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Comparative Analysis of Capital Structure of Automobile Companies Ashok Leyland and Eicher

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The capital structure has its impact on cost of capital which influence the earning of the firm, investment decision, value of the firm, operating efficiency, earning available to shareholder etc. the controversy is found in various theories formulated, the time period, the selection of the companies and sector companies on which studies had undertaken forms the research gap for the present study the past few studies on capital structure and its impact on profitability, the study of financial performance by different researcher on cement, power, banking , car manufacturing, sugar industries however very few studies has been conducted recently on comparative analysis of capital structure of automobile companies and more precisely on Ashok Leyland and Eicher. The present study focuses on trend of component of capital structure, relationship between debt-equity ratio and earning per share of shareholders and also considers the study of liquidity and profitability of the two selected companies.

Introduction

The automobile industry is one of the largest sectors in the world and also among the fastest growing sector in the Indian economy. Capital structure refers to the combination of equity and debt used by a firm to finance its asset.it also refers to the fraction of money owing preferred and common stock on company’s balance sheet. Capital structure is an important management decision as it greatly influences the owners ‘equity return, the owners’ risk as well as the market worth of the share. Earlier the Indian automobile industry use to depend on foreign counties for their technology but gradually Indian manufacturer started using their own technology. This will give enhanced profit and will give prospect to new heights. The capital structure or financial leverage decision should be examined from then point of its impact on the value of the firm. The relationship between debt, equity and profitability is examined and an attempt is made to understand this relationship among them. There are various factors that determine the capital structure they are: 1) financial leverage or ‘trading on equity’; 2) growth and stability of sales; 3) cost of capital; 4) cash flow ability to service debt; 5) nature and size of a firm; 6) control; 7) flexibility; 8) cost of flotation; 9) capital market conditions; 10) marketability; 11) government policy.

Objectives

  1. To study the relationship between Debt and Equity and Earning per share.
  2. To study the profitability of the two companies under study.

Hypotheses

  1. H0: There is no significant relationship between Debt and Equity and Earning per share.
  2. H1: There is a significant relationship between Debt and Equity and Earning per share.
  3. H0: There is no significant relationship between the profitability of two companies.
  4. H1: There is a significant relationship between the profitability of two companies.

Literature Review

Dhole Madhavi (2013) in her analytical study of four automobile companies instigated the impact of price movement of shares on selected company performance The study reveals that the sentimental factors do play a role in price movement only in short term but in long run annual performance is sole factor responsible for price movement.

Kumar Mohan, Vasu V and Narayan T. (2016) in their study made an attempt to study the relationship between liquidity and profitability. The data was collected from secondary source for the period of 10 years from 2005-2015. The study reveals there is a positive correlation between liquidity and profitability ratios except return on total assets. Z score value also indicate good health of the company.

Research Methodology

  1. Sample size. This paper is focused on the determinants of capital structure in auto industry and for the study the data was collected from secondary source. These companies belong to different segments like HCVs, LCVs, passenger vehicles:
  2. Sample Design. This paper is focus on the determinants of capital structure in auto industry and has a case study approach. The companies considered for study in the paper are Eicher and Ashok Leyland.
  3. Data Collection. Required secondary data was collected from the annual reports of two major automobile companies in India which is collected from the official website of the companies and money control application. The study on capital structure of the two selected companies is for the period of 5 years that is from 2014-2019.

Limitation of Study

The study is limited to the automobile sector of commercial vehicles, heavy vehicles. There is no consideration of two wheelers, three wheelers and cars. The time period of the study is only of five years and limited to the national boundaries i.e the study is of Indian automobile companies only.

Data Analysis and Interpretation

Descriptive Analysis

The debt equity ratio of Ashok Leyland is highest for the year 2015 whereas as EPS in the same year is negative. The debt equity ratio in the range of 1.55 to 1.75 is generating positive and increasing EPS for the company. In the year 2019 the EPS is the highest that is Rs.7.44. As the company increased the debt financing in the year 2015 where the debt equity ratio is highest, the company was not able to give EPS to the shareholders the reason for the same was high debt financing by company which lead to pay high interest to the creditors.

