0.05, there
can be a linear regression relationship between the dependent (represented by ROA) and independent
variables. It is also observed from the regression analysis in Table 9.5 that Debt–Equity ratio has a p-
value of 0.597 and the corresponding t-value of 0.531, dividend pay-out has a p-value of 0.220 and the
corresponding t-value of-1.236. It signifies that this particular variable is not important in the model.
Similarly, Log Assets (p-value of 0.225 and the corresponding t-value of–1.145), degree of financial
leverage (p-value of 0.722 and the corresponding t-value of 0.357) also seem not to be important enough
in the model, so they need to be removed. While it is also observed that Degree of Operating Leverage
having a p-value of 0.000 and a t-value of–5.818, Growth of Asset having a p-value of 0.003 and a t-
value of -3.020 and log Sales having a p-value of 0.00 and a t-value of 7.706 are significant variables in
determining the profitability (financial performance) of the companies from Oil and Natural Gas Industry
of India.
Table 6: Regression Statistics
Multiple R 0.56254
R Square 0.31645
Adjusted R Square 0.2588
Standard Error 0.25855
Observations 91
Source: Computed by the authors.
Notes: a. Dependent variable: Net Profit Ratio.
b. Independent Variables: Debt-Equity Ratio, Pay-out ratio, Log Asset, Log Sales, Growth of assets, degree of
financial leverage and operating leverage.
Table 7: ANOVA
df SS MS F Significance F
Regression 8 2.569 0.367 5.489 0.000
Residual 83 5.548 0.067
Total 91 8.117

Table 8: Regression Results

Standard P- Lower Upper Lower Upper
Coefficients t Stat
Error value 95% 95% 95.0% 95.0%
Intercept 0.328 0.319 1.028 0.307 -0.307 0.963 -0.307 0.963
[Debt-Equity Ratio] 0.005 0.01 0.544 0.588 -0.014 0.025 -0.014 0.025
Dividend Pay-out ratio -0.005 0.004 -1.471 0.145 -0.013 0.002 -0.013 0.002
Log Asset -0.178 0.084 -2.112 0.038 -0.346 -0.01 -0.346 -0.01
Log Sales 0.347 0.043 8.047 0 0.261 0.433 0.261 0.433
Growth of assets -0.942 0.297 -3.178 0.002 -1.532 -0.353 -1.532 -0.353
Financial Leverage -0.253 0.043 -5.913 0 -0.338 -0.168 -0.338 -0.168
Operating Leverage -0.193 0.049 -3.987 0.000 -0.290 -0.097 -0.290 -0.097

Regression Analysis has been conducted on dependent variable as ROA and seven independent
variables Independent Variables: Debt-Equity Ratio, Pay-out ratio, Log Asset, Log Sales, Growth of
assets, degree of financial leverage and operating leverage. It was observed from Table 6 that the R-
square value is 0.31645. It means that 31.65% of the dependent variable (ROA) is explained by
independent variables. When we analyze Table 7. (Analysis of variance (ANOVA) table), it can be
observed from it that F statistics is 5.489 which is highly significant at 0.000. Hence, as the p-value is
less, 0.05, there can be a linear regression relationship between the dependent (represented by ROA)
and independent variables. It is also observed from the regression analysis in Table 8 that Debt–Equity
ratio has a p-value of 0. 588 and the corresponding, t-value of 0.544, Dividend Pay-out has a p-value of
0.145 and the corresponding, t-value of -1.471. It signifies that these particular variables are not
136 Inspira- Journal of Modern Management & Entrepreneurship (JMME), July, 2017
important in the model. While log Assets (p-value of 0.038 and the corresponding t-value of–1.145),
degree of Financial Leverage (p-value of 0.0 and the corresponding t-value of-5.913), Growth of Asset (p-
value of 0.002 and the corresponding t-value of-3.178), log Sales (p-value of 0.0 and the corresponding t-
value of 8.047), degree of Operating Leverage (p-value of 0.0 and the corresponding t-value of -3.987)
are important enough in the model, as the p-values and t-values are in significant range in determining
the profitability (financial performance) of the firms in Oil and Natural Gas Industry of India.
Major Findings
Debt-equity ratio, log Assets, degree of Financial Leverage and Dividend Pay-out has insignificant
relationship with ROA and on the other hand Log sales, degree of operating leverage and growth of asset
are significant variables in determining the profitability (financial performance) of the firms in Oil and
Natural Gas Industry of India.
Testing of Hypotheses
The null hypotheses framed earlier have been accepted or rejected as follows.
H01 : There is no significant relation between the degree of Financial Leverage and ROA. (H01 is
accepted as there is no significant relation between degree of financial leverage and ROA)
H02 : There is no significant relation between the degree of Financial Leverage and Net profit ratio. (H02 is not
accepted as there is significant relation between degree of financial leverage and net profit ratio.)
H03 : There is no significant relation between degree of Operating Leverage and ROA. (H03 is not
accepted as there is significant relation between degree of operating leverage and ROA)
H04 : There is no significant relation between the Degree of Operating Leverage and Net profit ratio.
(H04 is not accepted as there is significant relation between degree of operating leverage and Net
profit ratio.)
Conclusion
Impact of optimum capital structure on profitability of firm is a debatable field of financial management.
The study examined the impact of independent variables (Financial Leverage, Operating leverage, Dividend
Pay-out, Debt Equity ratio, log Sales, log Assets, growth in Assets) on the dependent variable (ROA and Net
Profit Ratio) for the firms belonging to the Indian oil and natural Gas Industry. For identifying empirical effect of
independent variables on ROA and net profit ratio, the statistical techniques, viz., Pearson’s coefficient of
correlation and regression analysis in addition to descriptive statistics such as mean, standard deviation have
been used. The study concludes that Log sales, degree of Operating Leverage and Growth of Asset are
significant variables influence the ROA in positive way while in case of Net Profit Ratio, log Assets, degree of
Financial Leverage, Log Sales, degree of Operating Leverage and growth of Asset has significant relationship
in determining the profitability of firms in Oil and Natural Gas Industry of India. These results cannot be
generalized because requirements of factor of production and work conditions varies from industry to industry.
This study not only assist companies to identify what should be the optimum capital structure to increase
profitability but also contribute in further researches in this field. As capital structure varies from company to
company and effected by various microeconomic as well as macroeconomic factors like company’s dividend
policies, management decisions, price earning ratios, government policies, tax rates, inflation, recession etc.
directly or indirectly. In this context, it is recommended that companies can select their key performance
indicators like working capital ratio, operating cash flow, current ratio, net profit margin, return on equity, quick
ratio, debt to equity ratio, stock turnover ratio, budget variance etc. which can provide the base to find impact of
capital structure on their profitability.
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