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The Impact of Capital Structure on Profitability with Special Reference to IT Industry in India

Author(s): Ramachandran Azhagaiah | Candasamy Gavoury

Journal: Managing Global Transitions
ISSN 1581-6311

Volume: 9;
Issue: 4;
Start page: 371;
Date: 2011;
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Keywords: capital structure | profitability | return on assets | return on capital employed | debt | equity

Firms can use either debt or equity capital to finance their assets. Thebest choice is a mix of debt and equity. The present study mainly analyseshow far the capital structure (CS) affects the Profitability (P) of corporatefirms in India. The study tries to establish the hypothesized relationshipas to how far the CS affects the business revenue of firms andwhat the interrelationship is between CS and Profitability. This studyis carried out after categorizing the selected firms into three categoriesbased on two attributes, viz. business revenue and asset size. First, firmsare grouped into low, medium and high based on business revenue.Second, firms are classified into small, medium and large based on assetsize to establish the hypothesized relationship that CS has significantimpact on Profitability of Information Technology (IT) firms inIndia. For the study, a sample of 102 it firms was chosen by the Multi-Stage Sampling Technique. The data for a period of 8 years rangingfrom 1999–2000 to 2006–2007 have been collected and considered foranalysis. Regression Analysis (to analyze the unique impact of cs onProfitability), in addition to descriptive statistics such as Mean, StandardDeviation, and Ratios has been used. The study proves that therehas been a strong one-to-one relationship between cs variables andProfitability variables, Return on Assets (ROA) and Return on CapitalEmployed (ROCE) and the CS has significant influence on Profitability,and increase in use of debt fund in CS tends to minimize the net profitof the it firms listed in Bombay Stock Exchange in India.
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