Significance of financial leverage in capital structure decisions in indian auto mobile industry

Abstract

The very crucial problem in every business is financing the firms’ assets which influences the risk and return of investors. The term leverage refers to an increased means of accomplishing some purpose. In financial terminology, leverage refers to furnish the ability to use fixed cost assets or funds to increase the return to its shareholders. Financial leverage is the ability of a firm to use fixed financial charges to magnify the effects of changes in company's earnings before interest and taxes (EBIT) on the earnings per share. The usage of debt in the capital structure of the current Indian Auto mobile industry with specific reference to Tata motors, Bajaj Auto, Hero motors corporation and Maruti Suzuki, The study focused on total debt/Equity along with payable and receivables ratio, earning power, return on capital employed and return on equity. The said companies employed low level of borrowed funds. The companies are ploughing back of profits in the form of reserves. The debt equity ratio is less than one and also in decreasing trend in the specified companies. It may be concluded that profitable companies are not giving much importance for leverage aspects in India. As nothing is permanent in this world, it may be presumed that the companies may revert to debt fund for their further growth and expansion in coming years.