Correlation Between Capital Structure and Profitability: A Case Study on Indian Companies

Abstract

Capital Structure is the combination of debt and equity and is one of the critical decisions of finance. Capital Structure decision is of significant importance to a firm irrespective of its nature and firm size as it has a direct impact on the profits. Therefore, choosing an appropriate combination of debt and equity is essential for the finance manager because it also helps in the growth and expansion of the business. To survive and meet the requirements of debt and equity holders, the company has to earn good profit and maintain proper debt and equity position. This paper attempts to identify the relevance of capital structure on the profitability of ten BSE SENSEX companies from different industries for ten years from 2007 to 2016. The data has been analyzed using debt-equity ratios, profitability ratios, and descriptive statistics like mean, standard deviation, skewness, covariance, and correlation. Two tail t-test has been used to measure the correlation between the debt-equity ratio and other profitability ratios.