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The debt equity ratio of Eicher is in the range of 0.01 to 0.02. The EPS has increased it became almost double in the year 2016 as compared to 2015 where the debt equity ratio reduced by 50%. For the further years from 2017 to 2019 even though the debt equity ratio remained same EPS is increasing by 80/- to 100/-. The constant debt equity ratio is giving the increasing EPS so the line of debt equity is on X-axis and the line of EPS is upward sloping from right to left.

Inferential Analysis

Correlation Coefficient(r) of Ashok Leyland: -0.720168512.

It can be observed from the correlation coefficient value that there is a negative correlation between the debt equity ratio and EPS. Hence the test reveals that there is no significant relationship between the debt equity. Therefore, H0 is to be accepted.

Correlation Coefficient(r) of Eicher: 0.2478.

The debt equity ratio (%) and EPS (Rs) of Ashok Leyland for the period of the study i.e. from 2015 to 2019. The correlation coefficient is applied to test the relationship between debt equity and EPS of the company. It can be observed from the correlation coefficient value that there is a positive correlation between the debt equity ratio and EPS. It means that if one variable is increasing the other variable also increases and vice versa that is there is a direct relation between the two. Hence the test reveals that there is no significant relationship between the debt equity. Therefore, H0 is to be accepted.

The Return on Net worth of Ashok Leland lies in the range of 3.83 to 24.86, the ratio shows the increasing trend in return on net worth of a company from the year 2015 to 2019. The coefficient of variation calculated is 50.93% The coefficient of variation is 17.55% which is too less as compared to Ashok Leyland’s CV, it indicated that there is less consistency in Return on Net worth of Ashok Leyland as compared to Eicher which is not a good sign for the company. The investors would prefer to invest in Eicher on the basis of coefficient of variations the company is giving consistent returns.

Conclusion

From the whole study it is found that the relationship between debt equity ratio and EPS of Ashok Leyland is negative, hence it is concluded that there exists inverse relationship, as the debt equity increases EPS decreases and vice versa. It is observed from the study that there is no significant positive relationship between debt equity ratio and EPS. In case of Eicher it is revealed that the correlation ship between EPS & debt equity ratio is direct. The profitability of the two companies is examined on the basis of return on net worth. The coefficient of variance figure indicates that the Ashok Leyland is not preferable as there is much of variation in the returns on net worth. The investors would prefer to invest in Eicher as there is significant difference between the return on equity of both the companies.

References

  1. Dhole, P. (2013). “ANALYTICAL STUDY OF FOUR AUTOMOBILE SECTOR COMPANIES IN PRICE MOVEMENT OF SHARES”. International Journal of Application or Innovation in Engineering & Management (IJAIEM) Web.
  2. KUMAR, N. (2016). FIRM SIZE AND PROFITABILITY IN INDIAN AUTOMOBILE INDUSTRY: AN ANALYSIS.
  3. http://www.businessstudynotes.com/finance/financial-management-core-concepts/
  4. https://www.scribbr.com/dissertation/methodology/
  5. https://www.moneycontrol.com/annual-report/eichermotors/directors-report/EM
  6. https://www.topstockresearch.com/INDIAN_STOCKS/AUTOMOBILES_4_WHEELERS/RiskPriceAndValuationOfAshok_Leyland_Ltd.html
  7. https://www.ibef.org/download/Automotive_250608.pdf

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Comparative Analysis of Capital Structure of Automobile Companies Ashok Leyland and Eicher. (2022, September 01). Edubirdie. Retrieved February 3, 2023, from https://edubirdie.com/examples/comparative-analysis-of-capital-structure-of-automobile-companies-ashok-leyland-and-eicher/
“Comparative Analysis of Capital Structure of Automobile Companies Ashok Leyland and Eicher.” Edubirdie, 01 Sept. 2022, edubirdie.com/examples/comparative-analysis-of-capital-structure-of-automobile-companies-ashok-leyland-and-eicher/
Comparative Analysis of Capital Structure of Automobile Companies Ashok Leyland and Eicher. [online]. Available at: <https://edubirdie.com/examples/comparative-analysis-of-capital-structure-of-automobile-companies-ashok-leyland-and-eicher/> [Accessed 3 Feb. 2023].
Comparative Analysis of Capital Structure of Automobile Companies Ashok Leyland and Eicher [Internet]. Edubirdie. 2022 Sept 01 [cited 2023 Feb 3]. Available from: https://edubirdie.com/examples/comparative-analysis-of-capital-structure-of-automobile-companies-ashok-leyland-and-eicher/
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